AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON SEPTEMBER 28, 1995
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SCHEDULE 14A INFORMATION
PROXY STATEMENT PURSUANT TO SECTION 14(A)
OF THE SECURITIES EXCHANGE ACT OF 1934
-------------------
Filed by the Registrant X
Filed by a Party other than the Registrant / /
Check the appropriate box:
/ / Preliminary Proxy Statement
/X/ Definitive Proxy Statement
/ / Definitive Additional Materials
/ / Soliciting Material Pursuant to Sec.240.14a-11(c) or Sec.240.14a-12
-------------------
ORION PICTURES CORPORATION
(NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
-------------------
Payment of Filing Fee (Check the appropriate box):
/ / $125 per Exchange Act Rules 0-11(c)(1)(ii), 14a-6(i)(1), or 14a-6(i)(2)
/ / $500 per each party to the controversy pursuant to Exchange Act Rule
14a-6(i)(3)
/ / Fee computed on table below per Exchange Act Rules 14a-6(i)(4) and 0-11.
1) Title of each class of securities to which transaction applies:
2) Aggregate number of securities to which transaction applies:
3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11:
4) Proposed maximum aggregate value of transaction:
5) Total fee paid:
XFee paid previously with preliminary materials.
/ / Check box if any part of the fee is offset as provided by Exchange Act Rule
0-11(a)(2) and identify the filing for which the offsetting fee was paid
previously. Identify the previous filing by registration statement number,
or the Form or Schedule and the date of its filing.
1) Amount Previously Paid:
2) Form, Schedule or Registration No.:
3) Filing Party:
4) Date Filed:
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
[ORION LOGO]
1888 CENTURY PARK EAST
LOS ANGELES, CALIFORNIA 90067
SEPTEMBER 28, 1995
Dear Stockholder:
On behalf of the Board of Directors, I wish to extend to you a cordial
invitation to attend the Special Meeting of Stockholders of Orion Pictures
Corporation ("Orion"), which will be held in the Concourse Level at 1285 Avenue
of the Americas, New York, New York 10019 at 9:00 a.m., New York time, on
November 1, 1995. I look forward to greeting as many stockholders as possible at
the Special Meeting.
At the Special Meeting, the stockholders will be asked to vote on a proposal
to approve and adopt the Amended and Restated Agreement and Plan of Merger dated
as of September 27, 1995 (the "Merger Agreement") by and among Orion, The Actava
Group Inc. ("Actava"), Metromedia International Telecommunications, Inc.
("MITI"), MCEG Sterling Incorporated ("Sterling") OPC Merger Corp. ("OPC
Mergerco"), and MITI Merger Corp. ("MITI Mergerco") and the consummation of the
transactions contemplated by the Merger Agreement, including without limitation,
the merger of Orion with and into OPC Mergerco and the Merger of MITI with and
into MITI Mergerco, and the merger of Sterling with and into Actava, and to
transact such other business as may properly come before such meeting or any
adjournment or adjournments thereof.
Management of Orion believes that the proposed mergers contemplated by the
Merger Agreement are critical to Orion and will provide holders of Orion's
common stock with an opportunity to participate in the enhanced growth and other
opportunities of the combined organization. For information concerning the
reasons the Board of Directors determined to proceed with this transaction, see
"PROPOSAL NO. 1--THE PROPOSED MERGERS - Reasons For The Mergers; Board
Recommendations" in the accompanying joint proxy statement/prospectus.
AT THE DIRECTORS' MEETING HELD TO CONSIDER THE MERGER, THE DIRECTORS OF
ORION, FOLLOWING THE UNANIMOUS RECOMMENDATION OF A SPECIAL COMMITTEE OF THE
BOARD OF DIRECTORS FORMED TO CONSIDER THE MERGER AGREEMENT, CAREFULLY CONSIDERED
AND APPROVED THE TERMS OF THE MERGER AGREEMENT AS BEING IN THE BEST INTERESTS OF
ORION AND ITS STOCKHOLDERS. THE ORION BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS
THAT THE STOCKHOLDERS VOTE "FOR" THE PROPOSAL TO APPROVE THE MERGER AGREEMENT.
I hope that you will use this opportunity to take an active part in the
affairs of your Company by voting on the business to come before the Special
Meeting either by executing and returning the enclosed proxy or by casting your
vote in person at the Special Meeting.
It is important that your shares be represented at the Special Meeting,
whether or not you are able to attend. Accordingly, you are urged to sign, date
and mail the enclosed proxy promptly. If you later decide to attend the Special
Meeting, you may revoke your proxy and vote in person.
Thank you.
Sincerely,
Leonard White
President and
Chief Executive Officer
<PAGE>
ORION PICTURES CORPORATION
1888 CENTURY PARK EAST
SEVENTH FLOOR
LOS ANGELES, CALIFORNIA 90067
NOTICE OF SPECIAL MEETING OF STOCKHOLDERS
TO BE HELD ON NOVEMBER 1, 1995
TO THE STOCKHOLDERS OF
ORION PICTURES CORPORATION:
NOTICE IS HEREBY GIVEN that a Special Meeting of Stockholders (the
"Meeting") of Orion Pictures Corporation, a Delaware corporation ("Orion"), will
be held on November 1, 1995, at 9:00 a.m., local time, in the Concourse Level at
1285 Avenue of the Americas, New York, New York 10019 for the purpose of
considering and acting upon the following:
1. A proposal to approve and adopt the Amended and Restated Agreement
and Plan of Merger dated as of September 27, 1995 (the "Merger Agreement"),
by and among Orion, The Actava Group Inc. ("Actava"), MCEG Sterling
Incorporated ("Sterling"), Metromedia International Telecommunications, Inc.
("MITI"), OPC Merger Corp. ("OPC Mergerco") and MITI Merger Corp. ("MITI
Mergerco") and the consummation of the transactions contemplated thereby,
including, without limitation, the merger of Orion with and into OPC
Mergerco, the merger of MITI with and into MITI Mergerco and the merger of
Sterling with and into Actava.
2. The transaction of such other business as may properly come before
the Meeting or any adjournment thereof. The Board of Directors is not aware
of any other business that will be presented for consideration at the
Meeting.
THE SPECIAL COMMITTEE OF THE BOARD OF DIRECTORS FORMED TO CONSIDER THE
MERGER AGREEMENT AND THE BOARD OF DIRECTORS EACH UNANIMOUSLY RECOMMENDS THAT THE
STOCKHOLDERS VOTE "FOR" THE PROPOSAL TO ADOPT AND APPROVE THE MERGER AGREEMENT
AND THE TRANSACTIONS CONTEMPLATED THEREBY.
Only stockholders of record at the close of business on September 15, 1995,
will be entitled to notice of and to vote at the Meeting or any adjournment
thereof. The Meeting may be adjourned from time to time without notice other
than by announcement at the Meeting. A list of stockholders entitled to vote at
the Meeting will be available for inspection by any stockholder, for any reason
germane to the Meeting, during ordinary business hours, during the ten days
prior to the Meeting, at 1888 Century Park East, Seventh Floor, Los Angeles,
California 90067.
By Order of the Board of Directors
John W. Hester
Secretary
Los Angeles, California
September 28, 1995
IT IS IMPORTANT THAT YOUR SHARES BE REPRESENTED AT THE MEETING, REGARDLESS
OF THE NUMBER OF SHARES YOU HOLD, IN ORDER THAT A QUORUM MAY BE ASSURED. WHETHER
OR NOT YOU PLAN TO BE PRESENT AT THE MEETING IN PERSON, PLEASE COMPLETE, SIGN,
DATE AND MAIL THE ENCLOSED PROXY IN THE ACCOMPANYING RETURN ENVELOPE TO WHICH NO
POSTAGE NEED BE AFFIXED BY THE SENDER IF MAILED WITHIN THE UNITED STATES. IF YOU
RECEIVE MORE THAN ONE PROXY BECAUSE YOUR SHARES ARE REGISTERED IN DIFFERENT
NAMES OR ADDRESSES, EACH SUCH PROXY SHOULD BE SIGNED AND RETURNED TO ASSURE THAT
ALL OF YOUR SHARES WILL BE VOTED. THE PROXY SHOULD BE SIGNED BY ALL REGISTERED
HOLDERS EXACTLY AS THE STOCK IS REGISTERED.
<PAGE>
THE ACTAVA GROUP INC.,
ORION PICTURES CORPORATION,
METROMEDIA INTERNATIONAL TELECOMMUNICATIONS, INC.
AND
MCEG STERLING INCORPORATED
JOINT PROXY STATEMENT FOR
MEETINGS OF STOCKHOLDERS TO
BE HELD ON NOVEMBER 1, 1995
-------------------
PROSPECTUS OF
THE ACTAVA GROUP INC.
SHARES OF COMMON STOCK, $1.00 PAR VALUE
-------------------
This Joint Proxy Statement/Prospectus ("Joint Proxy Statement/Prospectus")
is being furnished to
(i) the holders of shares of Common Stock, par value $1.00 per share
(the "Common Stock"), of The Actava Group Inc., a Delaware corporation
("Actava");
(ii) the holders of shares of Common Stock, par value $.25 per share
(the "Orion Common Stock"), of Orion Pictures Corporation, a Delaware
corporation ("Orion");
(iii) the holders of shares of Common Stock, par value $.001 per share
(the "MITI Common Stock"), of Metromedia International Telecommunications,
Inc., a Delaware corporation ("MITI"); and
(iv) the holders of shares of Common Stock, par value $.001 per share
(the "Sterling Common Stock"), of MCEG Sterling Incorporated, a Delaware
corporation ("Sterling"),
in connection with the solicitation of proxies by each of the Boards of
Directors of Actava, Orion and Sterling for use at the Special Meeting of the
Stockholders of Actava to be held on November 1, 1995 in the Conference Center,
Resurgens Plaza, 945 East Paces Ferry Road, Atlanta, Georgia 30326 (the "Actava
Special Meeting"), at the Special Meeting of the Stockholders of Orion to be
held on November 1, 1995 in the Concourse Level at 1285 Avenue of the Americas,
New York, New York 10019 (the "Orion Special Meeting"), and at the Special
Meeting of the Stockholders of Sterling to be held on November 1, 1995 in the
Concourse Level at 1285 Avenue of the Americas, New York, New York 10019 (the
"Sterling Special Meeting"; and together with the Orion Special Meeting and the
Actava Special Meeting, the "Meetings"), and at any adjournments of any of the
Meetings. In lieu of MITI holding a Special Meeting of the Stockholders of MITI,
the holders of MITI Common Stock will be asked, in accordance with Section 228
of the Delaware General Corporation Law (the "DGCL"), to act by written consent
with respect to the matters described herein that are subject to their approval.
It is currently anticipated that the Meetings will be held simultaneously.
This Joint Proxy Statement/Prospectus also constitutes a prospectus of
Actava relating to approximately 11,036,267 shares of Common Stock to be issued
to certain of the Orion Stockholders (as defined below), certain of the MITI
Stockholders (as defined below) and the Sterling Stockholders (as defined below)
pursuant to the terms of an Amended and Restated Agreement and Plan of Merger
dated as of September 27, 1995 (the "Merger Agreement") among Orion, Actava,
MITI, Sterling, OPC Merger Corp., a newly formed, wholly-owned subsidiary of
Actava ("OPC Mergerco"), and MITI Merger Corp., a newly formed, wholly-owned
subsidiary of Actava ("MITI Mergerco"). The Merger Agreement amends and restates
in its entirety an Agreement and Plan of Merger dated as of April 12, 1995 (the
"Initial Merger Agreement") among Actava, Orion, Sterling and MITI. Pursuant to
the Merger Agreement, at the Effective Time (as defined below), (i) Orion will
merge with and into OPC Mergerco (the "Orion Merger") with OPC Mergerco being
the surviving corporation of the Orion Merger, (ii) MITI will merge with and
into MITI Mergerco (the "MITI Merger") with MITI Mergerco being the surviving
corporation of the MITI Merger, and (iii) Sterling will merge with and into
Actava (the "Sterling Merger" and together with the Orion Merger and the MITI
Merger, the "Mergers") with Actava being the surviving corporation of the
Sterling Merger. OPC Mergerco, as the surviving corporation of the Orion Merger
(referred to herein as "New Orion"), will be renamed "Orion Pictures
Corporation" and will continue the business and operations of Orion and Sterling
(see below). MITI Mergerco, as the surviving corporation of the MITI Merger
(referred to herein as "New MITI"), will be renamed "Metromedia International
Telecommunications, Inc." and will continue the business and operations of MITI.
Actava, as the surviving corporation of the Sterling Merger (referred to herein
as the "Surviving Corporation" or as "Metromedia International Group"), will be
(cover page continued on next page)
<PAGE>
renamed "Metromedia International Group, Inc." and will then transfer the
operating assets of Sterling to New Orion (all as more fully described herein).
Included among the matters described in this Joint Proxy
Statement/Prospectus are matters that relate to the approval of the Merger
Agreement providing for the Mergers by the holders of Orion Common Stock (the
"Orion Stockholders"), the holders of Common Stock (the "Actava Stockholders"),
the holders of MITI Common Stock (the "MITI Stockholders") and the holders of
Sterling Common Stock (the "Sterling Stockholders"). The consummation of each of
the Mergers is dependent on the consummation of each of the other Mergers. The
stockholders of each of Orion, Actava, MITI and Sterling must approve the Merger
Agreement for any of the Mergers to occur.
At the effective time of the Mergers (the "Effective Time"):
. Holders of Orion Common Stock will receive a number of shares of
Common Stock for each share of Orion Common Stock (the "Orion Exchange
Ratio") determined pursuant to a formula as more fully described herein
(assuming that the Determination Date (as defined below) occurred on
September 20, 1995, holders of Orion Common Stock would have received .57143
shares of Common Stock for each share of Orion Common Stock);
. Holders of MITI Common Stock will receive a number of shares of Common
Stock for each share of MITI Common Stock (the "MITI Exchange Ratio")
determined pursuant to a formula as more fully described herein (assuming
that the Determination Date occurred on September 20, 1995, holders of MITI
Common Stock would have received 5.54937 shares of Common Stock for each
share of MITI Common Stock); and
. Holders of Sterling Common Stock will receive a number of shares of
Common Stock for each share of Sterling Common Stock (the "Sterling Exchange
Ratio") determined pursuant to a formula as more fully described herein
(assuming that the Determination Date occurred on September 20, 1995,
holders of Sterling Common Stock would have received .04627 shares of Common
Stock for each share of Sterling Common Stock).
A toll-free number (800-846-1635) has been established from which
stockholders, commencing from the date of this Joint Proxy Statement/Prospectus
and continuing until the date of the Meetings, can obtain information regarding
the Orion Exchange Ratio, MITI Exchange Ratio and Sterling Exchange Ratio as of
each such date, the Actava Average Closing Price (as defined below) as of each
such date and the number of outstanding shares of Orion Common Stock, MITI
Common Stock and Sterling Common Stock as of each date during such period. Such
information will be updated daily following the close of business, New York City
time, and the Orion Exchange Ratio, the MITI Exchange Ratio and the Sterling
Exchange Ratio will be finally determined in accordance with the terms of the
Merger Agreement as of the day which is five calendar days prior to the day of
the Meetings, or if such day is not a business day, as of the business day
immediately preceding such day (the "Determination Date").
The final Orion Exchange Ratio, MITI Exchange Ratio and Sterling Exchange
Ratio will be determined on the Determination Date based on (i) the average of
the closing sale prices for the Common Stock as officially reported on the New
York Stock Exchange ("NYSE") for the last 20 consecutive trading days ending on
the business day immediately preceding the Determination Date (the "Actava
Average Closing Price") and (ii) the number of shares of Orion Common Stock,
MITI Common Stock and Sterling Common Stock, as the case may be, outstanding on
the business day immediately preceding the Determination Date, all as more fully
described herein.
All proxy cards delivered pursuant to this solicitation are revocable at any
time prior to the Orion Special Meeting, the Actava Special Meeting, or the
Sterling Special Meeting at the option of the persons executing them, in the
case of Orion Stockholders, by giving written notice to the Secretary of Orion,
by delivering a later dated proxy card or by voting in person at the Orion
Special Meeting, in the case of Actava Stockholders, by giving written notice to
the Secretary of Actava, by delivering a later dated proxy card or by voting in
person at the Actava Special Meeting, or in the case of Sterling Stockholders,
by giving written notice to the Secretary of Sterling, by delivering a later
dated proxy card or by voting in person at the Sterling Special Meeting. All
written notices of revocation and other communications with respect to
revocations of proxies should be addressed by Orion Stockholders to: Orion
Pictures Corporation, 1888 Century Park East, Seventh Floor, Los Angeles, CA
90067, Attention: John W. Hester, Secretary, by Actava Stockholders to: The
Actava Group Inc., 945 East Paces Ferry Road, Suite 2210, Atlanta, GA 30326,
Attention: Walter M. Grant, Secretary, and by Sterling Stockholders to: MCEG
Sterling Incorporated, 1888 Century Park East, Suite 1777, Los Angeles, CA
90067, Attention: Kathleen E. Morris, Secretary. In addition, both proxies and
revocations of proxies may be given by Orion Stockholders and
(cover page continued on next page)
2
<PAGE>
Actava Stockholders by delivering to Chemical Mellon Shareholder Services, by
means of facsimile at (201) 296-4956, or by Sterling Stockholders by delivering
to Sterling by means of facsimile at (310) 282-8303, in each case before 6:00
p.m., New York City time, on the business day immediately preceding the
Meetings, both sides of an executed form of proxy or notice of revocation
bearing a later date than the earlier delivered proxy. See "INFORMATION
REGARDING THE MEETINGS--Orion, Actava and Sterling Proxies."
The last reported closing sale price on September 20, 1995 for the Common
Stock was $18 3/4 per share. The Actava Average Closing Price for the Common
Stock for the 20 business days immediately preceding September 20, 1995 was
$16.38125.
Shares of Common Stock will remain entitled to one vote per share on all
matters to be voted upon by the Surviving Corporation's stockholders. Holders of
options, warrants and convertible securities of Actava will, upon the exercise
or conversion thereof after consummation of the Mergers, be entitled to receive
the same number of shares of Common Stock as if such exercise or conversion
occurred prior to the Mergers. Immediately following the Effective Time,
Metromedia Company, a Delaware general partnership ("Metromedia"), its two
general partners, John W. Kluge and Stuart Subotnick, and the following
corporations owned and controlled by Messrs. Kluge and Subotnick, Met
International, Inc., a Delaware corporation ("Met International"), Met Telcell,
Inc., a Delaware corporation ("Met Telcell"), and MetProductions, Inc., a
Delaware corporation ("MetProductions," which together with Metromedia, Messrs.
Kluge and Subotnick, Met International and Met Telcell are collectively referred
to as the "Metromedia Holders"), who, collectively, are the principal
stockholders of both Orion and MITI, will collectively own approximately 33.3%
of the outstanding shares of Common Stock of the Surviving Corporation (assuming
(i) that the Determination Date occurred on September 20, 1995, (ii) that
certain amounts owed by Orion and affiliates of Orion and MITI to certain of the
Metromedia Holders as of such date are converted into Common Stock and (iii) the
exercise of all outstanding options to acquire shares of Common Stock, all as
more fully described herein).
Upon consummation of the Mergers (assuming (i) that the Determination Date
occurred on September 20, 1995, (ii) that certain amounts owed by Orion and
affiliates of Orion and MITI to certain of the Metromedia Holders as of such
date are converted into Common Stock and (iii) the exercise of all outstanding
options to acquire shares of Common Stock, all as more fully described herein):
(i) Actava Stockholders will collectively own approximately 41.5% of the
outstanding shares of Common Stock of the Surviving Corporation;
(ii) Orion Stockholders will collectively own approximately 28.2% of the
outstanding shares of Common Stock of the Surviving Corporation;
(iii) MITI Stockholders will collectively own approximately 29.1% of the
outstanding shares of Common Stock of the Surviving Corporation; and
(iv) Sterling Stockholders will collectively own approximately 1.2% of
the outstanding shares of Common Stock of the Surviving Corporation.
Holders of Common Stock and holders of options, warrants and convertible
securities exercisable for or convertible into Common Stock will not be required
to exchange, exercise or convert their securities in connection with the
Mergers. Holders of options, warrants and convertible securities of Actava will,
upon the exercise or conversion thereof after consummation of the Mergers, be
entitled to receive the same number of shares of Common Stock as though such
exercise or conversion occurred prior to the Mergers.
STOCKHOLDERS OF ACTAVA, ORION, MITI AND STERLING
SHOULD CONSIDER CAREFULLY THE FACTORS DISCUSSED UNDER
THE HEADING "RISK FACTORS" IN THIS
JOINT PROXY STATEMENT/PROSPECTUS.
SEE PAGE 41 OF THIS JOINT PROXY STATEMENT/PROSPECTUS.
-------------------
(cover page continued on next page)
3
<PAGE>
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE COMMISSION OR
ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS
JOINT PROXY STATEMENT/PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
-------------------
The Common Stock is listed on the NYSE under the symbol "ACT." The Orion
Common Stock is quoted on the Nasdaq National Market of the National Association
of Securities Dealers, Inc. ("NASDAQ/NMS") under the symbol "ORPC." There is no
established public trading market for the Sterling Common Stock or the MITI
Common Stock. On September 20, 1995, the closing sale price for the Orion Common
Stock as quoted by NASDAQ/NMS was $10 3/4 per share and the closing sale price
for the Common Stock as reported on the NYSE was $18 3/4 per share.
This Joint Proxy Statement/Prospectus is first being mailed to Orion
Stockholders, Actava Stockholders, MITI Stockholders and Sterling Stockholders
on or about September 29, 1995 in connection with the solicitations of proxies
for the Meetings and the solicitation of written consents from the MITI
Stockholders.
The date of this Joint Proxy Statement/Prospectus is September 28, 1995.
4
<PAGE>
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATION NOT CONTAINED IN THIS JOINT PROXY STATEMENT/PROSPECTUS AND, IF
GIVEN OR MADE, SUCH INFORMATION AND REPRESENTATION SHOULD NOT BE RELIED UPON AS
HAVING BEEN AUTHORIZED BY ANY OF ORION, ACTAVA, MITI OR STERLING. THIS JOINT
PROXY STATEMENT/PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A
SOLICITATION OF AN OFFER TO BUY ANY SECURITIES OTHER THAN THE SHARES OF COMMON
STOCK TO WHICH IT RELATES OR AN OFFER TO ANY PERSON IN ANY JURISDICTION WHERE
SUCH AN OFFER WOULD BE UNLAWFUL. NEITHER THE DELIVERY OF THIS JOINT PROXY
STATEMENT/PROSPECTUS NOR ANY DISTRIBUTION OF SECURITIES PURSUANT HERETO SHALL
IMPLY OR CREATE AN IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF
ORION, ACTAVA, MITI OR STERLING OR ANY OF THEIR RESPECTIVE SUBSIDIARIES OR IN
THE INFORMATION SET FORTH OR INCORPORATED BY REFERENCE HEREIN SUBSEQUENT TO THE
DATE HEREOF.
AVAILABLE INFORMATION
Orion, Actava and Sterling are subject to the informational requirements of
the Securities Exchange Act of 1934, as amended (the "Exchange Act"), and in
accordance therewith file reports, proxy statements and other information with
the Securities and Exchange Commission (the "Commission"). Such reports, proxy
statements and other information can be inspected and copied during normal
business hours at prescribed rates at the public reference facilities of the
Commission at Room 1024, 450 Fifth Street, N.W., Judiciary Plaza, Washington,
D.C. 20549; Northwestern Atrium Center, 500 West Madison, Suite 1400, Chicago,
Illinois 60621; and 7 World Trade Center, 13th Floor, New York, New York 10048.
Such reports, proxy statements and other information relating to Actava also may
be inspected at the offices of the New York Stock Exchange, 20 Broad Street, New
York, New York 10005 and relating to Orion also at the offices of the National
Association of Securities Dealers, Inc., 1735 K Street N.W., Washington, D.C.,
20006.
This Joint Proxy Statement/Prospectus does not contain all of the
information set forth in the Registration Statement on Form S-4 and exhibits
thereto (the "Registration Statement") covering the securities offered hereby
which has been filed by Actava with the Commission. As permitted by the rules
and regulations of the Commission, this Joint Proxy Statement/Prospectus omits
certain information contained or incorporated by reference in the Registration
Statement. Statements contained in this Joint Proxy Statement/Prospectus as to
the contents of any contract or other document filed as an exhibit to the
Registration Statement are not necessarily complete and in each instance
reference is made to the copy of such contract or other document filed as an
exhibit to the Registration Statement. For such further information, reference
is made to the Registration Statement.
5
<PAGE>
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The following documents filed with the Commission pursuant to the Exchange
Act are incorporated by reference in this Joint Proxy Statement/Prospectus:
(a) Actava's Annual Report on Form 10-K for the fiscal year ended
December 31, 1994, Form 10-K/A Amendment No. 1 filed on April 28, 1995 and
Form 10-K/A Amendment No. 2 filed July 13, 1995 amending Actava's Form 10-K
for the fiscal year ended December 31, 1994 (File No. 1-5706);
(b) Actava's Quarterly Report on Form 10-Q for the quarter ended March
31, 1995 (File No. 1-5706);
(c) Actava's Quarterly Report on Form 10-Q for the quarter ended June
30, 1995 (File No. 1-5706);
(d) Actava's Current Report on Form 8-K dated April 12, 1995 and Form
8-K/A Amendment No. 1 filed on April 28, 1995 amending Actava's Current
Report on Form 8-K dated April 12, 1995 (File No. 1-5706);
(e) Actava's Current Report on Form 8-K dated September 27, 1995 (File
No. 1-5706);
(f) Orion's Annual Report on Form 10-K for the fiscal year ended
February 28, 1995 and Form 10-K/A Amendment No. 1 filed on June 28, 1995
amending Orion's Form 10-K for the fiscal year ended February 28, 1995 (File
No. 1-5979);
(g) Orion's Quarterly Report on Form 10-Q for the quarter ended May 31,
1995 (File No. 1-5979);
(h) Orion's Current Report on Form 8-K dated August 31, 1995 (File No.
1-5979);
(i) Orion's Current Report on Form 8-K dated September 7, 1995 (File No.
1-5979);
(j) Orion's Current Report on Form 8-K dated September 27, 1995 (File
No. 1-5979);
(k) Sterling's Annual Report on Form 10-K for the fiscal year ended
March 31, 1995 (File No. 0-16104);
(l) Sterling's Quarterly Report on Form 10-Q for the quarter ended June
30, 1995 (File No. 0-16104); and
(m) Sterling's Current Report on Form 8-K dated April 12, 1995 (File No.
0-16104).
All documents and reports filed by Orion, Actava or Sterling with the
Commission pursuant to Section 13(a), 13(c), 14 or 15(d) of the Exchange Act
subsequent to the date hereof and prior to the Meetings shall hereby be deemed
to be incorporated by reference into this Joint Proxy Statement/Prospectus and
to be a part hereof from the date of filing of such documents or reports. Any
statement contained in a document incorporated or deemed to be incorporated by
reference herein shall be deemed to be modified or superseded for purposes of
this Joint Proxy Statement/Prospectus to the extent that a statement contained
herein or in any other subsequently filed document which also is or is deemed to
be incorporated by reference herein modifies or supersedes such statement. Any
such statement so modified or superseded shall not be deemed, except as so
modified or superseded, to constitute a part of this Joint Proxy
Statement/Prospectus.
THIS JOINT PROXY STATEMENT/PROSPECTUS INCORPORATES DOCUMENTS BY REFERENCE
WHICH ARE NOT PRESENTED HEREIN OR DELIVERED HEREWITH. THESE DOCUMENTS ARE
AVAILABLE UPON REQUEST WITH RESPECT TO ORION, FROM ORION PICTURES CORPORATION,
1888 CENTURY PARK EAST, SEVENTH FLOOR, LOS ANGELES, CALIFORNIA
6
<PAGE>
90067, ATTENTION: CYNTHIA A. FRIEDMAN, CHIEF FINANCIAL OFFICER (TELEPHONE: (310)
282-0550), OR WITH RESPECT TO ACTAVA, FROM THE ACTAVA GROUP INC., 945 EAST PACES
FERRY ROAD, SUITE 2210, ATLANTA, GEORGIA 30326, ATTENTION: FREDERICK B.
BEILSTEIN, III, CHIEF FINANCIAL OFFICER (TELEPHONE: (404) 261-6190), OR WITH
RESPECT TO STERLING, TO MCEG STERLING INCORPORATED, 1888 CENTURY PARK EAST,
SUITE 1777, LOS ANGELES, CALIFORNIA 90067, ATTENTION: KATHLEEN E. MORRIS,
CORPORATE SECRETARY (TELEPHONE: (310) 282-0871). IN ORDER TO ENSURE TIMELY
DELIVERY OF THE DOCUMENTS, ANY REQUEST SHOULD BE MADE BY OCTOBER 13, 1995.
7
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TABLE OF CONTENTS
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AVAILABLE INFORMATION................................................................. 5
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE....................................... 6
SUMMARY INFORMATION................................................................... 15
The Proposed Mergers................................................................ 15
Certain Information; Proxies.................................................... 15
Actava Securities............................................................... 16
The Orion Merger................................................................ 16
The MITI Merger................................................................. 16
The Sterling Merger............................................................. 17
Interests of and Benefits to the Metromedia Holders and Senior Executives of Actava
as a Result of the Mergers........................................................ 18
Metromedia Loans and Advances to Orion, MITI and Sterling....................... 18
Control of Surviving Corporation by the Metromedia Holders...................... 19
Approval by Orion Stockholders is Assured Due to Vote of Metromedia Holders..... 20
Post-Employment Agreements with Walter M. Grant and Fredrick B. Beilstein....... 20
Employment Agreement with John D. Phillips...................................... 20
Certain Conditions.................................................................. 21
Risk Factors........................................................................ 21
Business of Orion................................................................... 21
Business of Actava.................................................................. 22
Business........................................................................ 22
Triton Opposition............................................................... 22
Litigation...................................................................... 23
Business of MITI.................................................................... 23
Business of Sterling................................................................ 23
The Combined Organization........................................................... 24
Reasons for the Mergers............................................................. 24
Capital Structure Following Effective Time.......................................... 24
Financing Arrangements.............................................................. 25
Federal Income Tax Consequences..................................................... 26
Actava Recommendation............................................................... 26
Opinion of Actava's Financial Advisor............................................... 27
The Actava Special Meeting.......................................................... 27
Orion Recommendation; Orion Special Committee....................................... 27
Opinion of Orion's Financial Advisor................................................ 30
The Orion Special Meeting........................................................... 30
MITI Recommendation................................................................. 31
Opinion of MITI's Financial Advisor................................................. 31
The MITI Action by Written Consent.................................................. 32
Sterling Recommendation............................................................. 32
Opinion of Sterling's Financial Advisors............................................ 33
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The Sterling Special Meeting........................................................ 33
Management and Operations After the Mergers......................................... 33
Regulatory Approvals................................................................ 34
Public Trading Market............................................................... 35
Accounting Treatment................................................................ 35
Dissenters' Rights.................................................................. 35
Equivalent Per Share Data........................................................... 36
Market Prices of Common Stock and Orion Common Stock................................ 37
Actava.......................................................................... 37
Orion........................................................................... 37
Sterling and MITI............................................................... 38
Summary Financial Data.............................................................. 38
SUMMARY FINANCIAL DATA................................................................ 39
RISK FACTORS.......................................................................... 41
Orion, Actava and MITI Have Each Recently Incurred Operating Losses and Orion and
MITI Have Faced Other Financial Difficulties.......................................... 41
Orion........................................................................... 41
MITI............................................................................ 41
Actava.......................................................................... 41
No Assurances of Profitability of the Surviving Corporation......................... 41
Leverage and Debt Service Payments of the Surviving Corporation..................... 42
Future Financing Needs.............................................................. 42
Control of Surviving Corporation by Metromedia Holders Due to Concentration of Share
Ownership and Voting Control...................................................... 43
Anti-takeover Provisions in Surviving Corporation's Charter and By-laws............. 43
Interests of and Benefits to the Metromedia Holders and Senior Executives of Actava
as a Result of the Mergers........................................................ 43
Metromedia Holders.............................................................. 43
Metromedia Loans and Advances to Orion, MITI and Sterling....................... 44
Actava.......................................................................... 44
Holding Company Structure; Limitations on Dividends; Debt Service of the Surviving
Corporation....................................................................... 45
Motion Picture Industry Involves a Substantial Degree of Risk and Is Competitive.... 45
Substantial Costs of Motion Pictures................................................ 45
Political and Social Risks for MITI................................................. 46
Economic Risks for MITI............................................................. 46
General Operating Risks for MITI.................................................... 46
Risks Inherent in Foreign Investment................................................ 46
Risks Inherent in Growth Strategy................................................... 47
Developing Legal Structures in MITI's Target Markets................................ 48
Exchange Rate Fluctuations and Inflation Risks in MITI's Target Markets............. 48
Competition for MITI................................................................ 48
Possible Inability to Control Certain of MITI's Joint Ventures...................... 49
Approvals and Uncertainty of License Renewals for MITI.............................. 49
Technological and Product Obsolescence for MITI..................................... 49
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INFORMATION REGARDING THE MEETINGS.................................................... 50
General............................................................................. 50
Orion Special Meeting............................................................... 50
Actava Special Meeting.............................................................. 50
MITI Written Consent................................................................ 51
Sterling Special Meeting............................................................ 51
Record Date; Quorum................................................................. 51
Orion........................................................................... 51
Actava.......................................................................... 51
MITI............................................................................ 52
Sterling........................................................................ 52
Vote Required....................................................................... 52
Orion........................................................................... 52
Actava.......................................................................... 52
MITI............................................................................ 53
Sterling........................................................................ 53
Orion, Actava and Sterling Proxies.................................................. 54
PROPOSAL NO. 1--THE PROPOSED MERGERS.................................................. 55
The Proposed Mergers................................................................ 55
General......................................................................... 55
Orion Exchange Ratio............................................................ 55
MITI Exchange Ratio............................................................. 56
Sterling Exchange Ratio......................................................... 56
The Metromedia Holders.......................................................... 57
Surrender of Stock Certificates................................................. 57
Background of the Mergers........................................................... 58
Orion Board Deliberations....................................................... 62
Actava Board Deliberations...................................................... 65
MITI Board Deliberations........................................................ 69
Sterling Board Deliberations.................................................... 71
Reasons for the Mergers; Board Recommendations...................................... 72
Orion's Reasons for the Orion Merger............................................ 72
Recommendation of Orion's Board of Directors.................................... 74
Factors Considered by Actava's Board of Directors............................... 74
Recommendation of Actava's Board of Directors................................... 79
MITI's Reasons for the MITI Merger.............................................. 79
Recommendation of MITI's Board of Directors..................................... 79
Sterling's Reasons for the Sterling Merger...................................... 80
Recommendation of Sterling's Board of Directors................................. 82
Opinions of Financial Advisors...................................................... 82
Orion........................................................................... 82
Actava.......................................................................... 96
MITI............................................................................ 105
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Sterling........................................................................ 111
Interests of and Benefits to the Metromedia Holders and Senior Executives of Actava
as a Result of the Mergers........................................................ 114
Control of Surviving Corporation by the Metromedia Holders...................... 114
Metromedia Loans and Advances to Orion, MITI and Sterling....................... 115
Approval by Orion Stockholders is Assured Due to Vote of Metromedia Holders..... 116
Employment Agreement with John D. Phillips...................................... 116
Post-Employment Agreements with Walter M. Grant and Fredrick B. Beilstein....... 116
Management and Operations After the Mergers......................................... 117
Management...................................................................... 117
Operations-General.............................................................. 118
Orion Refinancing............................................................... 119
Operations-Strategic Plans for Surviving Corporation............................ 119
Terms and Conditions of the Merger Agreement........................................ 121
Conditions to the Mergers....................................................... 121
Termination and Amendment of the Merger Agreement............................... 124
Agreement Not to Solicit Other Offers........................................... 125
Listing of Common Stock......................................................... 125
Covenant Regarding Refinancing of Indebtedness.................................. 125
Conduct of Business by Orion, Actava, MITI and Sterling Prior to the Mergers.... 125
Stockholder Rights Plan......................................................... 125
Expenses........................................................................ 125
Registration Rights Agreement....................................................... 126
Terms and Conditions of the Contribution Agreement.................................. 126
Regulatory Filings and Approvals.................................................... 126
Financing Arrangements.............................................................. 126
Background of Orion's Business; Bankruptcy Filing............................... 126
Terms of Principal Plan Documents............................................... 127
Required Debt Service Under Existing Plan Agreements............................ 127
Existing Orion Indebtedness..................................................... 128
Capital Structure Following Effective Time...................................... 128
New Orion Credit Facility....................................................... 129
Change in Control................................................................... 131
Accounting Treatment................................................................ 132
Public Trading Market............................................................... 132
Dissenters' Rights.................................................................. 132
Orion and Actava................................................................ 132
MITI and Sterling............................................................... 132
Surrender of Stock Certificates and Receipt of Merger Consideration................. ]134
Fractional Shares................................................................... 134
CERTAIN FEDERAL INCOME TAX CONSEQUENCES OF THE MERGERS................................ 135
The Mergers..................................................................... 135
Limitations on Net Operating Loss Carry-Forwards................................ 135
LITIGATION............................................................................ 137
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SURVIVING CORPORATION PRO FORMA COMBINING FINANCIAL STATEMENTS........................ 138
Accounting Treatment................................................................ 138
INFORMATION REGARDING ORION........................................................... 144
Business of Orion................................................................... 144
Historical Business............................................................. 144
Events Leading to Bankruptcy Case............................................... 144
Business and Results of Operations of Orion Following Plan Consummation......... 145
Selected Financial Data............................................................. 147
Management's Discussion and Analysis of Financial Condition and Results of
Operations........................................................................ 148
Overview........................................................................ 148
Results of Operations........................................................... 148
Revenues........................................................................ 150
Theatrical Revenues............................................................. 150
Home Video Direct Distribution Revenues......................................... 151
Home Video Subdistribution Revenues............................................. 152
Pay Television Revenues......................................................... 152
Free Television Revenues........................................................ 153
Gross Profit (Loss)............................................................. 154
Selling, General and Administrative Expense..................................... 156
Interest Expense................................................................ 156
Provision for Income Taxes...................................................... 156
Liquidity and Capital Resources................................................. 157
Relationship With Metromedia........................................................ 161
The Guarantee and Reimbursement Agreement....................................... 161
Miscellaneous Relationships..................................................... 162
Orion Designees to the Surviving Corporation Board of Directors..................... 165
INFORMATION REGARDING ACTAVA.......................................................... 166
Business of Actava.................................................................. 166
General......................................................................... 166
Recent Developments................................................................. 166
Election of John D. Phillips as Chief Executive Officer of Actava............... 166
Sale of Qualex.................................................................. 167
Actava-Roadmaster Exchange Transaction.......................................... 168
Sale of Real Estate Investment.................................................. 171
Other Developments.............................................................. 171
Litigation...................................................................... 175
Narrative Description of Business of Actava......................................... 175
Snapper Power Equipment Company................................................. 175
Investment in Roadmaster Industries, Inc. ...................................... 176
Description of Actava Capital Stock................................................. 177
Common Stock.................................................................... 177
Amendments to Actava's Restated Certificate of Incorporation and By-laws............ 178
Increase in Number of Shares of Authorized Capital Stock........................ 178
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Revised Governance Structure.................................................... 178
Transfer Agent and Registrar........................................................ 179
Restrictions on Resale of Common Stock by Affiliates................................ 179
Comparison of the Rights of Stockholders of Orion, MITI, Sterling and Actava........ 180
General......................................................................... 180
Cumulative Voting............................................................... 180
Classification of the Board of Directors........................................ 181
Restriction on Repurchases of Shares............................................ 181
Amendments to Charter Documents................................................. 181
Removal of Directors............................................................ 182
Power to Call Special Meetings of Stockholders.................................. 182
Issuance of Rights.............................................................. 183
Consideration of Other Constituencies in Board of Director Action............... 183
Preemptive Rights............................................................... 183
Action by Written Consent....................................................... 183
Stockholder Nominations and Proposals........................................... 184
Stockholder Rights Plan......................................................... 184
Actava Designees to the Surviving Corporation's Board of Directors.................. 184
INFORMATION REGARDING MITI............................................................ 186
Business of MITI.................................................................... 186
Overview........................................................................ 186
Markets......................................................................... 187
Joint Ventures.................................................................. 189
Services to and Payments from Joint Ventures.................................... 190
Marketing....................................................................... 191
Development of Communications Systems........................................... 191
Competition..................................................................... 193
Employees....................................................................... 194
Property........................................................................ 194
Legal Proceedings............................................................... 195
Security Ownership of Certain Beneficial Owners and Management...................... 195
Nominee to the Surviving Corporation's Board of Directors........................... 197
Selected Financial Data............................................................. 197
Selected Financial Information...................................................... 198
Management's Discussion and Analysis of Financial Condition and Results of
Operations........................................................................ 198
General......................................................................... 198
Liquidity and Capital Resources................................................. 199
Results of Operations........................................................... 201
Relationship With Metromedia........................................................ 204
INFORMATION REGARDING STERLING........................................................ 205
Business of Sterling................................................................ 205
General......................................................................... 205
Competition..................................................................... 207
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Seasonality..................................................................... 207
Employees....................................................................... 207
Properties.......................................................................... 207
Legal Proceedings................................................................... 207
Chapter 11 Bankruptcy Proceedings............................................... 207
Litigation...................................................................... 208
Security Ownership of Certain Beneficial Owners and Management...................... 209
Market Information.................................................................. 210
Selected Financial Data............................................................. 210
Management's Discussion and Analysis of Financial Condition and Results of
Operations........................................................................ 210
Results of Operations........................................................... 210
Liquidity and Capital Resources................................................. 214
Certain Relationships and Related Transactions...................................... 215
Metromedia Loan Agreement........................................................... 216
LEGAL OPINIONS........................................................................ 216
EXPERTS............................................................................... 216
GLOSSARY.............................................................................. 218
INDEX TO FINANCIAL STATEMENTS......................................................... F-1
Appendices
Appendix A--Merger Agreement........................................................ A-1
Appendix B-- Fairness Opinion of CS First Boston Corporation........................ B-1
Appendix C--Fairness Opinion of Alex. Brown & Sons Incorporated..................... C-1
Appendix D-- Fairness Opinion of Gerard Klauer Mattison & Co., L.L.C. .............. D-1
Appendix E-- Fairness Opinion of Houlihan, Lokey, Howard & Zukin.................... E-1
Appendix F-- Section 262 of the Delaware General Corporation Law.................... F-1
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SUMMARY INFORMATION
The following is a summary of certain important terms of the proposed
Mergers and related information discussed elsewhere in this Joint Proxy
Statement/Prospectus. This summary does not purport to be complete and is
qualified in its entirety by reference to the more detailed information which
appears elsewhere in this Joint Proxy Statement/Prospectus and the documents
incorporated by reference herein, including the Appendices attached to this
Joint Proxy Statement/Prospectus. Stockholders of each of Orion, Actava, MITI
and Sterling are urged to read this Joint Proxy Statement/Prospectus and the
Appendices hereto in their entirety. Stockholders of each of Orion, Actava, MITI
and Sterling are also urged to consider carefully the information set forth
under the heading "Risk Factors." A glossary of certain defined terms is set
forth in this Joint Proxy Statement/Prospectus under the heading "Glossary."
THE PROPOSED MERGERS
This Joint Proxy Statement/Prospectus relates primarily to the Orion Merger,
the MITI Merger and the Sterling Merger, each of which will be consummated
pursuant to the Merger Agreement. Each of the Orion Stockholders, Actava
Stockholders and Sterling Stockholders are being asked to approve the Merger
Agreement at the Orion Special Meeting, the Actava Special Meeting and the
Sterling Special Meeting, respectively. It is currently anticipated that the
Actava Special Meeting, the Orion Special Meeting and the Sterling Special
Meeting will be held simultaneously. In lieu of MITI holding a Special Meeting
of the MITI Stockholders, the holders of MITI Common Stock will be asked to
approve the Merger Agreement by written consent in accordance with Section 228
of the DGCL. Assuming that the stockholders of Actava, Orion, MITI and Sterling
approve the Merger Agreement and assuming that the other conditions precedent to
the Mergers are satisfied or waived, it is currently anticipated that the
Mergers will be consummated simultaneously immediately following the Meetings.
New Orion will be the surviving corporation in the Orion Merger, New MITI will
be the surviving corporation in the MITI Merger and Actava will be the surviving
corporation in the Sterling Merger. See "PROPOSAL NO. 1--THE PROPOSED
MERGERS--Terms and Conditions of the Merger Agreement."
Certain Information; Proxies
A toll-free number (800-846-1635) has been established from which
stockholders, commencing from the date of this Joint Proxy Statement/Prospectus
and continuing until the date of the Meetings, can obtain information concerning
(i) the Orion Exchange Ratio, the MITI Exchange Ratio and the Sterling Exchange
Ratio, (ii) the Actava Average Closing Price and (iii) the number of outstanding
shares of Orion Common Stock, MITI Common Stock and Sterling Common Stock, in
each case, as of the close of business on each such day.
All proxy cards delivered pursuant to this solicitation are revocable at any
time prior to the Orion Special Meeting, the Actava Special Meeting, or the
Sterling Special Meeting at the option of the persons executing them, in the
case of Orion Stockholders, by giving written notice to the Secretary of Orion,
by delivering a later dated proxy card or by voting in person at the Orion
Special Meeting, in the case of Actava Stockholders, by giving written notice to
the Secretary of Actava, by delivering a later dated proxy card or by voting in
person at the Actava Special Meeting, or in the case of Sterling Stockholders,
by giving written notice to the Secretary of Sterling, by delivering a later
dated proxy card or by voting in person at the Sterling Special Meeting. All
written notices of revocation and other communications with respect to
revocations of proxies should be addressed by Orion Stockholders to: Orion
Pictures Corporation, 1888 Century Park East, Seventh Floor, Los Angeles, CA
90067, Attention: John W. Hester, Secretary, by Actava Stockholders to: The
Actava Group Inc., 945 East Paces Ferry Road, Suite 2210, Atlanta, GA 30326,
Attention: Walter M. Grant, Secretary, and by Sterling
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Stockholders to: MCEG Sterling Incorporated, 1888 Century Park East, Suite 1777,
Los Angeles, CA 90067, Attention: Kathleen E. Morris, Secretary. In addition,
both proxies and revocations of proxies may be given by Orion Stockholders and
Actava Stockholders by delivering to Chemical Mellon Shareholder Services, by
means of facsimile at (201) 296-4956, or by Sterling Stockholders by delivering
to Sterling by means of facsimile at (310) 282-8303, in each case, before 6:00
p.m., New York City time, on the business day immediately preceding the
Meetings, both sides of an executed form of proxy or notice of revocation
bearing a later date than the earlier delivered proxy.
Actava Securities
Because Actava will issue shares of Common Stock as consideration for each
of the Mergers, holders of Common Stock and holders of options and convertible
securities exercisable for or convertible into, as the case may be, Common
Stock, will not be required to exchange, exercise or convert their securities in
connection with any of the Mergers. Holders of options, warrants and convertible
securities of Actava will, upon the exercise or conversion thereof after
consummation of the Mergers, be entitled to receive the same number of shares of
Common Stock as if such exercise or conversion had occurred prior to the
Mergers. As of September 20, 1995, there were 17,474,401 shares of Common Stock
outstanding.
The Orion Merger
Subject to the satisfaction or waiver of the conditions precedent set forth
in the Merger Agreement described below, at the Effective Time, Orion will merge
with and into OPC Mergerco, Orion's separate corporate existence will terminate
and OPC Mergerco, renamed "Orion Pictures Corporation," will continue as the
surviving corporation of the Orion Merger. Upon consummation of the Orion
Merger, each share of Orion Common Stock will be converted into the right to
receive .57143 shares of Common Stock (assuming that the Determination Date had
occurred on September 20, 1995). The exact Orion Exchange Ratio will be
determined on the Determination Date as follows: (i) if the Actava Average
Closing Price is greater than or equal to $10.50, the Orion Exchange Ratio shall
be equal to a fraction, the numerator of which is 11,428,572 and the denominator
of which is the number of shares of Orion Common Stock outstanding on the
business day immediately preceding the Determination Date or (ii) if the Actava
Average Closing Price is less than $10.50, the Orion Exchange Ratio shall be
determined by solving for "Y" in the following formula and dividing "Y" by the
number of shares of Orion Common Stock outstanding on the business day
immediately preceding the Determination Date:
120,000,000
----------------------------
"Y" = Actava Average Closing Price.
See "PROPOSAL NO. 1--THE PROPOSED MERGERS--Orion Exchange Ratio." As of
September 20, 1995, there were 20,000,000 shares of Orion Common Stock
outstanding. The Merger Agreement provides that it is a condition precedent to
the obligation of Actava to consummate any of the Mergers that the Actava
Average Closing Price not be less than $8.25.
The MITI Merger
Subject to the satisfaction or waiver of the conditions precedent set forth
in the Merger Agreement described below, at the Effective Time, MITI will merge
with and into MITI Mergerco, MITI's separate corporate existence will terminate
and MITI Mergerco, renamed "Metromedia International Telecommunications, Inc.,"
will continue as the surviving corporation of the MITI Merger. Upon consummation
of the MITI Merger, each share of MITI Common Stock will be converted into the
right to receive 5.54937 shares of Common Stock (assuming that the Determination
Date had occurred on September 20, 1995). The exact MITI Exchange Ratio will be
determined on the Determination Date as follows: (i) if the Actava Average
Closing Price is greater than or equal to $10.50, the MITI Exchange Ratio shall
be equal to a fraction, the numerator of which is 9,523,810 and the denominator
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of which is the number of shares of MITI Common Stock outstanding on the
business day immediately preceding the Determination Date or (ii) if the Actava
Average Closing Price is less than $10.50, the MITI Exchange Ratio shall be
determined by solving for "Y" in the following formula and dividing "Y" by the
number of shares of MITI Common Stock outstanding on the business day
immediately preceding the Determination Date:
100,000,000
----------------------------
"Y" = Actava Average Closing Price.
See "PROPOSAL NO. 1--THE PROPOSED MERGERS--MITI Exchange Ratio." As of September
20, 1995, there were 1,716,198 shares of MITI Common Stock outstanding. Options
and other rights to purchase shares of MITI Common Stock (the "MITI Options")
will remain outstanding following the Effective Time and, without any action on
the part of the holder thereof, will be converted into options or other rights
to purchase shares of Common Stock, which options or other rights will have
terms no less favorable to the holders thereof than those of the MITI Options,
with an appropriate adjustment being made to the exercise price of and the
number of shares subject to each such option or other right to reflect the MITI
Exchange Ratio.
The Sterling Merger
Subject to the satisfaction or waiver of the conditions precedent set forth
in the Merger Agreement described below, at the Effective Time, Sterling will
merge with and into Actava, Sterling's separate corporate existence will
terminate and Actava, renamed "Metromedia International Group, Inc.," will
continue as the surviving corporation of the Sterling Merger. In addition,
immediately following the Effective Time, the Surviving Corporation will
transfer the assets that were owned by Sterling immediately prior to the
Effective Time to New Orion, which will continue the business and operations of
both Sterling and Orion. Upon consummation of the Sterling Merger, each share of
Sterling Common Stock will be converted into the right to receive .04627 shares
of Common Stock (assuming that the Determination Date had occurred on September
20, 1995). The exact Sterling Exchange Ratio will be determined on the
Determination Date in accordance with one of the following three methods
depending on the Actava Average Closing Price:
1. If the Actava Average Closing Price is less than $10.50, then the
Sterling Exchange Ratio will be determined by solving for "Y" in the
following formula and dividing "Y" by the number of shares of Sterling
Common Stock outstanding on the business day immediately preceding the
Determination Date:
6,000,000
-----------------------------
"Y" = Actava Average Closing Price;
2. If the Actava Average Closing Price is greater than or equal to
$10.50 and less than or equal to $14.875, then the Sterling Exchange Ratio
will be equal to a fraction, the numerator of which is 571,428 and the
denominator of which is the number of shares of Sterling Common Stock
outstanding on the business day immediately preceding the Determination
Date; or
3. If the Actava Average Closing Price is greater than $14.875, the
Sterling Exchange Ratio will be determined by solving for "Y" in the
following formula and then dividing "Y" by the number of shares of Sterling
Common Stock outstanding on the business day immediately preceding the
Determination Date:
8,500,000
----------------------------
"Y" = Actava Average Closing Price.
See "PROPOSAL NO. 1--THE PROPOSED MERGERS--Sterling Exchange Ratio." As of
September 20, 1995, there were 11,215,000 shares of Sterling Common Stock
outstanding.
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INTERESTS OF AND BENEFITS TO THE METROMEDIA HOLDERS AND SENIOR EXECUTIVES OF
ACTAVA AS A RESULT OF THE MERGERS
Metromedia Loans and Advances to Orion, MITI and Sterling
Each of Orion, MITI and Sterling are currently party to a number of material
contracts and other arrangements with Metromedia and certain affiliates of
Metromedia pursuant to which Metromedia and certain of its affiliates have,
among other things, made loans or provided financing to, or paid obligations on
behalf of, each of Orion, MITI and Sterling. It is a condition to the
consummation of the Mergers and the transactions contemplated thereby that such
indebtedness, financing and other obligations of Orion, MITI and Sterling to
Metromedia and its affiliates be refinanced, repaid or converted into equity in
the Surviving Corporation, depending upon the type of financing arrangement, as
more fully described herein. See "PROPOSAL NO. 1--THE PROPOSED
MERGERS--Interests of and Benefits to the Metromedia Holders and Senior
Executives of Actava as a Result of the Mergers."
Certain of the amounts owed by Orion ($20,400,000), MITI ($34,076,000) and
Sterling ($524,000) to Metromedia were financed by Metromedia through borrowings
under a $55 million credit agreement between Actava and Metromedia (the
"Actava-Metromedia Credit Agreement"). At the Effective Time, Orion, MITI and
Sterling will repay such amounts to Metromedia and Metromedia will immediately
utilize such funds to repay Actava the amounts owed by Metromedia to Actava
under the Actava-Metromedia Credit Agreement. Because, at the Effective Time,
Orion, Sterling and MITI will be a part of the Surviving Corporation, there will
be no net addition to the assets of the Surviving Corporation as a result of
these transactions. See "PROPOSAL NO. 1--THE PROPOSED MERGERS--Interests of and
Benefits to the Metromedia Holders and Senior Executives of Actava as a Result
of the Mergers."
In addition, Metromedia and Mr. Kluge have guaranteed (the "Bank Guarantee")
amounts owed to the banks (the "Banks") that are parties to the Third Amended
and Restated Credit Agreement with Orion (the "Third Restated Credit Agreement")
and amounts owed to Sony Pictures Entertainment Corp. ("Sony") (the maximum
exposure thereunder as of September 20, 1995 was $54.4 million, subject to
reduction for payments made by Orion from September 20, 1995 until October 20,
1995). The Bank Guarantee requires that Metromedia and Mr. Kluge make payments
to the Banks and Sony during October 1995 if Orion has not reduced to zero the
amount of its outstanding debt to such parties. Because Orion has not satisfied
its payment obligation to Sony and it anticipates that it will not satisfy its
payment obligations to the Banks, Metromedia will be obligated to pay the
remaining unpaid portion of the $54.4 million owed to the Banks and Sony during
October 1995. Orion is required to reimburse Metromedia in full for all such
payments made by Metromedia on Orion's behalf. Accordingly, at the Effective
Time, the Surviving Corporation would be obligated to repay to Metromedia the
amount of such guaranteed payment paid by Metromedia to the Banks and Sony
during October 1995. See "INFORMATION REGARDING ORION--Relationship with
Metromedia;" "INFORMATION REGARDING MITI--Relationship with Metromedia;"
"INFORMATION REGARDING STERLING--Metromedia Loan Agreement;" and "PROPOSAL NO.
1--THE PROPOSED MERGERS--Background of the Mergers."
Certain indebtedness owed by Metromedia International, Inc. ("MII"), a
wholly-owned subsidiary of MITI, to an affiliate of Metromedia in the principal
amount of approximately $19.6 million (as of September 20, 1995) will be
refinanced or repaid in full or converted into Common Stock of the Surviving
Corporation as provided in the Contribution Agreement among Actava and certain
of the Metromedia Holders to be executed at the Effective Time (the
"Contribution Agreement"). In addition, certain non-recourse financing provided
by an affiliate of Metromedia to Orion and its affiliates (approximately $9.1
million at September 20, 1995) will either be refinanced or repaid in full or
converted into Common Stock of the Surviving Corporation as provided in the
Contribution
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Agreement. Pursuant to the Contribution Agreement, the amount of Common Stock
into which such financing will be converted at the Effective Time is based on,
in the case of the financing provided to Orion and its affiliates, the stock
prices utilized in formulating the Orion Exchange Ratio, and in the case of the
financing provided to MII, the stock prices utilized in formulating the MITI
Exchange Ratio. If the entire amount of such financing ($29.4 million including
accrued interest as of September 20, 1995) is converted into shares of Common
Stock pursuant to such formulas, such conversion would have resulted in the
issuance of an aggregate of 2,776,854 shares of Common Stock. See "INFORMATION
REGARDING ORION--Relationship with Metromedia;" "INFORMATION REGARDING
MITI--Relationship with Metromedia;" "INFORMATION REGARDING STERLING-Metromedia
Loan Agreement;" and "PROPOSAL NO. 1--THE PROPOSED MERGERS--Terms and Conditions
of the Contribution Agreement."
Control of Surviving Corporation by the Metromedia Holders
The following diagram illustrates the pre-Mergers and post-Mergers equity
ownership by the Metromedia Holders of the parties to the Merger Agreement and
of the Surviving Corporation, respectively.
<TABLE>
Pre-Mergers Ownership Structure
<S> <C> <C> <C> <C> <C>
Metromedia Public Public Public Metromedia Other
Holders Stockholders Stockholders Stockholders Holders Stockholders
(56.1%) (43.9%) | | (55.8%) (44.2%)
| | | | | |
| | | | | |
| | | | | |
------------------- --------- ----------- --------------------
Orion Actava Sterling MITI
------------------- --------- ----------- --------------------
</TABLE>
Post-Mergers Ownership Structure
Metromedia Public
Holders Stockholders
(33.3%)* (66.7%)
| |
| |
| |
-----------------------------------
Surviving Corporation
(Metromedia International Group)
-----------------------------------
| | |
| | |
| | |
--------- ------- ----
New Orion New New
Snapper MITI
--------- ------- ----
* Assumes (i) that the Determination Date occurred on September 20, 1995, (ii)
that certain amounts owed by Orion and affiliates of Orion and MITI to certain
of the Metromedia Holders as of such date are converted into Common Stock and
(iii) that all outstanding options to acquire shares of Common Stock are
exercised.
Currently, the Metromedia Holders, as shown above, collectively own
approximately 56.1% of the outstanding shares of Orion Common Stock and
approximately 55.8% of the outstanding shares of MITI Common Stock. The
Metromedia Holders consist of Metromedia Company, its two general partners, John
W. Kluge and Stuart Subotnick, and the following corporations owned and
controlled by Messrs. Kluge and Subotnick: Met International, Inc., Met Telcell,
Inc. and MetProductions, Inc. For a
19
<PAGE>
table identifying the ownership of each such Metromedia Holder in Orion, MITI
and the Surviving Corporation, see "PROPOSAL NO. 1--THE PROPOSED
MERGERS--Interests of and Benefits to the Metromedia Holders and Senior
Executives of Actava as a Result of the Mergers." As provided for in the Merger
Agreement, the Metromedia Holders will have their shares of Orion Common Stock
converted into shares of Common Stock pursuant to the Orion Merger and their
shares of MITI Common Stock converted into shares of Common Stock pursuant to
the MITI Merger. Immediately following the Effective Time, the Metromedia
Holders will collectively be the Surviving Corporation's largest stockholder and
will collectively own approximately 33.3% of the outstanding shares of Common
Stock of the Surviving Corporation (assuming (i) that the Determination Date
occurred on September 20, 1995, (ii) that certain amounts owed by Orion and its
affiliates and an affiliate of MITI to certain of the Metromedia Holders as of
such date are converted into Common Stock and (iii) the exercise of all
outstanding options to acquire shares of Common Stock). In addition, Metromedia,
as the majority stockholder of Orion and whose designees, together with a member
of Orion's management, constitute a majority of the members of the Board of
Directors of Orion, will, pursuant to the Merger Agreement, be entitled to
designate six of the ten members of the Surviving Corporation's Board of
Directors at the Effective Time. The size of the Surviving Corporation's Board
of Directors is subject to downward adjustment under certain circumstances. See
"PROPOSAL NO. 1--THE PROPOSED MERGERS--Management and Operations After the
Mergers."
Approval by Orion Stockholders is Assured Due to Vote of Metromedia Holders
The Metromedia Holders have indicated that they will vote all of their
shares of Orion Common Stock and MITI Common Stock, as applicable, in favor of
the Merger Agreement (if the Merger Agreement is approved by the requisite vote
of each of the Actava Stockholders and Sterling Stockholders). Accordingly, if
all such shares held by the Metromedia Holders are voted as anticipated, the
vote will be sufficient to assure approval of the Merger Agreement by the Orion
Stockholders.
Post-Employment Agreements with Walter M. Grant and Frederick B. Beilstein
Actava has entered into Post-Employment Consulting Agreements with two of
its senior executive officers (the "Post-Employment Agreements"). The two Actava
executive officers with Post-Employment Agreements are Frederick B. Beilstein,
Senior Vice President and Chief Financial Officer, and Walter M. Grant, Senior
Vice President and General Counsel. If either of these executive officers does
not remain with the Surviving Corporation following the consummation of the
Mergers, he will be entitled to receive certain severance benefits under his
Post-Employment Agreement. The maximum amounts payable under the Post-Employment
Agreements (including Actava's share of the medical and other benefits to which
each executive will be entitled) will be $559,973 for Mr. Beilstein and $485,851
for Mr. Grant. These amounts, however, will be reduced in the event that a
terminated executive has "earned income" (as defined in the Post-Employment
Agreements) during the two-year period he serves as a consultant to the
Surviving Corporation. The minimum amounts payable under the Post-Employment
Agreements will be $275,000 for Mr. Beilstein and $237,500 for Mr. Grant. See
"PROPOSAL NO. 1--THE PROPOSED MERGERS-- Interests of and Benefits to the
Metromedia Holders and Senior Executives of Actava as a Result of the Mergers."
Employment Agreement with John D. Phillips
Actava is currently a party to an employment agreement with Mr. Phillips
which provides that Mr. Phillips will be entitled to receive his base salary of
$625,000 per annum through December 31, 1996 in the event he is terminated
without cause. Consummation of the Mergers will not trigger any payments to Mr.
Phillips under his employment agreement.
Except as described above, there is no affiliation among Orion, MITI and the
Metromedia Holders, on the one hand, and Actava and Sterling, on the other hand,
and there is no affiliation between Actava and Sterling.
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<PAGE>
CERTAIN CONDITIONS
Pursuant to the terms of the Merger Agreement, the obligation of each of
Actava, Orion, MITI and Sterling to consummate the Mergers is subject to the
satisfaction of a number of conditions, including the following:
(i) the stockholders of each of Actava, Orion, MITI and Sterling shall
have approved the Merger Agreement;
(ii) less than 25% of the MITI Stockholders and less than 25% of the
Sterling Stockholders shall have perfected their dissenters' rights of
appraisal;
(iii) the Orion Senior Indebtedness (as defined below) and Orion
Subordinated Indebtedness (as defined below) shall have been refinanced on
terms reasonably acceptable to Actava and to Orion;
(iv) the Actava Average Closing Price shall not be less than $8.25
(subject to upward or downward adjustment in the event of a stock split,
recapitalization or other similar corporate transaction);
(v) the receipt of certain opinions of counsel with respect to certain
legal matters and relating to the tax-free nature of the Mergers;
(vi) that no material adverse change has occurred since April 12, 1995
in the business, assets, prospects, condition, or results of operations of
any of Orion, Actava, MITI, Sterling, or Roadmaster Industries, Inc. (a
company in which Actava owns a 39% interest, as described below);
(vii) the shares of Common Stock shall have been accepted for listing on
the NYSE or the American Stock Exchange, Inc. ("AMEX") or accepted for
quotation on the NASDAQ/NMS; and
(viii) the concurrent consummation of each of the Mergers.
For a description of all of the conditions precedent to the consummation of
the Mergers, see "PROPOSAL NO. 1--THE PROPOSED MERGERS--Terms and Conditions of
the Merger Agreement."
The Merger Agreement may be terminated at any time prior to the Effective
Time (i) by the mutual written consent of the parties, (ii) unilaterally by any
party, if the Effective Time has not occurred on or before December 31, 1995 or
(iii) by the non-breaching party in the case of certain material breaches by the
other party. See "PROPOSAL NO. 1--THE PROPOSED MERGERS-- Terms and Conditions of
the Merger Agreement."
RISK FACTORS
Orion Stockholders, Actava Stockholders, MITI Stockholders and Sterling
Stockholders should consider carefully, in addition to the other information set
forth herein, the factors discussed under the heading "RISK FACTORS" in this
Joint Proxy Statement/Prospectus.
BUSINESS OF ORION
Orion is engaged in the worldwide distribution of filmed entertainment
product for theatrical, cable, pay and free television markets and to the video
cassette and video disc markets and through other emerging technologies. Orion
has a library of approximately 750 motion picture and television titles which it
distributes in all media. Orion also distributes new and re-released product
produced by
21
<PAGE>
third parties and acquired by Orion through non-recourse financing and provides
distribution services for third parties. See "INFORMATION REGARDING
ORION--Business of Orion."
For the fiscal year ended February 28, 1995, and the three months ended May
31, 1995, Orion reported revenues of $191.2 million and $42.2 million,
respectively, and net losses of $50.3 million and $9.8 million, respectively.
Three separate lawsuits have been filed in the Delaware Court of Chancery
(the "Delaware Court"), one against Orion and its directors, one against Orion,
its directors and Actava and one against Actava, its directors, Orion, MITI and
Sterling. Such lawsuits seek, among other things, to enjoin consummation of the
Mergers. See "LITIGATION."
Orion's principal executive offices are located at 1888 Century Park East,
Seventh Floor, Los Angeles, CA 90067 and its telephone number is (310) 282-0550.
BUSINESS OF ACTAVA
Business
Actava presently operates one business, Snapper Power Equipment Company
("Snapper"), which is engaged in the manufacture and sale of lawn and garden
equipment. At the beginning of 1994, Actava owned and operated businesses in
three industries: photofinishing, lawn and garden equipment (Snapper), and
sporting goods. Actava sold its photofinishing subsidiary and its four sporting
goods subsidiaries during 1994. In addition to operating Snapper, Actava owns
19,169,000 shares (or approximately 39%) of the common stock of Roadmaster
Industries, Inc. ("Roadmaster"), an NYSE-listed company which is one of the
largest manufacturers of bicycles and a leading manufacturer of fitness
equipment and toy products in the United States. These shares were issued to
Actava in connection with the sale of Actava's four sporting goods subsidiaries
to Roadmaster effective as of December 6, 1994 (the "Actava-Roadmaster Exchange
Transaction").
For the fiscal year ended December 31, 1994, and the six months ended June
30, 1995, Actava reported revenues of $551.8 million and $98.8 million,
respectively, losses from continuing operations of $23.5 million and $18.9
million, respectively, a loss from discontinued operations of $40.7 million (for
the fiscal year ended December 31, 1994), and a loss from an extraordinary item
of $1.6 million (for the fiscal year ended December 31, 1994), resulting in net
losses of $65.8 million and $18.9 million, respectively.
Actava's principal executive offices are located at 945 East Paces Ferry
Road, Suite 2210, Atlanta, Georgia 30326 and its telephone number is (404)
261-6190.
Triton Opposition
On February 15, 1995, Triton Group Ltd. ("Triton"), which owns approximately
25.3% of the issued and outstanding shares of Common Stock, filed with the
Commission Amendment No. 11 to its Schedule 13D (the "Schedule 13D Amendment")
relating to its ownership of Common Stock. In the Schedule 13D Amendment, Triton
indicated that, based on its review of preliminary materials regarding the
Mergers, it opposed the Mergers and encouraged Actava's Board of Directors and
management to evaluate other alternative business strategies and to exercise
their obligations diligently under Delaware law relating to the sale of Actava.
Actava and Triton have had significant contracts and agreements between them for
a period of years prior to the filing of the Schedule 13D Amendment, which are
described elsewhere in this Joint Proxy Statement/Prospectus. See "INFORMATION
REGARDING ACTAVA--Other Developments."
22
<PAGE>
Litigation
Three separate lawsuits have been filed in the Delaware Court, one against
Orion and its directors, one against Orion, its directors and Actava and one
against Actava, its directors, Orion, MITI and Sterling. Such lawsuits seek,
among other things, to enjoin consummation of the Mergers. See "LITIGATION."
BUSINESS OF MITI
MITI, through its wholly owned subsidiaries, currently owns interests in and
participates along with local partners in the management of certain joint
ventures which operate communications businesses in certain countries in Eastern
Europe and certain of the former Soviet Republics. MITI currently owns interests
in and participates in the management of joint ventures which operate (i)
wireless cable television systems in six cities in Russia and other former
Soviet Republics, (ii) paging systems in six cities in Russia, other former
Soviet Republics and Romania, (iii) an international toll calling service which
operates throughout the Republic of Georgia, (iv) a trunked mobile radio service
which operates in certain areas in Romania and (v) a radio station which
broadcasts on two FM radio frequencies in Moscow, Russia, radio stations which
broadcast on an AM and an FM radio frequency in St. Petersburg, Russia, a radio
station which broadcasts on an FM radio frequency in Sochi, Russia and a radio
station which broadcasts on an FM radio frequency in Riga, Latvia. MITI also
currently owns a radio station which broadcasts on an AM radio frequency and two
FM radio frequencies in Budapest, Siofok and Khebegy, Hungary. In addition, MITI
holds ownership interests in joint ventures which are currently constructing
wireless cable television systems in Bucharest, Romania and Nizhny Novgorod,
Russia, a paging system in Almaty, Kazakhstan and a wireless local loop
telephony system in Tashkent, Uzbekistan. MITI is also in the process of
purchasing an ownership interest in a joint venture which is constructing a
paging system in St. Petersburg, Russia.
MITI is seeking to enter into joint venture arrangements for additional
wireless cable television, paging, wireless telephony and radio broadcast
projects in various markets in which it has existing operations as well as in
additional markets in Eastern Europe and the former Soviet Republics. MITI is
also pursuing opportunities to expand its communications businesses into other
emerging markets in areas such as the Far East, including China. MITI's strategy
of investing in a variety of different communications projects in a number of
different markets is intended to (i) reduce the negative impact that political
or economic instability in any one market would have on MITI, and (ii) enable
MITI to offer multiple communications services in many of its markets which
reduces the possibility that MITI's business prospects would be adversely
affected if a particular communications service offered by it is not widely
accepted or becomes obsolete.
For the fiscal year ended December 31, 1994 and the six months ended June
30, 1995, MITI reported revenues of approximately $3.5 million and $3.3 million,
respectively, and net losses of approximately $19.1 million and $13.1 million,
respectively.
Three separate lawsuits have been filed in the Delaware Court, one against
Orion and its directors, one against Orion, its directors and Actava and one
against Actava, its directors, Orion, MITI and Sterling. Such lawsuits seek,
among other things, to enjoin consummation of the Mergers. See "LITIGATION."
MITI's principal executive offices are located at 41 West Putnam Avenue,
Greenwich, Connecticut 06830 and its telephone number is (203) 862-9200.
BUSINESS OF STERLING
Sterling is engaged in international and domestic distribution and
production of motion pictures and other entertainment product, and also provides
consulting services to other corporations and entities, principally to
businesses in the entertainment industry. The principal strategic objective of
Sterling is to capitalize on niche markets currently unexploited or
under-exploited by the "major" studios, large distributors, and established
entertainment financiers, as well as traditional financial consulting firms.
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<PAGE>
For the fiscal year ended March 31, 1995 and the three months ended June 30,
1995, Sterling reported revenues of $8.4 million and $1.7 million respectively,
and net income of $259,000 and $16,000, respectively.
Three separate lawsuits have been filed in the Delaware Court, one against
Orion and its directors, one against Orion, its directors and Actava and one
against Actava, its directors, Orion, MITI and Sterling. Such lawsuits seek,
among other things, to enjoin consummation of the Mergers. See "LITIGATION."
Sterling's principal executive offices are located at 1888 Century Park
East, Suite 1777, Los Angeles, California 90067 and its telephone number is
(310) 282-0871.
THE COMBINED ORGANIZATION
Upon consummation of the Mergers, the Surviving Corporation, through
wholly-owned subsidiaries (see below), will conduct all of the business and
operations of Orion, Actava, MITI and Sterling. The pro forma income statement
of the combined organization for the twelve month period ended February 28,
1995, and the three month period ended May 31, 1995, reflects revenues of
approximately $452.7 million and $102.1 million, respectively, and losses from
continuing operations of approximately $88.8 million and $22.2 million,
respectively. See "SURVIVING CORPORATION PRO FORMA COMBINING FINANCIAL
STATEMENTS."
REASONS FOR THE MERGERS
The Surviving Corporation will combine the valuable entertainment and
communications assets of Orion, MITI and Sterling with the financial resources
of Actava to create a global entertainment, media and communications company.
The Surviving Corporation will be better positioned to capitalize on the assets
of Actava, Orion, MITI and Sterling than any of the individual companies on a
stand-alone basis. For example, the Surviving Corporation will have the
financial and operational resources to develop more fully MITI's wireless cable
and communications businesses in the former Soviet Republics and Eastern Europe
and other emerging markets and thereby capitalize on MITI's position as a
leading provider of such services in these markets. MITI will also benefit from
increased access to high quality programming from the combined Orion/Sterling
film and television library. The Mergers will also enable Orion to initiate the
production and acquisition of new motion pictures, which management of each of
the companies believes will enhance the marketability and value of the combined
Orion/Sterling film library and will enable the Surviving Corporation to utilize
more effectively Orion's existing distribution infrastructure. The Surviving
Corporation also should have greater access to capital markets and an enhanced
ability to make strategic acquisitions of other companies whose businesses
and/or assets complement those of the Surviving Corporation than any of the
companies have individually. The respective Boards of Directors of Orion,
Actava, MITI and Sterling also believe that the Surviving Corporation will
benefit from potential operating cost savings, including reductions in corporate
overhead and distribution expenses and other cost savings resulting from the
combination of the Orion and Sterling film and television libraries, and that
the Mergers will create greater liquidity for the stockholders of the combined
organization.
In reaching their decision to approve the Merger Agreement, the Board of
Directors of each of Orion, Actava, MITI and Sterling consulted with their
respective management teams and advisors, and independently considered the
material factors described above and elsewhere in this Joint Proxy
Statement/Prospectus. See "PROPOSAL NO. 1--The Proposed Mergers--Reasons for the
Mergers; Board Recommendations." Based upon their independent review of such
factors and the other factors set forth herein, the Board of Directors of each
of Orion, Actava, MITI and Sterling approved the Merger Agreement.
CAPITAL STRUCTURE FOLLOWING EFFECTIVE TIME
At the Effective Time, (i) Orion will merge with and into New Orion, a newly
formed, wholly-owned subsidiary of Actava, and New Orion, as the surviving
corporation of the Orion Merger, will change its name to "Orion Pictures
Corporation," (ii) MITI will merge with and into New MITI, a newly formed,
wholly-owned subsidiary of Actava, and New MITI, as the surviving corporation of
the
24
<PAGE>
MITI Merger, will change its name to "Metromedia International
Telecommunications, Inc." and (iii) Sterling will merge with and into Actava,
and Actava, as the surviving corporation of the Sterling Merger, will change its
name to "Metromedia International Group, Inc." Immediately following
consummation of the Mergers, the Surviving Corporation will transfer (i) all of
its assets that were owned by Sterling immediately prior to the Effective Time
to New Orion, which will continue the business and operations of Orion and
Sterling and (ii) all of the assets of its Snapper Power Equipment Company
division to a newly formed subsidiary ("New Snapper"), which will continue the
business and operations of the Snapper division. Transferring the assets of
Actava's Snapper division to New Snapper will require the consent of Snapper's
existing bank lenders. New MITI will continue the business and operations of
MITI. Accordingly, immediately following the Effective Time, the Surviving
Corporation will be a holding company whose assets will consist of Actava's cash
and cash equivalents owned as of the Effective Time, the stock of New Orion, New
MITI and New Snapper and Actava's current stock investment in Roadmaster. In
addition, Actava's existing subordinated indebtedness (approximately $159.2
million as of September 20, 1995) will remain outstanding as subordinated
indebtedness of the Surviving Corporation.
FINANCING ARRANGEMENTS
The Surviving Corporation will refinance substantially all of Orion's
existing indebtedness in order to enable it to utilize its operating cash flow
and cash on hand to implement its stated business strategy. The covenants and
debt service requirements imposed by certain of Orion's existing indebtedness
arrangements would otherwise have prevented the Surviving Corporation from
capitalizing on its significant business opportunities and realizing the
benefits of the Mergers. In addition, as of August 31, 1995, an event of default
has occurred under certain of Orion's existing indebtedness, which indebtedness
will be refinanced in full in the manner described herein. Orion and Chemical
Bank have entered into a commitment letter pursuant to which Chemical Bank has
committed, subject to certain conditions, to provide an aggregate of $185
million of financing to New Orion, $135 million of which will be used to
refinance in part Orion's existing indebtedness and $50 million of which will
provide New Orion with a revolving line of credit. In addition, the Surviving
Corporation will enter into a credit facility with Chemical Bank secured by the
Surviving Corporation's stock in Roadmaster, which will provide up to $35
million to be used to refinance in part Orion's existing indebtedness. For a
description of the new credit facilities to be obtained by the Surviving
Corporation and Orion and the intended use of such facilities to repay Orion's
existing indebtedness, see "PROPOSAL NO. 1--THE PROPOSED MERGERS--Financing
Arrangements--Use of Proceeds by the Surviving Corporation to Refinance Existing
Orion Indebtedness."
The following summarizes the anticipated sources and uses of funds required
to refinance Orion's existing indebtedness, assuming the Effective Time occurred
on September 20, 1995.
SOURCE OF FUNDS
- -----------------------------------------------------------
New Orion, as borrower from Chemical Bank, as agent........ $135.0 million
Surviving Corporation, as borrower from Chemical Bank...... $ 34.5 million
Actava's and Orion's cash on hand at Effective Time........ $41.4 million
Total...................................................... $210.9 million
USE OF FUNDS
- -----------------------------------------------------------
Refinance existing Orion Senior Indebtedness and Orion
Subordinated Indebtedness, including debt issuance costs... $210.9 million(1)
- ------------
(1) Assumes that the Effective Time occurred at September 20, 1995 and that all
existing Orion indebtedness was repaid at 100% of the outstanding principal
amount thereof, plus accrued and unpaid interest at such date, except for
Orion's 10% Subordinated Debentures due 2001 which were assumed to have been
redeemed at 95% of their outstanding principal amount. Orion anticipates
that it will make certain net cash flow payments to the Banks, Sony and the
holders of the Orion Subordinated Indebtedness (as defined herein) prior to
the Effective Time and, accordingly, the aggregate amount of Orion's
indebtedness at the Effective Time will change from the amounts shown.
In addition, it is anticipated that each of New Orion, New MITI and New
Snapper will have available lines of credit which will not be used to finance
the operations of any other businesses of the
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<PAGE>
Surviving Corporation or to refinance any existing indebtedness. New Orion will
have a $50 million revolving line of credit available to fund its production,
acquisition and distribution of motion pictures and for general working capital
purposes. New MITI may have up to $29.9 million available to it, subject to
certain conditions, to finance the construction, operation and management,
through joint ventures, of wireless cable television operations in Eastern
Europe and the former Soviet Republics. New Snapper will also have a revolving
credit facility available to finance its operations and working capital needs.
FEDERAL INCOME TAX CONSEQUENCES
In the opinion of Long, Aldridge & Norman, counsel to Actava, based upon the
representations relied upon and assumptions set forth in its opinion, no gain or
loss will be recognized for federal income tax purposes by Actava Stockholders
upon consummation of the Orion Merger, the MITI Merger and the Sterling Merger.
Actava Stockholders should consult with their own tax advisors regarding the tax
consequences of the Orion Merger, the MITI Merger and the Sterling Merger to
them including the applicability of various state and local tax laws. See
"CERTAIN FEDERAL INCOME TAX CONSEQUENCES OF THE MERGERS."
In the opinion of Paul, Weiss, Rifkind, Wharton & Garrison, counsel to
Orion, based upon the representations relied upon and assumptions set forth in
its opinion, the Orion Merger will qualify as a reorganization within the
meaning of Section 368(a) of the Internal Revenue Code of 1986, as amended (the
"Code"). Accordingly, no gain or loss will be recognized by Orion Stockholders
upon receipt of Common Stock, except in respect of cash received in lieu of
fractional shares. Holders of shares of Orion Common Stock should consult with
their own tax advisors regarding the tax consequences of the Orion Merger to
them including the applicability of various state and local tax laws. See
"CERTAIN FEDERAL INCOME TAX CONSEQUENCES OF THE MERGERS."
In the opinion of Rubin Baum Levin Constant & Friedman, counsel to MITI,
based upon the representations relied upon and assumptions set forth in its
opinion, the MITI Merger will qualify as a reorganization within the meaning of
Section 368(a) of the Code. Accordingly, no gain or loss will be recognized by
MITI Stockholders upon receipt of Common Stock, except in respect of cash
received in lieu of fractional shares. Holders of shares of MITI Common Stock
should consult with their own tax advisors regarding the tax consequences of the
MITI Merger to them including the applicability of various state and local tax
laws. See "CERTAIN FEDERAL INCOME TAX CONSEQUENCES OF THE MERGERS."
In the opinion of Robinson Brog Leinwand Greene Genovese & Gluck P.C.,
counsel to Sterling, based upon the representations relied upon and assumptions
set forth in its opinion, the Sterling Merger will qualify as a reorganization
within the meaning of Section 368(a) of the Code. Accordingly, no gain or loss
will be recognized by Sterling Stockholders upon receipt of Common Stock, except
in respect of cash received in lieu of fractional shares. Holders of shares of
Sterling Common Stock should consult with their own tax advisors regarding the
tax consequences of the Sterling Merger to them including the applicability of
various state and local tax laws. See "CERTAIN FEDERAL INCOME TAX CONSEQUENCES
OF THE MERGERS."
ACTAVA RECOMMENDATION
At the meetings of Actava's Board of Directors held to consider and vote on
the Merger Agreement, the directors of Actava considered the advantages and
benefits of the Mergers to Actava and the Actava Stockholders and the risks and
uncertainties associated with the Mergers. See "PROPOSAL NO. 1--THE PROPOSED
MERGERS--Factors Considered by Actava's Board of Directors." The Board of
Directors of Actava concluded that the Mergers provide the Actava Stockholders
with significant opportunities for growth and long-term capital appreciation and
that these opportunities outweigh the risks that will be faced by the Surviving
Corporation. THE ACTAVA BOARD OF DIRECTORS BY A VOTE OF FIVE TO FOUR APPROVED
THE TERMS OF THE INITIAL MERGER AGREEMENT AND, FOLLOWING THE RESIGNATIONS OF TWO
MEMBERS OF THE BOARD OF DIRECTORS, THE BOARD OF DIRECTORS UNANIMOUSLY
26
<PAGE>
APPROVED THE MERGER AGREEMENT AND RECOMMENDS THAT THE STOCKHOLDERS OF ACTAVA
VOTE "FOR" THE PROPOSAL TO APPROVE THE MERGER AGREEMENT. See "PROPOSAL NO.
1--THE PROPOSED MERGERS--Background of the Mergers" and "--Reasons for the
Mergers; Board Recommendations."
OPINION OF ACTAVA'S FINANCIAL ADVISOR
On April 12, 1995, CS First Boston Corporation ("First Boston"), financial
advisor to Actava in connection with the Mergers, delivered its oral opinion to
the Board of Directors of Actava, which was subsequently confirmed in writing,
to the effect that on and as of the date of such opinion, and based upon the
procedures and subject to the assumptions described in such opinion, the Orion
Exchange Ratio, the Sterling Exchange Ratio and the MITI Exchange Ratio, taken
as a whole, were fair from a financial point of view to the Actava Stockholders.
In arriving at its opinion, First Boston, among other things, (i) reviewed the
Merger Agreement, certain publicly available business and financial information
relating to Actava, Orion, MITI and Sterling (collectively, the "Merging
Parties") and certain other information, including financial forecasts, provided
to First Boston by the Merging Parties, (ii) held discussions with the
respective managements of the Merging Parties regarding the respective
businesses and prospects of each of the Merging Parties and certain strategic
and financial benefits anticipated from the Mergers and (iii) performed various
financial analyses with respect to each of the Merging Parties, including a
discounted cash flow analysis, a comparable company analysis and a comparable
transaction analysis. At the meeting of Actava's Board of Directors held on
September 15, 1995, First Boston informed the Board of Directors of Actava that,
as of such date, nothing had come to the attention of First Boston that would
cause it to change the opinion that it delivered to the Board of Directors on
April 12, 1995. A copy of First Boston's opinion, which sets forth the
assumptions made, matters considered and limitations on the review undertaken by
First Boston, is attached as Appendix B to this Joint Proxy Statement/Prospectus
and holders of Common Stock are urged to read the opinion in its entirety. See
"PROPOSAL NO. 1--THE PROPOSED MERGERS--Opinions of Financial Advisors."
THE ACTAVA SPECIAL MEETING
The Actava Special Meeting will be held on November 1, 1995 at 9:00 a.m.,
local time, in the Conference Center, Resurgens Plaza, 945 East Paces Ferry
Road, Atlanta, Georgia 30326.
Actava Stockholders will vote at the Actava Special Meeting on whether to
approve the Orion Merger, the MITI Merger, the Sterling Merger by considering
and voting upon a proposal to approve and adopt the Merger Agreement (which
approval will also constitute an approval of the amendment and restatement of
Actava's Restated Certificate of Incorporation) (Proposal No. 1).
The affirmative vote of the holders of a majority of all the issued and
outstanding shares of Common Stock (whether or not represented in person or by
proxy at the Actava Special Meeting) is required to approve the Mergers as
provided for in the Merger Agreement.
As of the record date for the Actava Special Meeting, directors, executive
officers and affiliates of Actava owned beneficially an aggregate of 5,199,991
shares of Common Stock (excluding shares which may be received upon the exercise
of Actava Options), or approximately 29.8% of the outstanding shares of Common
Stock. Included among the 5,199,991 shares of Common Stock owned beneficially by
Actava's directors, executive officers and affiliates is an aggregate of
4,413,598 shares of Common Stock, or approximately 25.3% of the outstanding
shares of Common Stock, owned by Triton.
In its Schedule 13D Amendment, Triton announced its opposition to the
Mergers. It is anticipated that Triton will vote such shares of Common Stock
against the Merger Agreement.
The Board of Directors of Actava knows of no other business that will be
presented for consideration at the Actava Special Meeting. See "INFORMATION
REGARDING THE MEETINGS--Vote Required--Actava."
ORION RECOMMENDATION; ORION SPECIAL COMMITTEE
On March 2, 1995, Orion's Board of Directors formed a special committee (the
"Orion Special Committee") to consider the terms of the Initial Merger
Agreement, including the Orion Merger, and
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to make a recommendation to the full Board of Directors of Orion regarding the
Initial Merger Agreement. The Orion Special Committee also considered the terms
of the Merger Agreement and made a recommendation to the full Board of Directors
regarding the Merger Agreement. The Orion Special Committee was formed because
Orion's Board of Directors is composed of a majority of persons who are
affiliated with Metromedia and because of the Board of Directors' view that the
Orion directors affiliated with Metromedia could be viewed as having an interest
in the transactions contemplated by the Merger Agreement, in addition to the
interests of Orion Stockholders generally, in light of (i) the then contemplated
issuance to the Metromedia Holders (such issuance is referred to as the "Share
Exchange," and the agreement pursuant to which the Share Exchange was to be
effectuated, is referred to as the "Share Exchange Agreement") in connection
with the Mergers of a special class of stock of the Surviving Corporation (the
"Class A Common Stock") entitled to three votes per share on all matters to be
voted on by the Surviving Corporation's stockholders (other than the election of
directors) and entitled to vote as a separate class to elect six of the ten
members of the Surviving Corporation's Board of Directors (the Merger Agreement,
as amended, eliminates the Share Exchange and the issuance of Class A Common
Stock) and (ii) the MITI Merger. The members of the Orion Special Committee are
Michael I. Sovern, Joel R. Packer and Raymond L. Steele, each of whom Orion
considers an independent director. Messrs. Packer and Steele were two of the
three directors selected to Orion's Board of Directors at the request of Orion's
unsecured creditors in connection with the consummation of Orion's Modified
Third Amended Joint Consolidation Plan of Reorganization (the "Plan"). See
"INFORMATION REGARDING ORION--Management's Discussion and Analysis of Financial
Condition and Results of Operations." The third member of Orion's Board of
Directors selected by Orion's unsecured creditors in connection with
consummation of the Plan, Stephen Wertheimer, elected not to serve on the Orion
Special Committee because he is involved in active negotiations with Metromedia
on a matter unrelated to the Mergers, to Orion and to Mr. Wertheimer's duties as
a director of Orion. Mr. Steele has approached representatives of Metromedia
regarding their interest in making an investment in several potential
transactions. Metromedia has declined to participate or has not yet taken action
with respect to each such potential transaction. In light of the lack of any
substantive discussions between Mr. Steele and Metromedia regarding these
transactions, Mr. Steele and the Orion Board of Directors determined that Mr.
Steele could serve on the Orion Special Committee.
Mr. Sovern was selected as Chairman of the Orion Special Committee. The
Orion Special Committee considered several independent law firms and investment
banking firms and at meetings held on March 15 and 16, 1995 selected the law
firm of Davis Polk & Wardwell ("Davis Polk") and the investment banking firm of
Alex. Brown & Sons, Incorporated ("Alex. Brown") to render legal and financial
advice, respectively, to the Orion Special Committee. On March 28, April 11,
April 27, May 5 and September 13, 1995, the Orion Special Committee held
meetings which were attended by its advisors in order to discuss the terms of
the Orion Merger. On May 5, 1995, the Orion Special Committee unanimously
recommended that the full Board of Directors of Orion approve the Initial Merger
Agreement. The Orion Special Committee, following the amendments to the Initial
Merger Agreement described herein, met again on September 13, 1995 and
unanimously recommended that the full Board of Directors of Orion approve the
Merger Agreement. See "PROPOSAL NO. 1--THE PROPOSED MERGERS--Background of the
Mergers--Orion Board Deliberations" and "--Reasons for the Mergers; Board
Recommendations--Orion's Reasons for the Orion Merger."
At the meeting of Orion's Board of Directors held on September 13, 1995 to
consider the Orion Merger, based on the unanimous recommendation of the Orion
Special Committee that the full Board of Directors of Orion approve the Merger
Agreement, the full Board of Directors of Orion unanimously approved the Merger
Agreement as being in the best interests of Orion and its stockholders. In
analyzing the proposed transactions and in its deliberations regarding its
recommendation of the Merger Agreement, the Orion Special Committee and the full
Board of Directors of Orion considered a number of factors, including Orion's
current financial condition and prospects as a stand-alone company and the
advantages of the Merger to the Orion Stockholders, such as potentially enhanced
stockholder
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value due to the larger revenue base and potential for improved earnings per
share. In this process, the Orion Special Committee and the full Board of
Directors of Orion reviewed information provided by the managements of Actava,
MITI and Sterling concerning the financial performance, condition, business
operations and prospects of Actava, MITI and Sterling, and the substantial
future capital requirements related to such operations. The Orion Special
Committee and the full Board of Directors of Orion concluded that the
opportunities for growth related to these businesses outweighed the risks. In
addition, the Orion Special Committee and the full Board of Directors of Orion
considered the proposed structure of the transactions and the terms of the
Merger Agreement and other documents to be executed in connection with the
Mergers. The Orion Special Committee and the full Board of Directors of Orion
considered and relied upon but did not adopt the opinion of the financial
advisor to the Orion Special Committee that the value of the consideration to be
received by Orion's public stockholders in connection with the proposed Mergers
is fair, from a financial point of view, to such stockholders. The Orion Special
Committee, which was formed in part because of the potential conflict of
interest created by the Metromedia Holders' majority ownership of Orion and
MITI, also requested and reviewed (and had the Orion Special Committee's
financial advisor review) substantial financial information regarding MITI and
its operations. The Orion Special Committee voted to recommend that the full
Board of Directors of Orion approve the Merger Agreement notwithstanding any
potential conflict of interest created by the Metromedia Holders' majority
ownership interest of Orion and MITI.
The Orion Special Committee and the full Board of Directors of Orion also
considered the fact that the existing covenants contained in the Third Restated
Credit Agreement between the Banks and Orion (such indebtedness referred to
collectively with (i) Orion's obligations to Sony and (ii) Orion's reimbursement
obligation to Metromedia, to the extent Metromedia has or makes payments on
Orion's behalf pursuant to the Bank Guarantee, as the "Orion Senior
Indebtedness") and the indebtedness pursuant to which the Talent Notes due March
1, 1999 of Orion (the "Talent Notes"), the Creditor Notes due March 1, 1999 of
Orion (the "Creditor Notes") and the 10% Subordinated Debentures due October 31,
2001 of Orion (the "10% Debentures," and together with the Talent Notes and
Creditor Notes, the "Orion Subordinated Indebtedness") impose substantial
restrictions on Orion's operations; that as a result of the Mergers and the
refinancing of Orion's indebtedness, the combined enterprise will have greater
operational flexibility and greater financial resources than Orion now
possesses; that, absent the refinancing of Orion's indebtedness, Orion faced the
possibility of a near-term payment acceleration under certain of its
indebtedness and the possible need to file for protection from its creditors
under chapter 11 of the Bankruptcy Code; that the Mergers would provide the
Orion Stockholders with the opportunity to maintain a continuing ownership
interest in Orion's existing business while at the same time participate in a
broader-based enterprise with media, entertainment and telecommunications
businesses; that while certain of those businesses presented risks, they also
presented opportunities; that the Orion Stockholders are currently minority
stockholders in a company already majority owned by Metromedia and its
affiliates and accordingly would not be relinquishing control in connection with
the Mergers (following the consummation of which Metromedia and its affiliates
will be the largest stockholder of the Surviving Corporation and will have
substantial influence on the Surviving Corporation); and that the Orion
Stockholders would have greater stockholder liquidity as a result of the
Mergers. The Orion Special Committee and the full Board of Directors of Orion
did not find it practical to and did not quantify or attempt to attach relative
weight to any of the specific factors considered by them. THE ORION SPECIAL
COMMITTEE UNANIMOUSLY RECOMMENDED THAT THE FULL BOARD OF DIRECTORS OF ORION
APPROVE THE MERGER AGREEMENT AND THE FULL BOARD OF DIRECTORS OF ORION
UNANIMOUSLY RECOMMENDS THAT THE STOCKHOLDERS OF ORION VOTE "FOR" THE PROPOSAL TO
APPROVE THE MERGER AGREEMENT. For discussion of the factors considered by the
directors of Orion in reaching their decision, see "PROPOSAL NO. 1--THE PROPOSED
MERGERS--Reasons for the Mergers; Board Recommendations."
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OPINION OF ORION'S FINANCIAL ADVISOR
On April 27, 1995, Alex. Brown, financial advisor to the Orion Special
Committee in connection with the Orion Merger, delivered its oral opinion to the
Orion Special Committee, which was later confirmed in writing, to the effect
that on and as of the date of such opinion, and based upon the procedures and
subject to the assumptions described in such opinion, the value of the
consideration to be paid to the Orion Stockholders in the Orion Merger is fair,
from a financial point of view, to the Orion Stockholders. In arriving at its
opinion, Alex. Brown, among other things: (i) reviewed the Merger Agreement and
the preliminary Joint Proxy Statement/Prospectus, (ii) reviewed certain publicly
available financial information concerning Orion, Sterling and Actava, and
certain non-public information, including financial forecasts, concerning Orion,
Sterling, MITI and Actava, (iii) reviewed the reported price and trading
activity for the common stock of Orion and Actava, (iv) reviewed certain
financial and stock market information for Orion and Actava, and certain
financial information for MITI and Sterling, and similar information for certain
other companies whose securities are publicly traded, (v) reviewed the financial
terms of certain recent business combinations which Alex. Brown deemed
comparable in whole or in part, (vi) met with the management of Orion, Sterling,
MITI and Actava, respectively, to discuss their respective businesses and
prospects, and (vii) considered such other information and other factors which
Alex. Brown deemed appropriate. At the meeting of the Orion Special Committee
held on September 13, 1995, Alex. Brown informed the Orion Special Committee
that, as of such date, nothing had come to the attention of Alex. Brown that
would cause it to change the opinion that it delivered to the Board of Directors
on April 27, 1995. A copy of Alex. Brown's opinion is attached as Appendix C to
this Joint Proxy Statement/Prospectus and holders of Orion Common Stock are
urged to read the opinion in its entirety. See "PROPOSAL NO. 1--THE PROPOSED
MERGERS--Opinions of Financial Advisors."
THE ORION SPECIAL MEETING
The Orion Special Meeting is scheduled to be held in the Concourse Level,
1285 Avenue of the Americas, New York, New York 10019, on November 1, 1995,
beginning at 9:00 a.m., local time.
The Orion Stockholders will vote at the Orion Special Meeting on whether to
approve the Orion Merger by considering and voting upon a proposal to approve
and adopt the Merger Agreement (Proposal No. 1).
The affirmative vote of the holders of a majority of all of the issued and
outstanding shares of Orion Common Stock (whether or not represented in person
or by proxy at the Orion Special Meeting) is required to approve the Orion
Merger as provided for in the Merger Agreement.
As of the record date for the Orion Special Meeting, directors, executive
officers and affiliates of Orion owned beneficially an aggregate of 11,224,329
shares of Orion Common Stock, or approximately 56.1% of the outstanding shares
of Orion Common Stock. Included among the 11,224,329 shares of Orion Common
Stock owned beneficially by Orion's directors, executive officers and affiliates
is an aggregate of 11,215,325 shares of Orion Common Stock, or approximately
56.1% of the outstanding shares of Orion Common Stock, owned beneficially by the
Metromedia Holders. It is anticipated that all such directors, executive
officers and affiliates (including the Metromedia Holders who have indicated
that they will vote in favor of the Merger Agreement if the Merger Agreement is
approved by the requisite vote of each of the Actava Stockholders and the
Sterling Stockholders) will vote their shares of Orion Common Stock in favor of
the Merger Agreement. Accordingly, if all such shares held by directors,
executive officers and affiliates of Orion (including the Metromedia Holders)
are voted as anticipated, the vote will be sufficient to assure approval of the
Merger Agreement.
The Board of Directors of Orion knows of no business that will be presented
for consideration at the Orion Special Meeting other than the matters described
in this Joint Proxy Statement/Prospectus. See "INFORMATION REGARDING THE
MEETINGS--Vote Required--Orion."
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MITI RECOMMENDATION
Because six of the twelve members of MITI's Board of Directors are
designated to serve on its Board by stockholders of MITI who are affiliated with
Metromedia and a seventh member of its Board is a director of an investment
banking institution which, at the time MITI's Board of Directors considered the
Initial Merger Agreement, was serving as an advisor to Orion in connection with
the then contemplated refinancing of the Orion Subordinated Indebtedness, the
Board of Directors of MITI determined that in light of the Orion Merger and the
then contemplated Share Exchange these seven directors could be viewed as having
an interest in the transactions contemplated by the Merger Agreement in addition
to the interests of MITI Stockholders generally. As a result thereof, the Board
of Directors of MITI determined that in accordance with the terms of the
Stockholders' Agreement, dated as of August 15, 1994 by and among MITI and each
of its stockholders (the "MITI Stockholders' Agreement"), approval of the Merger
Agreement required the approval of a majority of the remaining five members of
MITI's Board of Directors who do not have an interest in the transactions
contemplated by the Merger Agreement in addition to the interests of the MITI
Stockholders generally. At the meeting of MITI's Board of Directors held to
consider the MITI Merger, the directors of MITI not affiliated with Metromedia
and the full Board of Directors of MITI approved the Merger Agreement as being
in the best interests of MITI and its stockholders. In assessing the proposed
transactions and in its deliberations concerning its recommendation of the
Merger Agreement, the Board of Directors of MITI considered a number of factors
including MITI's current financial condition, its need for significant
additional capital to develop and construct its wireless communications systems
and radio stations and its prospects as a stand-alone company. The Board of
Directors of MITI considered and relied upon but did not adopt the opinion of
its financial advisor that the value of the consideration to be provided to the
MITI Stockholders in connection with the proposed MITI Merger is fair, from a
financial point of view, to the MITI Stockholders. THE MITI BOARD OF DIRECTORS
UNANIMOUSLY RECOMMENDS THAT THE STOCKHOLDERS OF MITI VOTE "FOR" THE PROPOSAL TO
APPROVE THE MERGER AGREEMENT. For a discussion of the factors considered by the
directors of MITI in reaching their decision, see "PROPOSAL NO. 1--THE PROPOSED
MERGERS--Reasons for the Mergers; Board Recommendations."
OPINION OF MITI'S FINANCIAL ADVISOR
On April 12, 1995, Gerard Klauer Mattison & Co., L.L.C. ("GKM"), financial
advisor to MITI in connection with the MITI Merger, delivered its oral opinion
to the Board of Directors of MITI, which was later confirmed in writing, to the
effect that on and as of the date of such opinion, and based upon the procedures
and subject to the assumptions described in such opinion, the value of the
consideration to be paid to the MITI Stockholders in the MITI Merger is fair,
from a financial point of view, to the MITI Stockholders. In arriving at its
opinion, GKM, among other things: (i) reviewed certain internal business,
operating and financial information, including financial forecasts, furnished to
GKM by MITI, (ii) discussed the past and current operations and financial
condition and the prospects of MITI with members of senior management of MITI,
(iii) compared the financial performance of MITI with that of certain comparable
publicly traded companies, (iv) reviewed the financial terms, to the extent
publicly available, of certain comparable acquisition transactions, (v) reviewed
the Merger Agreement, drafts of the Joint Proxy Statement/Prospectus, certain
other documents related to the Mergers and MITI's arrangements with its joint
venture partners and (vi) conducted such other analyses, performed such other
investigations and considered such other matters as GKM deemed necessary to
arrive at its opinion, including, but not limited to, GKM's assessment of
general economic, market and monetary conditions in the United States and, in
particular, in those foreign countries in which MITI operates, in light of the
political, economic and social risks associated with foreign investments.
Further, in rendering its opinion, GKM has assumed, as instructed by MITI, that
the aggregate value of consideration to be received by the MITI Stockholders
pursuant to the MITI Merger is $100 million. This assumption is based on the
formula set forth in the Merger Agreement which provides that the
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MITI Exchange Ratio will vary based on the Actava Average Closing Price such
that the aggregate market value of the Common Stock to be issued to the MITI
Stockholders in connection with the MITI Merger shall be not less than $100
million. A copy of GKM's opinion is attached as Appendix D to this Joint Proxy
Statement/Prospectus and holders of MITI Common Stock are urged to read the
opinion in its entirety. See "PROPOSAL NO. 1--THE PROPOSED MERGERS--Opinions of
Financial Advisors."
THE MITI ACTION BY WRITTEN CONSENT
In accordance with the terms and conditions of the MITI Stockholders'
Agreement, the affirmative vote of the holders of 65% or more of all of the
issued and outstanding shares of MITI Common Stock is required to approve the
MITI Merger as provided for in the Merger Agreement. In lieu of holding a
Special Meeting of the MITI Stockholders in order to consider and vote upon a
proposal to approve and adopt the Merger Agreement, MITI Stockholders will be
asked to act by written consent in accordance with Section 228 of the DGCL with
respect to this proposal (the "MITI Action by Written Consent"). In addition,
each MITI Stockholder may be asked to terminate, waive and release all of its
rights and claims under the MITI Stockholders' Agreement.
As of the record date established for the MITI Action by Written Consent,
directors, executive officers and affiliates of MITI owned beneficially an
aggregate of 1,213,269 shares of MITI Common Stock (excluding shares which may
be received upon the exercise of MITI Options), or approximately 70.7% of the
outstanding shares of MITI Common Stock. Included among the 1,213,269 shares of
MITI Common Stock owned beneficially by MITI's directors, executive officers and
affiliates are an aggregate of 957,414 shares of MITI Common Stock, or
approximately 55.8% of the outstanding shares of MITI Common Stock, owned
beneficially by the Metromedia Holders. If all shares held by directors,
executive officers and affiliates of MITI (including the Metromedia Holders who
have indicated that they will vote in favor of the Merger Agreement if the
Merger Agreement is approved by the requisite vote of each of the Actava
Stockholders and the Sterling Stockholders) are voted in favor of the MITI
Merger, the vote will be sufficient to assure approval of the proposal to
approve the Merger Agreement.
The Board of Directors of MITI knows of no other business that will be
presented for consideration by the MITI Stockholders at the time of the MITI
Action by Written Consent. See "INFORMATION REGARDING THE MEETINGS--Vote
Required--MITI."
STERLING RECOMMENDATION
At the September 14, 1995 meeting of Sterling's Board of Directors held to
consider the Sterling Merger, the directors of Sterling considered and
unanimously approved the Merger Agreement as being in the best interests of
Sterling and its stockholders. The directors of Sterling considered the
advantages and benefits of the Mergers to Sterling and the Sterling Stockholders
and the risks and uncertainties associated with the Mergers. See "PROPOSAL NO.
1--THE PROPOSED MERGERS--Sterling's Reasons for the Sterling Merger." The Board
of Directors unanimously concluded that the Mergers provide the Sterling
Stockholders with significant opportunities for growth and long-term capital
appreciation and that these opportunities outweigh the risks that will be faced
by the Surviving Corporation. Because of these opportunities, the Board of
Directors of Sterling believes that the Mergers are in the best interests of
Sterling and the Sterling Stockholders. ACCORDINGLY, THE STERLING BOARD OF
DIRECTORS UNANIMOUSLY RECOMMENDS THAT THE STOCKHOLDERS OF STERLING VOTE "FOR"
THE PROPOSAL TO APPROVE THE MERGER AGREEMENT. For a discussion of the factors
considered by the directors of Sterling in reaching their decision, see
"PROPOSAL NO. 1--THE PROPOSED MERGERS--Reasons for the Mergers; Board
Recommendations."
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OPINION OF STERLING'S FINANCIAL ADVISORS
On April 11, 1995, Houlihan, Lokey, Howard & Zukin ("Houlihan Lokey"),
Sterling's financial advisor in connection with the Sterling Merger, delivered
its oral opinion to the Board of Directors of Sterling, which was later
confirmed in writing, to the effect that, on and as of the date of such opinion,
and based upon the procedures and subject to the assumptions described in such
opinion, the value of the consideration to be paid to the Sterling Stockholders
in the Sterling Merger is fair, from a financial point of view, to Sterling
Stockholders. In arriving at its opinion, Houlihan Lokey (i) had discussions
with certain members of the senior management of Sterling regarding the
operations, financial condition, future prospects and projected operations and
performance of Sterling; (ii) reviewed forecasts and projections prepared by
Orion, Actava, MITI and Sterling management; (iii) reviewed the historical
market prices and trading volume for Orion's and Actava's publicly traded
securities; (iv) reviewed certain other publicly available financial data for
certain companies that it deemed comparable to Orion, Actava, MITI and Sterling;
(v) reviewed the Merger Agreement and drafts of this Joint Proxy
Statement/Prospectus; and (vi) conducted such other studies, analyses and
inquiries as it deemed appropriate. A copy of Houlihan Lokey's opinion is
attached as Appendix E to this Joint Proxy Statement/Prospectus and holders of
Sterling Common Stock are urged to read the opinion in its entirety. See
"PROPOSAL NO. 1--THE PROPOSED MERGERS--Opinions of Financial Advisors."
THE STERLING SPECIAL MEETING
The Sterling Special Meeting will be held on November 1, 1995 at 9:00 a.m.,
local time in the Concourse Level at 1285 Avenue of the Americas, New York, New
York 10019 . Sterling Stockholders will vote at the Sterling Special Meeting on
whether to approve the Sterling Merger by considering and voting upon a proposal
to approve and adopt the Merger Agreement (Proposal No. 1).
The affirmative vote of the holders of a majority of all the issued and
outstanding shares of Sterling Common Stock (whether or not represented in
person or by proxy at the Sterling Special Meeting) is required to approve the
Sterling Merger as provided for in the Merger Agreement.
As of the record date for the Sterling Special Meeting, directors, executive
officers and affiliates of Sterling owned beneficially an aggregate of 2,653,800
shares of Sterling Common Stock, or approximately 23.7% of the outstanding
shares of Sterling Common Stock. Furthermore, 6,400,000 shares, or approximately
57.1% of the outstanding shares of Sterling Common Stock, are held by a voting
trust (the "Sterling Voting Trust") created by the Voting Trust Agreement dated
March 30, 1992 by and among Sterling, the voting trustees named therein and the
Liquidation Estate (as defined therein). It is anticipated that the Sterling
Voting Trust and all such directors, executive officers and affiliates will vote
their shares in favor of the proposal to approve the Merger Agreement.
Accordingly, if all such shares held by the Sterling Voting Trust and directors,
executive officers and affiliates of Sterling are voted as anticipated, the vote
will be sufficient to assure approval of the Merger Agreement.
The Board of Directors of Sterling knows of no other business that will be
presented for consideration at the Sterling Special Meeting. See "INFORMATION
REGARDING THE MEETINGS--Vote Required--Sterling."
MANAGEMENT AND OPERATIONS AFTER THE MERGERS
It is currently anticipated that, following the consummation of the Mergers,
a three person Office of the Chairman will be created to manage the business and
affairs of the Surviving Corporation consisting of the following persons: John
W. Kluge, the current Chairman of the Board of Orion and MITI, as Chairman of
the Board, Stuart Subotnick, the current Vice Chairman of Orion and MITI, as
Vice Chairman, and John D. Phillips, the current President and Chief Executive
Officer of Actava, as President and Chief Executive Officer.
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The Merger Agreement provides that as of the Effective Time the number of
members of the Board of Directors of the Surviving Corporation will be fixed at
ten persons to be designated prior to the Effective Time. Six of the ten persons
are to be designated by the Board of Directors of Orion and the remaining four
directors are to be designated by the Board of Directors of Actava. It is
currently anticipated that Messrs. Kluge and Subotnick and Silvia Kessel, a
Senior Vice President of Metromedia and an Executive Vice President and director
of Orion, Richard J. Sherwin, Co-President and a director of MITI, Arnold L.
Wadler, a Senior Vice President of Metromedia and a director of Orion, and
Leonard White, President, Chief Executive Officer and a director of Orion, will
be designated by Orion to the Surviving Corporation's Board of Directors. It is
currently anticipated that Mr. Phillips and Carl E. Sanders, John P. Imlay, Jr.
and Clark A. Johnson, each of whom is a director of Actava, will be designated
by Actava to the Surviving Corporation's Board of Directors.
Triton and Actava are currently parties to an amended and restated
stockholders agreement (the "Triton Stockholders Agreement") which generally
provides that Actava's Board of Directors must be fixed at nine members and that
Triton is entitled to nominate two members to Actava's Board of Directors if
Triton owns in excess of 20% of the outstanding Common Stock and is entitled to
nominate one member to Actava's Board of Directors if it owns more than 10% but
less than 20% of the outstanding Common Stock. Because Triton would own in
excess of 10% but less than 20% of the Common Stock following consummation of
the Mergers, in accordance with the terms of the Triton Stockholders Agreement,
the Surviving Corporation's Board of Directors will be fixed at nine members and
the Surviving Corporation would be required to nominate one director designated
by Triton to the Surviving Corporation's Board of Directors. Unless Triton
waives compliance with such provision of the Triton Stockholders Agreement, it
is currently anticipated that Triton will designate Richard Nevins, who is
currently a member of the Board of Directors of Actava, to serve on the Board of
Directors of the Surviving Corporation. In this event, the Board of Directors of
the Surviving Corporation will consist of nine persons rather than ten persons
as contemplated by the Merger Agreement. The nine persons who will serve as
directors under these circumstances will be (i) the six persons designated by
Orion and named above, (ii) Mr. Nevins, (iii) Mr. Phillips and (iv) either Mr.
Sanders, Mr. Imlay or Mr. Johnson. If the nine persons referred to above are
elected to the Board of Directors of the Surviving Corporation and if Triton, at
any time prior to the time when the Surviving Corporation nominates directors
for election at the Surviving Corporation's first annual meeting of stockholders
after the Effective Time, loses or waives its right to nominate one director to
the Surviving Corporation's Board of Directors, it is anticipated that the two
directors designated by Actava who were not able to serve on the Surviving
Corporation's Board of Directors at the Effective Time will then be appointed to
the Surviving Corporation's Board of Directors.
The Board of Directors of the Surviving Corporation will be divided into
three classes. One class of directors will be initially elected for a term
expiring at the annual meeting of stockholders of the Surviving Corporation to
be held in 1996, a second class will be initially elected for a term expiring at
the annual meeting of stockholders of the Surviving Corporation to be held in
1997, and a third class will be initially elected for a term expiring at the
annual meeting of stockholders of the Surviving Corporation to be held in 1998.
Members of each class will hold office until their successors are elected and
qualified. At each succeeding annual meeting of stockholders of the Surviving
Corporation, the successors of the class of directors whose term expires at that
meeting shall be elected by a plurality vote of all votes cast at such meeting
and will hold office for a three-year term.
REGULATORY APPROVALS
The appropriate filings required under the Hart-Scott-Rodino Antitrust
Improvements Act of 1976, as amended (the "Hart Scott Act"), have been made and
the waiting period expired on June 12, 1995. See "PROPOSAL NO. 1--THE PROPOSED
MERGERS--Regulatory Filings and Approvals."
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PUBLIC TRADING MARKET
It is a condition to the consummation of the Mergers that the outstanding
shares of Common Stock and the shares of Common Stock to be issued in connection
with the Orion Merger, the MITI Merger and the Sterling Merger be accepted for
listing on the NYSE or the AMEX or accepted for quotation on the NASDAQ/NMS. An
application to list the Surviving Corporation's Common Stock on the AMEX will be
filed shortly.
ACCOUNTING TREATMENT
At the Effective Time, the Metromedia Holders will (through their majority
ownership of the Orion Common Stock and through their control, with a member of
Orion's management, of the Board of Directors of Orion) control the direction
and operations of the Surviving Corporation as a result of their ability to
designate a majority of the members of the Board of Directors of the Surviving
Corporation at the Effective Time and will be the Surviving Corporation's single
largest stockholder. Due to the existence of common control of Orion and MITI,
their combination pursuant to the Mergers will be accounted for as a combination
of entities under common control. As a result, the combination of Orion and MITI
will be effected utilizing historical costs for the ownership interests of the
Metromedia Holders. The remaining ownership interests of MITI other than those
of the Metromedia Holders will be accounted for based on fair value, as
determined by the value of shares received by such holders at the Effective
Time, in accordance with the purchase method of accounting. For accounting
purposes only, Orion and MITI have been deemed to be the joint acquiror of
Actava and Sterling. The acquisition of Actava and Sterling will be accounted
for as a purchase. As a result of the reverse acquisition of Actava by Orion,
the historical financial statements of the Surviving Corporation for periods
prior to the Mergers will be those of Orion rather than Actava.
DISSENTERS' RIGHTS
Orion Stockholders and Actava Stockholders are not entitled to dissenters'
rights of appraisal or other dissenters' rights under Delaware law with respect
to the Mergers or any transactions contemplated by the Merger Agreement.
Holders of MITI Common Stock and Sterling Common Stock have the right to
obtain a cash payment under Section 262 ("Section 262") of the DGCL for the
"fair value" of their shares (exclusive of any element of value arising from the
accomplishment or expectation of the MITI Merger or the Sterling Merger, as the
case may be). In order to exercise appraisal rights, MITI and/or Sterling
stockholders must take certain steps, including (i) holding the MITI Common
Stock or Sterling Common Stock, as the case may be, at the Effective Time, (ii)
voting against or abstaining from voting on the approval of the Merger
Agreement, (iii) delivering a written demand for appraisal to MITI or Sterling,
as the case may be, prior to the vote on the Merger Agreement and (iv) filing a
petition in the Delaware Court demanding a determination of the "fair value" of
the MITI Common Stock or Sterling Common Stock, as the case may be, within 120
days after the date of the consummation of the Mergers. Such "fair value" would
be determined in judicial proceedings. Failure to take any of the actions
required under Section 262 may result in the loss of such statutory appraisal
rights. See "PROPOSAL NO. 1--THE PROPOSED MERGERS--Dissenters' Rights."
35
<PAGE>
EQUIVALENT PER SHARE DATA
The following sets forth certain data concerning the historical net income
(loss), dividends and book value per share for each of Actava, Orion, MITI and
Sterling, and for combined Actava, Orion, MITI and Sterling on a pro forma basis
after giving effect to the Mergers, the refinancing of the Orion Senior
Indebtedness and the Orion Subordinated Indebtedness, the conversion to equity
of certain amounts owed to Metromedia and its affiliates, the repayment of
certain Actava subordinated debt (which occurred during Actava's current fiscal
year which began on January 1, 1995) and the retirement of Actava's redeemable
common stock (which occurred during Actava's current fiscal year which began on
January 1, 1995). The information below should be read in conjunction with the
unaudited Pro Forma Combining Financial Statements and the historical financial
statements of Actava, Orion, MITI and Sterling included elsewhere in this Joint
Proxy Statement/Prospectus or incorporated herein by reference. The unaudited
pro forma equivalent per share data shows, for each share of Common Stock, Orion
Common Stock, MITI Common Stock and Sterling Common Stock before the Mergers,
its equivalent position after giving effect to the Mergers. Orion, MITI and
Sterling stockholders will receive .57143, 5.54937 and .04627 shares,
respectively, of Common Stock for each share of Orion Common Stock, MITI Common
Stock and Sterling Common Stock outstanding (assuming the Determination Date
occurred on September 20, 1995).
<TABLE><CAPTION>
THREE MONTHS SIX MONTHS THREE MONTHS YEAR ENDED
ENDED ENDED ENDED -------------------------------------------------------
MAY 31, 1995 JUNE 30, 1995 JUNE 30, 1995 MARCH 31, 1995 FEBRUARY 28, 1995 DECEMBER 31, 1994
------------ --------------- ------------- -------------- ----------------- ------------------
HISTORICAL ORION ACTAVA MITI STERLING STERLING ORION ACTAVA MITI
- ----------------------- ------------ ------ ------ ------------- -------------- ----------------- ------ -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net income (loss) per
common share.......... $ (.49) $(1.07) $(7.65) -- $ 0.02 $ (2.51) $(1.29) $(12.05)
Cash dividends declared
per share............. -- -- -- -- -- -- -- --
Book value per common
share at end of
period................ $ (.91) 6.17 (4.51) .34 0.33 (0.42) 6.79 2.99
</TABLE>
<TABLE><CAPTION>
THREE MONTHS ENDED MAY 31, 1995 YEAR ENDED FEBRUARY 28, 1995
--------------------------------------------------------- -----------------------------------------
COMBINED COMBINED
ACTAVA, EQUIVALENT PER ACTAVA, EQUIVALENT PER
ORION, ----------------------------------------- ORION, ------------------------------
MITI AND ACTAVA ORION MITI STERLING MITI AND ACTAVA ORION MITI
PRO FORMA STERLING SHARE(2) SHARE(2) SHARE(2) SHARE(2) STERLING SHARE(2) SHARE(2) SHARE(2)
- --------------------------- ------------- -------- -------- -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net income (loss) per
common share.............. $(.55) $ (.55) $ (.31) $(3.02) $ (.03) $(2.18) $(2.18) $(1.24) $ (12.09)
Cash dividends declared per
share..................... -- -- -- -- -- -- -- -- --
Book value per common share
at end of period.......... $9.25 $ 9.25 $ 5.29 $51.32 $ .43 N/A N/A N/A N/A
<CAPTION>
STERLING
PRO FORMA SHARE(2)
- --------------------------- --------
<S> <C>
Net income (loss) per
common share.............. $ (.10)
Cash dividends declared per
share..................... --
Book value per common share
at end of period.......... N/A
</TABLE>
- ------------
(1) Reflects pro forma per share data as if the Mergers, the refinancing of the
Orion Senior Indebtedness and the Orion Subordinated Indebtedness, the
conversion to Common Stock of certain amounts owed to Metromedia and its
affiliates, the repayment of certain Actava subordinated debt and the
retirement of Actava redeemable common stock occurred as of January 1, 1994.
(2) Reflects the unaudited pro forma combined Actava, Orion, MITI and Sterling
amounts multiplied by the exchange ratios of .57143, 5.54937 and .04627
shares for Orion Common Stock, MITI Common Stock and Sterling Common Stock,
respectively, and multiplied by 1 share for Common Stock.
36
<PAGE>
MARKET PRICES OF COMMON STOCK AND ORION COMMON STOCK
Actava
The Common Stock is listed and traded on the NYSE and the Pacific Stock
Exchange under the symbol "ACT." The following table sets forth the quarterly
high and low closing sales prices per share for Common Stock according to the
New York Stock Exchange Composite Tape for the periods indicated.
<TABLE><CAPTION>
COMMON
STOCK
-----------------------------
FISCAL QUARTER ENDED HIGH LOW
-------------------- ------------ ------------
1993
<S> <C> <C>
March 31..................................................... 14 1/2 11 5/8
June 30...................................................... 14 9 1/2
September 30................................................. 9 1/2 7 1/4
December 31.................................................. 8 1/4 6 5/8
1994
March 31..................................................... 9 1/4 5 7/8
June 30...................................................... 9 3/8 5 3/4
September 30................................................. 13 3/4 8 1/4
December 31.................................................. 10 3/8 8 3/8
1995
March 31..................................................... 11 8 3/4
June 30...................................................... 13 3/8 8 5/8
September 30 (through September 20, 1995).................... 18 3/4 13 1/4
</TABLE>
Orion
The Orion Common Stock is traded in the over-the-counter market and its
stock is quoted on the NASDAQ/NMS under the symbol "ORPC." The table below
reflects the quarterly high and low transaction prices per share of the Orion
Common Stock in the over-the-counter market for the periods indicated as
reported by NASDAQ/NMS. Prices for the Orion Common Stock reflect interdealer
transactions without markup, markdown or commission.
<TABLE><CAPTION>
ORION
COMMON
STOCK
FISCAL YEAR ENDED ----------------------------
FEBRUARY 28, 1994 HIGH LOW
----------------- ------------ ------------
<S> <C> <C>
First Quarter.................................................. 3 1/4 2 3/8
Second Quarter................................................. 7 7/8 2 1/16
Third Quarter.................................................. 9 1/2 5 1/2
Fourth Quarter................................................. 7 1/8 5 1/4
<CAPTION>
FISCAL YEAR ENDED
FEBRUARY 28, 1995 HIGH LOW
----------------- ------------ ------------
<S> <C> <C>
First Quarter.................................................. 7 4 7/8
Second Quarter................................................. 6 1/4 2 5/8
Third Quarter.................................................. 6 3/4 4 1/2
Fourth Quarter................................................. 6 3/8 4 3/4
<CAPTION>
FISCAL YEAR ENDED
FEBRUARY 29, 1996 HIGH LOW
----------------- ------------ ------------
<S> <C> <C>
First Quarter.................................................. 8 5 3/8
Second Quarter................................................. 9 29/32 6 5/8
Third Quarter (through September 20, 1995)..................... 11 8 9/16
</TABLE>
37
<PAGE>
The closing transaction price on August 30, 1994 (the last closing
transaction price available immediately prior to the announcement of the
Mergers) reported by NASDAQ/NMS for the Orion Common Stock was $3 9/16 and the
closing sales price on such date reported by NYSE for the Common Stock was $13
3/8. On September 20, 1995, the closing transaction price for the Orion Common
Stock reported by NASDAQ/NMS was $10 3/4 and the closing transaction price for
the Common Stock on such date reported by the NYSE was $18 3/4.
Sterling and MITI
Although the Sterling Common Stock is registered under the Exchange Act, and
therefore Sterling is required to file periodic reports with the Commission,
there is no established trading market for the Sterling Common Stock. MITI is a
private company and there is no established trading market for the MITI Common
Stock.
SUMMARY FINANCIAL DATA
The following tables present selected audited historical financial data of
Orion (except for the three month periods ended May 31, 1995 and 1994, which are
unaudited), Actava (except for the six month periods ended June 30, 1995 and
1994, which are unaudited), MITI (except for the year ended December 31, 1991
and the six month periods ended June 30, 1995 and 1994, which are unaudited) and
Sterling (except for the three month periods ended June 30, 1995 and 1994, which
are unaudited) and selected unaudited pro forma financial data after giving
effect to the Mergers.
The pro forma data are not necessarily indicative of the results of
operations or the financial condition that would have been reported if the
Mergers had been in effect during those periods, or as of those dates, or that
may be reported in the future. The pro forma combined per share data of Orion
gives effect to the exchange of each share of Orion Common Stock for .57143
shares of Common Stock, each share of MITI Common Stock for 5.54937 shares of
Common Stock and each share of Sterling Common Stock for .04627 shares of Common
Stock, in connection with the Orion Merger, the MITI Merger and the Sterling
Merger, respectively.
These data should be read in conjunction with the consolidated financial
statements of Actava and the related notes thereto, which are incorporated by
reference herein, and the consolidated financial statements of Orion, MITI and
Sterling and the related notes thereto appearing elsewhere in this Joint Proxy
Statement/Prospectus and in conjunction with the unaudited pro forma financial
information, including the notes thereto, appearing elsewhere in this Joint
Proxy Statement/Prospectus. See "INCORPORATION OF CERTAIN DOCUMENTS BY
REFERENCE," "SURVIVING CORPORATION PRO FORMA COMBINING FINANCIAL STATEMENTS,"
"Consolidated Financial Statements of Orion," "Consolidated Financial Statements
of MITI" and "Consolidated Financial Statements of Sterling."
38
<PAGE>
SUMMARY FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE DATA)
ORION--HISTORICAL
<TABLE><CAPTION>
THREE MONTHS THREE MONTHS YEAR ENDED FEB 28/29
ENDED ENDED -------------------------------------------------------------
MAY 31, 1995 MAY 31, 1994 1995 1994 1993 1992 1991
------------ ------------ -------- --------- -------- ---------- ----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
Revenues.......... 42,232 83,757 $191,244 $175,662 $222,318 $491,117 $507,304
------------ ------------ -------- --------- --------
Loss from
continuing
operations...... (9,761) (12,104) (50,270) (125,196) (72,973) (280,832) (60,648)
------------ ------------ -------- --------- --------
Per common share:
Primary........ (.49) (.61) (2.51) (6.26) (11.29) (1,744.47) (409.97)
Fully diluted.. (.49) (.61) (2.51) (6.26) (11.29) (1,755.38) (427.30)
Dividends per
common share.... -- -- -- -- -- -- --
Total assets...... 323,284 452,920 351,588 508,014 704,356 856,950 1,058,673
Notes and
subordinated
debt............ 198,150 253,732 212,079 274,501 325,158 521,968 510,894
</TABLE>
ACTAVA--HISTORICAL
<TABLE><CAPTION>
SIX MONTHS SIX MONTHS
ENDED ENDED YEAR ENDED DECEMBER 31,
JUNE 30, JUNE 30, ---------------------------------------------------------
1995 1994 1994 1993(A) 1992(A) 1991(A) 1990(A)
---------- ---------- --------- ---------- ---------- ---------- ----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
Revenues................. $98,848 $279,214 $551,828 $465,812 $377,890 $274,907 $348,401
Loss from continuing
operations............. (18,858) (18,263) (23,456) (51,716) (322) (55,987) (10,649)
Loss from continuing
operations
Per common
share(b)............... (1.07) (1.02) (1.29) (3.01) (.02) (3.38) (.59)
Dividends per common
share.................. -- -- -- .36 .36 .36 .32
Total assets............. 426,839 591,606 493,779 1,271,584 1,217,866 1,089,554 1,015,867
Long-term and
subordinated debt...... 156,674 189,894 159,740 411,438 413,923 352,219 243,570
</TABLE>
MITI--HISTORICAL
<TABLE><CAPTION>
SIX MONTHS SIX MONTHS
ENDED ENDED YEAR ENDED DECEMBER 31,
JUNE 30, JUNE 30, --------------------------------------
1995 1994 1994 1993 1992 1991
---------- ---------- -------- -------- -------- --------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
Revenues................................. $3,316 $1,495 $3,545 $51 $24 $0
Equity in losses of Joint Ventures(c).... (2,221) (362) (2,257) (777) (269) (120)
Loss from continuing operations.......... (13,122) (5,156) (19,141) (7,334) (2,870) (808)
Investments in and Advances to Joint
Ventures............................... 33,133 15,455 24,311 9,712 5,220 1,507
Total assets............................. 50,673 29,843 40,282 12,637 6,083 1,850
Notes payable and long-term debt......... 46,922 7,714 24,948 9,999 5,266 0
</TABLE>
STERLING--HISTORICAL
<TABLE><CAPTION>
THREE MONTHS THREE MONTHS
ENDED ENDED YEAR ENDED MARCH 31,
JUNE 30, JUNE 30, -------------------------------------
1995 1994 1995 1994 1993 1992
------------ ------------ ------ ------ ------ -------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
Revenues.............................. $ 1,705 $ 1,355 $8,443 $7,839 $7,137 $ 7,795
Income (loss) before extraordinary
item................................ 16 (22) 259 400 284 (244)
Per common share(b)................... -- -- .02 .04 .03 (.02)
Total assets.......................... 7,074 9,150 8,146 8,562 7,791 9,088
Debt.................................. 495 -- 495 -- -- --
</TABLE>
39
<PAGE>
SUMMARY FINANCIAL DATA (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
PRO FORMA--COMBINED
<TABLE><CAPTION>
PRO FORMA--COMBINED
---------------------------------
THREE MONTHS
ENDED YEAR ENDED
MAY 31, 1995 FEBRUARY 28, 1995
------------ -----------------
(UNAUDITED)
<S> <C> <C>
Revenues....................................................... $ 102,110 $ 452,734
Loss from continuing operations................................ (22,223) (88,813)
Per common share:
Primary...................................................... (.55) (2.18)
Fully diluted................................................ (.55) (2.18)
Dividends per common share..................................... -- --
Total assets................................................... 1,052,558 N/A
Debt........................................................... 402,933 N/A
</TABLE>
- ------------
<TABLE>
<C> <S>
(a) Reclassified for discontinued operations.
(b) Per share data is primary; fully diluted data is not dilutive.
(c) Effective January 1, 1994, MITI changed its policy of accounting for the Joint Ventures
by recording its equity in their losses based upon a three month lag. As a result, the
1994 consolidated Statement of Operations reflects nine months of operations through
September 30, 1994 for the Joint Ventures compared to twelve months for 1993.
Additionally, as a result of this change in policy, consolidated statement of
operations data for the six month period ended June 30, 1995 reflects equity in losses
of the Joint Ventures for the period from October 1, 1994 to March 31, 1995. The
consolidated statement of operations for the six month period ended June 30, 1994
reflects equity in losses of the Joint Ventures for the period from January 1, 1994 to
March 31, 1994. Had MITI applied this method from October 1, 1993, the effect on
reported 1994 operating results would not have been material. Future years will reflect
twelve months of activity based upon a September 30 reporting period for the Joint
Ventures.
</TABLE>
40
<PAGE>
RISK FACTORS
Orion Stockholders, Actava Stockholders, MITI Stockholders and Sterling
Stockholders should consider carefully, in addition to the other information set
forth herein, the following risk factors before voting to approve the proposed
Mergers.
ORION, ACTAVA AND MITI HAVE EACH RECENTLY INCURRED OPERATING LOSSES AND ORION
AND MITI HAVE FACED OTHER FINANCIAL DIFFICULTIES.
Orion
For the three months ended May 31, 1995 and the fiscal years ended February
28, 1995, 1994 and 1993, Orion reported a net loss of $(9.8 million) and income
(loss) before extraordinary gains of $(50.3 million), $(125.2 million) and
$(73.0 million), respectively. During the fiscal year ended February 28, 1995,
Orion could not satisfy the debt repayment schedule set forth in the Third
Restated Credit Agreement and in Orion's agreement with Sony entered into in
connection with the Plan and, as a result, the guarantors of such indebtedness
satisfied such obligation. Orion has not satisfied its payment obligation to
Sony and Orion anticipates that it will not satisfy its payment obligations to
the Banks during October 1995 and therefore Metromedia will be obligated to
satisfy such payment shortfall pursuant to the Bank Guarantee. Further, Orion
has not been able to satisfy its payment obligations under certain of its
indentures during its current fiscal year, which began on March 1, 1995, leading
to an event of default under such indentures as of August 31, 1995. The event of
default gives the Trustee under such indentures or the holders of such notes the
right to accelerate payment thereunder in accordance with the terms of the
indentures for such notes. If an acceleration under such indentures occurs,
Orion, absent the refinancing comtemplated to occur in connection with the
Mergers or other financing arrangements, may be forced to seek protection under
chapter 11 of the Bankruptcy Code. As a result of Orion's then anticipated
payment shortfall, Orion's independent auditor's report on the consolidated
financial statements for the fiscal year ended February 28, 1995 states that
this condition raises substantial doubt about Orion's ability to continue as a
going concern. In addition, on December 11 and 12, 1991, Orion and its
subsidiaries filed petitions under chapter 11 of the Bankruptcy Code for
protection from various creditors. See "INFORMATION REGARDING
ORION--Management's Discussion and Analysis of Financial Condition and Results
of Operations--Liquidity and Capital Resources."
MITI
For the six months ended June 30, 1995 and the fiscal years ended December
31, 1994, 1993 and 1992, MITI reported net losses of $(13.1 million), $(19.1
million), $(7.3 million) and $(2.9 million), respectively. As a result of MITI's
recurring losses from operations, MITI's independent auditors' report on the
financial statements for the fiscal year ended December 31, 1994 states
conditions that raise substantial doubt about MITI's ability to continue as a
going concern.
Actava
For the six months ended June 30, 1995 and the fiscal years ended December
31, 1994, 1993 and 1992, Actava reported net losses from continuing operations
of $(18.9 million), $(23.5 million), $(51.7 million) and $(.3 million),
respectively, and net income (loss) of $(18.9 million), $(65.8 million), $(47.6
million), and $11.6 million, respectively.
NO ASSURANCES OF PROFITABILITY OF THE SURVIVING CORPORATION
Management of Orion, Actava, Sterling and MITI believe that the Surviving
Corporation will report significant operating losses for the fiscal years ended
December 31, 1995 and December 31, 1996. The future profitability of the
Surviving Corporation will depend upon the success of its operations in the
communications industry in Eastern Europe and other emerging markets and in the
motion picture industry, both of which are speculative and involve a high degree
of risk. There can be no assurance that the businesses conducted by Orion,
Actava, MITI and Sterling will be integrated successfully with each other.
Accordingly, there can be no assurance of the profitability of the Surviving
Corporation.
41
<PAGE>
LEVERAGE AND DEBT SERVICE PAYMENTS OF THE SURVIVING CORPORATION
The Surviving Corporation will be a highly leveraged company. As a result of
the consummation of the Mergers and the refinancing described above, the
Surviving Corporation would have a debt to equity ratio of 1.07 on a pro forma
basis. It is anticipated that the Surviving Corporation's 1995 pro forma debt
will require debt service payments of approximately $20.4 million during the
remainder of the fiscal year ending December 31, 1995.
Debt service payments required to be made after December 31, 1995 by the
Surviving Corporation will be substantial. For example, it is anticipated that
the Surviving Corporation's 1996 pro forma debt will require debt service
payments of approximately $98.9 million during the calendar year ending December
31, 1996, excluding certain amounts payable under New Snapper's revolving credit
facility, which are subject to change. Unless it curtails significantly the
implementation of its short and long term business objectives, the Surviving
Corporation expects that it will have to (i) refinance, restructure or extend
New Orion's term loan and/or the Surviving Corporation's one year $35 million
credit facility, (ii) otherwise restructure its capitalization, (iii) raise
funds through a private or public sale of equity or debt securities or (iv)
dispose of certain nonstrategic assets in order to be able to service its debt
and satisfy its ongoing working capital requirements. No assurance can be given
that such extension, refinancing or restructuring can be completed on acceptable
terms, if at all, or that the Surviving Corporation will be able to realize a
fair price for its nonstrategic assets if it chooses to dispose of any of them.
In addition, the cash flow required to service the debt of the Surviving
Corporation may reduce its liquidity, which in turn could reduce its ability to
fund the production or acquisition of entertainment product for distribution by
Orion, the capital expenditures required by MITI, the internal growth of the
Surviving Corporation and other capital improvements required by the Surviving
Corporation. The Surviving Corporation's degree of financial leverage and debt
service obligations following the consummation of the Mergers also could inhibit
its ability to obtain outside financing at all or to obtain outside financing on
reasonably acceptable terms. See "PROPOSAL NO. 1--THE PROPOSED
MERGERS--Management and Operations After the Mergers."
FUTURE FINANCING NEEDS
The Surviving Corporation will require substantial funds to achieve its
short term and long term business objectives. In addition to the possible need
to refinance the Surviving Corporation's indebtedness as described above, each
of Orion, MITI and Sterling is engaged in an industry which requires significant
cash and capital expenditures prior to the recognition of revenue. Generally,
producers of motion picture product are required to spend significant capital in
order to fund the development, production and distribution costs associated with
such motion picture product prior to its theatrical release or other
distribution and the receipt of any revenues. The Surviving Corporation intends
to reduce the risks associated with substantial upfront production costs by
obtaining financing from acceptable third party production partners and by
"pre-selling" certain rights in films prior to production. There can be no
assurance, however, that the Surviving Corporation will be successful in either
pre-selling rights or obtaining acceptable production partners on commercially
reasonable terms. MITI's businesses are similarly capital intensive and require
the investment of significant amounts of capital in order to construct and
develop operational systems and to attract a significant number of subscribers
to a network.
The Surviving Corporation may require additional financing in order to
satisfy its on-going working capital requirements and its debt service
requirements. No assurance can be given that additional financing will be
available to the Surviving Corporation on acceptable terms, if at all. If the
Surviving Corporation raises additional funds by issuing additional equity
securities, further dilution to existing equityholders will result. If adequate
additional funds are not available, the Surviving Corporation may be required to
curtail significantly its short term and long term business objectives and the
Surviving Corporation's results from operations may be materially and adversely
affected.
42
<PAGE>
CONTROL OF SURVIVING CORPORATION BY METROMEDIA HOLDERS DUE TO CONCENTRATION OF
SHARE OWNERSHIP AND VOTING CONTROL
Following the consummation of the Mergers, the Metromedia Holders will
collectively own approximately 33.3% of the outstanding shares of Common Stock
of the Surviving Corporation (assuming that the Determination Date occurred on
September 20, 1995, including shares of Common Stock issuable upon the
conversion of certain amounts owed to certain of the Metromedia Holders as of
such date, as described herein, and assuming the exercise of all outstanding
options to acquire shares of Common Stock) and will be the Surviving
Corporation's largest stockholder. In addition, Metromedia, as the majority
stockholder of Orion and whose designees, together with a member of Orion's
management, constitute a majority of the members of the Board of Directors of
Orion, will, pursuant to the Merger Agreement, be entitled to designate, at the
Effective Time, six of the ten members of the Surviving Corporation's Board of
Directors. The size of the Surviving Corporation's Board of Directors is subject
to downward adjustment under certain circumstances. See "PROPOSAL NO. 1--THE
PROPOSED MERGERS--Management and Operations After the Mergers." In accordance
with the Restated Certificate of Incorporation and By-laws of the Surviving
Corporation and Delaware law, in the future, the majority of the members of the
Surviving Corporation's Board of Directors will nominate the directors for
election to the Surviving Corporation's Board of Directors. Accordingly, it is
likely that directors designated by the Metromedia Holders will constitute a
majority of the members of the Board of Directors of the Surviving Corporation.
As such, the Metromedia Holders will likely control the direction and future
operations of the Surviving Corporation, including decisions regarding
acquisitions and other business opportunities, the declaration of dividends and
the issuance of additional shares of the Surviving Corporation's capital stock
and other securities. Such concentration of ownership may also have the effect
of delaying, deferring or preventing a change of control of the Surviving
Corporation pursuant to a transaction which might otherwise be beneficial to
stockholders.
ANTI-TAKEOVER PROVISIONS IN THE SURVIVING CORPORATION'S CHARTER AND BY-LAWS
The Surviving Corporation's Restated Certificate of Incorporation and
By-laws will contain provisions that could delay, defer or prevent a change in
control without the approval of its incumbent Board of Directors. These
provisions, among other things, (i) divide the Board of Directors into three
classes, with members of each class to be elected in staggered three year terms,
(ii) prohibit stockholder action by written consent in lieu of a meeting, (iii)
limit the right to call special meetings of stockholders to the Chairman or Vice
Chairman of the Surviving Corporation's Board of Directors and (iv) authorize
the Board of Directors to issue preferred stock in one or more classes or series
without any action on the part of stockholders. Such provisions could limit the
price that investors might be willing to pay in the future for shares of the
Surviving Corporation's Common Stock and significantly impede the ability of the
holders of the Surviving Corporation's Common Stock to replace management. In
addition, it is anticipated that within 30 days following the Effective Time,
the Surviving Corporation will adopt a stockholder rights plan which will have
certain anti-takeover effects. Although the specific terms of such rights plan
have not been determined, it is expected that such rights plan will cause
substantial dilution to a person or group that attempts to acquire the Surviving
Corporation on terms not approved by the Surviving Corporation's Board of
Directors. Provisions and agreements that inhibit or discourage takeover
attempts could reduce the market value of the Common Stock.
INTERESTS OF AND BENEFITS TO THE METROMEDIA HOLDERS AND SENIOR EXECUTIVES OF
ACTAVA AS A RESULT OF THE MERGERS
Metromedia Holders
As a result of the consummation of the Mergers, the Metromedia Holders,
which currently control a majority of the outstanding common stock of each of
Orion and MITI, will be the largest single stockholder of the Surviving
Corporation. Certain officers of Metromedia also currently serve as officers and
directors of Orion and MITI, including John W. Kluge and Stuart Subotnick, the
general partners
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of Metromedia, who will serve as Chairman of the Board of Directors and Vice
Chairman of the Board of Directors, respectively, of the Surviving Corporation.
Metromedia Loans and Advances to Orion, MITI and Sterling
Each of Orion, MITI and Sterling and certain of their respective affiliates
are currently party to a number of material contracts and other arrangements
with Metromedia and certain affiliates of Metromedia pursuant to which
Metromedia and certain of its affiliates have, among other things, made loans
to, or paid obligations on behalf of, each of Orion, MITI and Sterling and their
affiliates, some of which Metromedia financed through the use of the
Actava-Metromedia Credit Agreement, as discussed below. See "PROPOSAL NO. 1--THE
PROPOSED MERGERS--Background of the Mergers." Certain of the amounts owed by
Orion ($20,400,000), MITI ($34,076,000) and Sterling ($524,000) to Metromedia
will be utilized by Metromedia to repay to Actava certain amounts owed by
Metromedia to Actava under the Actava-Metromedia Credit Agreement. Accordingly,
at the Effective Time, there will be no net addition to the assets of the
Surviving Corporation as a result of these transactions. See "PROPOSAL NO.
1--THE PROPOSED MERGERS--Interests of and Benefits to the Metromedia Holders and
Senior Executives of Actava as a Result of the Mergers." In addition Metromedia
and Mr. Kluge have guaranteed certain amounts owed by Orion to the Banks and
amounts owed to Sony pursuant to the Bank Guarantee (the maximum exposure
thereunder as of September 20, 1995 was $54.4 million, subject to reduction for
payments made by Orion from September 20, 1995 until October 20, 1995). The Bank
Guarantee requires that Metromedia and Mr. Kluge make payments to the Banks and
to Sony during October 1995 if Orion has not reduced to zero the amount of its
outstanding debt to such parties. Because Orion has not satisfied its payment
obligation to Sony and Orion anticipates that it will not generate sufficient
net cash flow to satisfy its payment obligations to the Banks, Metromedia will
be obligated during October 1995 to pay the remaining unpaid portion of the
$54.4 million owed to the Banks and Sony. Orion is required to reimburse
Metromedia in full for all such payments made by Metromedia on Orion's behalf.
Accordingly, at the Effective Time, the Surviving Corporation would be obligated
to repay Metromedia the amount of such guarantee payment. Certain other
indebtedness owed by MII to an affiliate of Metromedia in the principal amount
of approximately $19.6 million (as of September 20, 1995) will be refinanced or
repaid in full or converted into Common Stock of the Surviving Corporation as
provided in the Contribution Agreement. In addition, certain non-recourse
financing provided by an affiliate of Metromedia to Orion and its affiliate
(approximately $9.1 million at September 20, 1995) will either be refinanced or
repaid in full or converted into Common Stock of the Surviving Corporation as
provided in the Contribution Agreement. See "INFORMATION REGARDING
ORION--Relationship with Metromedia;" "INFORMATION REGARDING MITI--Relationship
with Metromedia;" "INFORMATION REGARDING STERLING-Metromedia Loan Agreement;"
"PROPOSAL NO. 1--THE PROPOSED MERGERS--Background of the Mergers" and "--Terms
and Conditions of the Contribution Agreement.
Actava
Actava has entered into Post-Employment Agreements with two of its senior
executive officers. The two Actava executive officers with Post-Employment
Agreements are Frederick B. Beilstein, Senior Vice President and Chief Financial
Officer, and Walter M. Grant, Senior Vice President and General Counsel. If
either of these executive officers does not remain with the Surviving
Corporation following the consummation of the Mergers, he will be entitled to
receive certain severance benefits under his Post-Employment Agreement. The
maximum amounts payable under the Post-Employment Agreements (including Actava's
share of the medical and other benefits to which each executive will be
entitled) will be $559,973 for Mr. Beilstein and $485,851 for Mr. Grant. These
amounts, however, will be reduced in the event that a terminated executive has
"earned income" (as defined in the Post-Employment Agreements) during the
two-year period he serves as a consultant to the Surviving Corporation. The
minimum amounts payable under the Post-Employment Agreements will be $275,000
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for Mr. Beilstein and $237,500 for Mr. Grant. See "PROPOSAL NO. 1--THE PROPOSED
MERGERS-- Interests of and Benefits to the Metromedia Holders and Senior
Executives of Actava as a Result of the Mergers--Actava."
HOLDING COMPANY STRUCTURE; LIMITATIONS ON DIVIDENDS; DEBT SERVICE OF THE
SURVIVING CORPORATION
Following the consummation of the Mergers, the Surviving Corporation will be
a holding company that conducts operations solely through its subsidiaries, New
Orion, New MITI and New Snapper. The Surviving Corporation will rely on
dividends from its subsidiaries to meet its cash requirements, including cash
requirements in connection with interest and principal payments on Actava's
existing subordinated indebtedness. In addition, it is anticipated that the loan
documents for New Orion's credit facility and for New Snapper's credit facility
will contain, and the loan documents for New MITI's credit facility may contain,
substantial restrictions on dividend payments to the Surviving Corporation by
New Orion, New Snapper and New MITI, respectively. Accordingly, in order to be
able to meet its debt service obligations under Actava's existing subordinated
indebtedness, the Surviving Corporation expects that it will have to (i)
refinance through a public or private sale of debt or equity securities of the
Surviving Corporation or restructure such subordinated indebtedness, (ii)
otherwise restructure its capitalization, (iii) dispose of certain non-strategic
assets or (iv) seek a waiver or waivers under New Orion's credit facility, New
Snapper's credit facility and/or New MITI's credit facility to permit the
payment of dividends to the Surviving Corporation by New Orion, New Snapper
and/or New MITI, respectively. There can be no assurance that any of the
foregoing can be accomplished by the Surviving Corporation on reasonably
acceptable terms, if at all.
MOTION PICTURE INDUSTRY INVOLVES A SUBSTANTIAL DEGREE OF RISK AND IS COMPETITIVE
Substantially all of Orion's operating revenue and approximately 75% of
Sterling's operating revenue are derived from the exploitation of their
respective film libraries and other assets and, historically, the distribution
and production of theatrical motion pictures. The motion picture industry is
unpredictable and involves a substantial degree of risk. Accordingly, there can
be no assurance as to the financial success of any motion picture. Furthermore,
the motion picture industry is extremely competitive. Orion and Sterling compete
with many other motion picture companies, including the "major" motion picture
studios, which are larger and have financial resources which are substantially
greater than those of Orion or Sterling. The major studios are typically large,
diversified entertainment concerns or subsidiaries of diversified corporations
which have strong relationships with creative talent, exhibitors and others
involved in the entertainment industry, and whose non-motion picture operations
provide stable sources of earnings that offset variations in the financial
performance of their motion picture operations. Several motion picture companies
have recently increased or announced an intention to increase the number of
films they release, and this may adversely affect the Surviving Corporation. In
addition, companies in related fields with substantial financial resources have
recently entered or expressed an interest in entering into or expanding
operations in the motion picture industry. The Surviving Corporation's ability
to compete successfully depends upon its ability to release successful motion
picture products and the continued availability of independently developed
motion pictures (domestic and foreign) which it can acquire and distribute
successfully.
SUBSTANTIAL COSTS OF MOTION PICTURES
The motion picture business in which Orion and, to a lesser extent,
Sterling, have historically been engaged requires substantial outlays of
capital. The costs of producing and marketing motion pictures have generally
increased in recent years, and may continue to increase in the future, thereby
increasing the costs to the Surviving Corporation of the motion pictures it
produces or with respect to which it acquires distribution rights. Consequently,
the Surviving Corporation may be subject to substantial financial risks relating
to the production, completion and release of motion pictures. Moreover, there
can be no assurance that the Surviving Corporation will be able to obtain
additional financing if it is required. See "RISK FACTORS--Future Financing
Needs."
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POLITICAL AND SOCIAL RISKS FOR MITI
MITI's operations may be materially and adversely affected by significant
political and social uncertainties in Eastern Europe and the former Soviet
Republics. Political stability in many of MITI's markets has been affected
recently by political and military tensions between different branches of
government. The upcoming presidential and parliamentary elections in Russia,
parliamentary elections in Belarus and suspension of presidential elections in
Uzbekistan and Kazakhstan could also heighten concern about long-term political
stability in these areas. In addition, internal military conflicts have occurred
in certain regions of the countries in which MITI has made investments. There
are also concerns about potential civil unrest fueled by, among other things,
economic and social crises in certain of MITI's markets. Moreover, political
tensions between the Russian Federation and its constituent regions and
republics may have a material adverse effect on MITI's operations in such areas.
MITI's operations may also be materially and adversely affected by bureaucratic
infighting between governmental agencies with unclear and overlapping
jurisdictions.
ECONOMIC RISKS FOR MITI
The governments in MITI's markets have exercised and continue to exercise
substantial influence over many aspects of the private sector. Confronted with
the collapse of the command economy they previously managed, the governments in
these areas have been attempting to implement economic reform policies and
encourage substantial private economic activity. However, these reforms have
been only partially successful to date. The economies in many of MITI's markets
are still characterized by high unemployment, high inflation, high foreign debt,
weak currencies and the possibility of widespread bankruptcies. Therefore,
despite some success in implementing reform policies, there can be no assurance
that the pursuit of economic reforms by any of these governments will continue
or prove to be ultimately effective especially in the event of a change in
leadership, social or political disruption or other circumstances affecting
economic, political or social conditions.
GENERAL OPERATING RISKS FOR MITI
MITI's operating results are dependent upon the sale of commercial
advertising time, the ability to attract subscribers to its systems and its
ability to control operating expenses. The sale of commercial advertising time
and the ability to attract subscribers is dependent on the general economic
conditions in the market where each radio station and cable system is located,
the relative popularity of the programming of MITI's radio stations and cable
systems, the demographic characteristics of the audiences of MITI's radio
stations and cable systems, the activities of competitors and other factors
which may be outside of MITI's control.
MITI relies heavily in the countries in which it operates upon the
availability and accessibility of government owned broadcast and transmission
facilities for distribution of its signal throughout its license areas. The
joint ventures in which MITI makes investments often require substantial
construction of new systems and additions to the physical plant or existing
systems. Construction projects are often adversely affected by cost overruns and
delays not within the control of MITI or its subcontractors, such as those
caused by governmental action or inaction or financing delays. Delays also can
occur as a result of design changes and material or equipment shortages or
delays in delivery of material or equipment. The failure to complete
construction of a communications system on a timely basis could jeopardize the
franchise or license for such system or provide opportunities to MITI's
competitors.
RISKS INHERENT IN FOREIGN INVESTMENT
MITI has invested substantial resources in operations outside of the United
States and plans to make additional international investments in the near
future. Risks inherent in foreign operations include loss of revenue, property
and equipment from expropriation, nationalization, war, insurrection, terrorism
and other political risks, risks of increases in taxes and governmental
royalties and involuntary renegotiation of contracts with or licenses issued by
foreign governments. MITI is also vulnerable to the risk of changes in foreign
and domestic laws and policies that govern operations of overseas-based
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companies. Exchange control regulations currently in place or which could be
enacted in many of MITI's markets could create substantial barriers to the
repatriation of funds, and such restrictions could adversely affect MITI's and
the Surviving Corporation's ability to pay overhead expenses, meet any of their
respective debt obligations and to continue and expand its communications
businesses. In addition, criminal organizations in certain of the countries in
which MITI operates threaten and intimidate foreign businesses. While MITI has
thus far not experienced any difficulties with criminal organizations in these
countries, there can be no assurance that it will not face pressures from
criminal organizations in the future which could have a material adverse effect
on MITI and its operations.
There is significant uncertainty as to the extent to which local parties and
entities, particularly governmental authorities, in MITI's markets will respect
the contractual and other rights of foreign parties, such as MITI, and also as
to the extent to which the "rule of law" has taken hold and will be upheld in
each of these countries. Although the general legal framework and the
governments' strategy in many of MITI's markets currently encourage foreign
investment, relevant laws of the countries in which MITI has invested may not be
enforced in accordance with their terms or implemented in countries in which
they do not now exist. Laws in MITI's markets affecting foreign investment such
as tax and currency laws are constantly changing often creating uncertainty and
confusion. Additionally, foreign investors may be materially and adversely
affected by conflicting and restrictive administrative regulations in many of
MITI's markets.
Legislation has recently been passed in the Republic of Latvia which would
limit to 20% the interest which a foreign person is permitted to own in entities
engaged in certain communications businesses, such as radio, cable television
and other systems of transmission. This legislation could require MITI, within
one year of the enactment of this legislation, to reduce to 20% its existing
ownership interests in joint ventures which operate a wireless cable television
system, paging system and FM radio station in Riga, Latvia. Legislation has also
been proposed and recently rejected by the upper house of the Russian
Federation's legislature which would limit to 35% the interest which a foreign
person is permitted to own in entities holding broadcasting licenses. It is
possible that such legislation could be reintroduced and enacted in Russia
and/or that other countries in Eastern Europe and the former Soviet Republics
may enact similar legislation which could have a material adverse effect on the
business, operations, financial condition or prospects of MITI. Such legislation
could be similar to United States federal law which limits the foreign ownership
in entities owning broadcasting licenses. There is no way of predicting whether
foreign ownership limitations will be enacted in any of MITI's markets, or
whether any such law, if enacted, will force MITI to reduce its ownership
interest in any of the ventures in which MITI currently has an ownership
interest. If foreign ownership limitations are enacted in any of MITI's markets
and MITI is required to reduce its ownership interest in any ventures, it is
unclear how such reduction would be effected.
RISKS INHERENT IN GROWTH STRATEGY
MITI has grown rapidly since its inception. Many of MITI's ventures are
either in developmental stages or have only recently commenced commercial
operation. MITI has incurred significant operating losses to date. The Surviving
Corporation intends to pursue additional investments in a variety of
communications businesses in both its existing markets and additional markets.
This growth strategy entails the risks inherent in assessing the strengths and
weaknesses of development opportunities, in evaluating the costs and uncertain
returns of developing and constructing the facilities for operating systems and
in integrating and managing the operations of existing and additional systems.
MITI's growth strategy requires the company to expend significant capital in
order to enable MITI to continue to develop its existing operations and to
invest in additional ventures. There can be no assurance that the Surviving
Corporation will have the funds necessary to support the capital needs of MITI's
current investments or any of MITI's additional investment opportunities or that
MITI will be able to obtain financing from third parties. If such financing is
unavailable, MITI may not be able to further develop its existing ventures and
the number of additional ventures in which it invests may be significantly
curtailed.
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DEVELOPING LEGAL STRUCTURES IN MITI'S TARGET MARKETS
As a result of recent political and social changes in Eastern Europe and in
the former Soviet Republics, the constitution and bodies of commercial and
corporate laws in MITI's markets are, in most cases, in their formative stages.
Despite the fact that many of these areas have undergone radical changes in
recent years, commercial and corporate laws in these markets are still
significantly less developed than comparable laws in industrialized countries
and are subject to permanent change, preemption by local laws or administrative
regulations or new regimes. Taxation remains one of the most confusing and least
settled aspects of conducting business in MITI's markets. In Russia, for
example, tax rules and laws are often changing and contradictory and thus makes
tax compliance and planning extremely difficult. Therefore, no assurance can be
given that the uncertainties associated with the existing and future laws and
regulations in MITI's markets will not have a material adverse effect on MITI's
ability to conduct its business and to generate profits.
In addition, the courts in many of MITI's markets are not insulated from
political considerations and other outside pressures and sometimes do not
function in an independent manner. Enforcement of legal rights in these areas is
also affected in some cases by political discretion and lobbying. This creates
particular concerns for MITI because the licenses held by MITI's businesses may
be significantly modified, revoked or cancelled without justification, and legal
redress may be substantially delayed or even unavailable in such cases.
EXCHANGE RATE FLUCTUATIONS AND INFLATION RISKS IN MITI'S TARGET MARKETS
In most cases, MITI's local joint ventures set the prices for their services
in U.S. dollars but receive some payments from their customers in local
currencies. Accordingly, a change in the value of these currencies against the
U.S. dollar will result in corresponding changes in the price and affordability
of the services provided to such customers which could have a material adverse
impact on MITI's business, financial condition and results of operations.
Moreover, if the exchange rate relative to the U.S. dollar of a currency in
which a local joint venture receives income declines between the time of a joint
venture's receipt of such income and the time it distributes earnings in U.S.
dollars to MITI, the amount of such earnings in U.S. dollars would decrease and
MITI's results of operations would be adversely impacted. MITI does not hedge
against foreign currency exchange risks. In addition, the economies of certain
of MITI's target markets have experienced significant and in some periods
extremely high rates of inflation over the past few years. Inflation and rapid
fluctuation in inflation rates have had and may continue to have negative
effects on these economies and could have a material adverse impact on MITI's
business, financial condition and results of operations.
COMPETITION FOR MITI
MITI operates in industries that are highly competitive worldwide. MITI and
the Surviving Corporation recognize that in the future MITI is likely to
encounter significant competition from other entities which may be led by
successful and experienced members of the communications industry and which may
have established operating infrastructures and superior access to financial
resources. There is a possibility, for example, that coaxial cable television
systems and satellite master television systems could emerge over time in
Eastern Europe and the former Soviet Republics and compete directly with MITI's
cable television operations. Competitive alternatives to MITI's prospective
wireless telephony systems could stem from other wireless communications
systems, including specialized mobile radio systems and private radio systems.
Advanced Cordless Telephone and other satellite-based services may also prove to
be competitive with MITI's wireless telephony operations in the future. In
addition, MITI does not expect to maintain or to be granted exclusive licenses
to operate its communications businesses in any of the markets where MITI
currently provides or plans to provide its services. Emerging or projected
technological developments could also lead to additional competition for MITI in
the future. The wireless cable television ventures in which MITI has an interest
transmit an encrypted signal to its subscribers to prevent the receipt of such
signal by persons other than their subscribers. MITI is aware that equipment is
being manufactured for the purpose of unlawfully receiving and decoding
encrypted
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signals transmitted by wireless cable television ventures. MITI believes that it
has thus far only experienced unlawful receipt of its signal on a limited basis
with respect to certain of its wireless cable television services. There can be
no assurance, however, that the unlawful receipt of their signals by persons
other than their subscribers will continue on a limited basis. MITI currently
competes in all of its markets with over-the-air broadcast television stations
which often offer a wider array of programming than MITI. With respect to its
radio station operations, MITI faces significant competition for listeners and
advertising revenues in its markets from other broadcasting stations and also
competes for advertising revenues with other media businesses such as broadcast
television, cable television, newspapers, magazines and billboard advertising.
POSSIBLE INABILITY TO CONTROL CERTAIN OF MITI'S JOINT VENTURES
MITI has invested in virtually all of its joint ventures with local
partners. Although MITI exercises significant influence in the management and
operations of the joint ventures in which it has an ownership interest and
intends to invest in the future only in joint ventures in which it can exercise
significant influence in management, the degree of its voting power and the
voting power and veto rights of its joint venture partners may limit MITI from
effectively controlling the operations, strategies and financial decisions of
the joint ventures in which it has an ownership interest. MITI is dependent on
the continuing cooperation of its partners in the joint ventures and any
significant disagreements among the participants could have a material adverse
effect on any such venture. In addition, in most instances, MITI's partners in a
joint venture include a governmental entity. The presence of a governmental
entity as a partner poses a number of risks, including the possibility of
decreased governmental support or enthusiasm for the venture as a result of a
change of government, a change of policy by the government and perhaps most
significantly the ability of the governmental entities to exert undue control or
influence over the project in the event of a dispute or otherwise. In addition,
if the joint ventures become profitable and generate sufficient cash flows in
the future, there can be no assurance that the joint ventures will pay dividends
or return capital at any time. Moreover, the equity interests of MITI in its
investments generally are not freely transferable. Therefore, there can be no
assurance of MITI's or the Surviving Corporation's ability to realize economic
benefits through the sale of MITI's interests in its joint ventures.
APPROVALS AND UNCERTAINTY OF LICENSE RENEWALS FOR MITI
MITI's operations are subject to governmental regulation in its markets and
its operations require certain governmental approvals. There can be no assurance
that MITI will obtain approvals to operate additional wireless cable television,
wireless telephony or paging systems or radio broadcast stations in any of the
various markets where it is seeking to obtain operations.
The licenses pursuant to which MITI's businesses operate are issued for
limited periods. Certain of these licenses expire over the next several years.
No statutory or regulatory presumption exists for renewal by the current license
holder, and there can be no assurance that MITI's licenses will be renewed upon
the expiration of their current terms. MITI's partners in these ventures have
not advised MITI of any reason such licenses would not be renewed. The failure
of such licenses to be renewed may have a material adverse effect on MITI.
TECHNOLOGICAL AND PRODUCT OBSOLESCENCE FOR MITI
The communications industry has been characterized in recent years by rapid
and significant technological changes and frequent new product introductions.
New market entrants could introduce new or enhanced products with features which
would render MITI's technology obsolete or significantly less marketable. The
ability of MITI to compete successfully will depend to a large extent on its
ability to respond quickly and adapt to technological changes and advances in
its industry. There can be no assurance that MITI will be able to keep pace, or
will have the financial resources to keep pace, with the technological demands
of the marketplace.
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INFORMATION REGARDING THE MEETINGS
GENERAL
This Joint Proxy Statement/Prospectus is being furnished to holders of
Common Stock, Orion Common Stock, and Sterling Common Stock in connection with
the solicitation of proxies by the Board of Directors of each of Actava, Orion,
and Sterling for use at the Actava Special Meeting, the Orion Special Meeting,
and the Sterling Special Meeting, respectively, and any adjournments thereof. In
lieu of holding a Special Meeting of the MITI Stockholders in order to consider
and vote upon a proposal to approve and adopt the Merger Agreement, the MITI
Stockholders will be asked to act by written consent in accordance with Section
228 of the DGCL with respect to this proposal. Each copy of this Joint Proxy
Statement/Prospectus which is being mailed or delivered to Orion Stockholders is
accompanied by an Orion proxy card and the Notice of Special Meeting of
Stockholders of Orion. Each copy of this Joint Proxy Statement/Prospectus which
is being mailed or delivered to Actava Stockholders is accompanied by an Actava
proxy card and the Notice of Special Meeting of Stockholders of Actava. Each
copy of this Joint Proxy Statement/Prospectus which is being mailed or delivered
to MITI Stockholders is accompanied by a written consent and a separate waiver
form pursuant to which each MITI Stockholder will be asked to terminate, waive
and release all of its rights and claims under the MITI Stockholders' Agreement.
Each copy of this Joint Proxy Statement/Prospectus which is being mailed or
delivered to Sterling Stockholders is accompanied by a Sterling proxy card and
Notice of Special Meeting of Stockholders of Sterling.
This Joint Proxy Statement/Prospectus is also being furnished by Actava to
each holder of Orion Common Stock, MITI Common Stock and Sterling Common Stock
as a prospectus in connection with the issuance by Actava of shares of Common
Stock upon the consummation of the Orion Merger, the MITI Merger and the
Sterling Merger, respectively. This Joint Proxy Statement/Prospectus, the
letters to Stockholders, the Notices of Special Meeting and proxy cards are
being first mailed to stockholders of each of Orion, Actava, and Sterling on or
about September 29, 1995 and this Joint Proxy Statement/Prospectus along with
the MITI written consent and separate waiver form are first being mailed to the
MITI Stockholders on or about September 29, 1995.
ORION SPECIAL MEETING
The Orion Special Meeting is scheduled to be held in the Concourse Level,
1285 Avenue of the Americas, New York, New York 10019, on November 1, 1995,
beginning at 9:00 a.m., local time. It is currently anticipated that the Actava
Special Meeting, the MITI Special Meeting and the Sterling Special Meeting will
take place simultaneously with the Orion Special Meeting. At the Orion Special
Meeting, Orion Stockholders will consider and vote upon a proposal to approve
and adopt the Merger Agreement, which provides for, among other things, the
merger of Orion with and into OPC Mergerco, a wholly-owned subsidiary of Actava.
See "PROPOSAL NO. 1--THE PROPOSED MERGERS." The Board of Directors of Orion
knows of no business that will be presented for consideration at the Orion
Special Meeting other than the matters described in this Joint Proxy
Statement/Prospectus.
ACTAVA SPECIAL MEETING
The Actava Special Meeting is scheduled to be held in the Conference Center,
Resurgens Plaza, 945 East Paces Ferry Road, Atlanta, Georgia 30326, on November
1, 1995, beginning at 9:00 a.m., local time. At the Actava Special Meeting,
holders of Common Stock will consider and vote upon a proposal to approve and
adopt the Merger Agreement, which provides for, among other things, the Mergers.
See "PROPOSAL NO. 1--THE PROPOSED MERGERS." The Board of Directors of Actava
knows of no business that will be presented for consideration at the Actava
Special Meeting other than the matters described in this Joint Proxy
Statement/Prospectus.
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MITI WRITTEN CONSENT
In lieu of holding a Special Meeting of the MITI Stockholders, holders of
MITI Common Stock will be asked to act by written consent in accordance with
Section 228 of the DGCL in order to consider and vote upon a proposal to approve
the Merger Agreement, which provides for, among other things, the merger of MITI
with and into MITI Mergerco, a wholly-owned subsidiary of Actava. See "PROPOSAL
NO. 1--THE PROPOSED MERGERS." In addition, each MITI Stockholder may be asked to
terminate, waive and release all of its rights and claims under the MITI
Stockholders' Agreement. The Board of Directors of MITI knows of no other
business that will be presented for the consideration and vote of the MITI
Stockholders at the time they are considering the proposals set forth in the
written consent.
STERLING SPECIAL MEETING
The Sterling Special Meeting is scheduled to be held in the Concourse Level
at 1285 Avenue of the Americas, New York, New York 10019, on November 1, 1995,
beginning at 9:00 a.m., local time. At the Sterling Special Meeting, holders of
Sterling Common Stock will consider and vote upon a proposal to approve and
adopt the Merger Agreement, which provides for, among other things, the merger
of Sterling with and into Actava. See "PROPOSAL NO. 1--THE PROPOSED MERGERS."
The Board of Directors of Sterling knows of no business that will be presented
for consideration at the Sterling Special Meeting other than the matters
described in this Joint Proxy Statement/Prospectus.
RECORD DATE; QUORUM
Orion
Only holders of record of Orion Common Stock as of the close of business on
September 15, 1995 will be entitled to notice of and to vote at the Orion
Special Meeting. As of September 15, 1995, there were 20,000,000 shares of Orion
Common Stock outstanding and entitled to vote at the Orion Special Meeting, with
each share entitled to one vote. The presence, in person or by proxy, of a
majority of the outstanding shares of Orion Common Stock is necessary to
constitute a quorum at the Orion Special Meeting. The shares of Orion Common
Stock represented by proxies marked "ABSTAIN" for any proposal presented at the
Orion Special Meeting and shares of Orion Common Stock held by persons in
attendance at the Orion Special Meeting who abstain from voting on any such
proposal will be counted for purposes of determining the presence of a quorum
but shall not be voted for or against such proposal. Shares as to which a broker
indicates it has no discretion to vote and which are not voted will be
considered not present at such meeting for purposes of determining the presence
of a quorum and as unvoted for purposes of the approval of the Orion Merger as
provided in the Merger Agreement. Because of the vote required to approve the
Merger Agreement (see below), abstentions and broker non-votes will have the
effect of a vote against the Merger Agreement.
Actava
Only holders of record of Common Stock as of the close of business on
September 15, 1995, will be entitled to notice of and to vote at the Actava
Special Meeting. As of September 15, 1995, there were 17,474,401 shares of
Common Stock outstanding and entitled to vote at the Actava Special Meeting,
held by approximately 6,200 stockholders of record, with each share entitled to
one vote. The presence, in person or by proxy, of a majority of the outstanding
shares of Common Stock is necessary to constitute a quorum at the Actava Special
Meeting. The shares of Common Stock represented by proxies marked "ABSTAIN" for
any proposal at the Actava Special Meeting and shares of Common Stock held by
persons in attendance at the Actava Special Meeting who abstain from voting on
any such proposal will be counted for purposes of determining the presence of a
quorum but shall not be voted for or against such proposal. Shares as to which a
broker indicates it has no discretion to vote and which are not voted will be
considered not present at such meeting for purposes of determining the presence
of a quorum and as unvoted for purposes of the approval of the Mergers as
provided in the Merger
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Agreement. Because of the vote required to approve the Merger Agreement (see
below), abstentions and broker non-votes will have the effect of a vote against
the Merger Agreement.
MITI
Only holders of record of MITI Common Stock as of the close of business on
September 15, 1995 will be entitled to act by written consent and to consider
and vote on whether to approve and adopt the Merger Agreement. As of September
15, 1995, there were 1,716,198 shares of MITI Common Stock outstanding and
entitled to act by written consent with each share entitled to one vote.
Sterling
Only holders of record of Sterling Common Stock as of the close of business
on September 15, 1995 will be entitled to notice of and to vote at the Sterling
Special Meeting. As of September 15, 1995, there were 11,215,000 shares of
Sterling Common Stock outstanding and entitled to vote at the Sterling Special
Meeting, with each share entitled to one vote. The presence, in person or by
proxy, of a majority of the outstanding shares of Sterling Common Stock is
necessary to constitute a quorum at the Sterling Special Meeting. The shares of
Sterling Common Stock represented by proxies marked "ABSTAIN" for any proposal
presented at the Sterling Special Meeting and shares of Sterling Common Stock
held by persons in attendance at the Sterling Special Meeting who abstain from
voting on any such proposal will be counted for purposes of determining the
presence of a quorum but shall not be voted for or against such proposal. Shares
as to which a broker indicates it has no discretion to vote and which are not
voted will be considered not present at such meeting for purposes of determining
the presence of a quorum and as unvoted for purposes of the approval of the
Sterling Merger as provided in the Merger Agreement. Because of the vote
required to approve the Merger Agreement (see below), abstentions and broker
non-votes will have the effect of a vote against the Merger Agreement.
VOTE REQUIRED
Orion
The affirmative vote of the holders of a majority of all of the issued and
outstanding shares of Orion Common Stock (whether or not represented in person
or by proxy at the Orion Special Meeting) is required to approve the Orion
Merger as provided for in the Merger Agreement.
As of the record date for the Orion Special Meeting, directors, executive
officers and affiliates of Orion owned beneficially an aggregate of 11,224,329
shares of Orion Common Stock, or approximately 56.1% of the outstanding shares
of Orion Common Stock. Included among the 11,224,329 shares of Orion Common
Stock owned beneficially by Orion's directors, executive officers and affiliates
are an aggregate of 11,215,325 shares of Orion Common Stock, or approximately
56.1% of the outstanding shares of Orion Common Stock, owned beneficially by
certain of the Metromedia Holders. It is anticipated that all such directors,
executive officers and affiliates (including the Metromedia Holders who have
indicated that they will vote in favor of the Merger Agreement if the Merger
Agreement is approved by the requisite vote of each of the Actava Stockholders
and Sterling Stockholders) will vote their shares of Orion Common Stock in favor
of the proposal to approve the Merger Agreement. Accordingly, if all such shares
held by directors, executive officers and affiliates of Orion (including the
Metromedia Holders) are voted as anticipated, the vote will be sufficient to
assure approval of the Merger Agreement.
Actava
The affirmative vote of the holders of a majority of all the issued and
outstanding shares of Common Stock (whether or not represented in person or by
proxy at the Actava Special Meeting) is required to approve the Mergers as
provided for in the Merger Agreement.
As of the record date for the Actava Special Meeting, directors, executive
officers and affiliates of Actava owned beneficially an aggregate of 5,199,991
shares of Common Stock (excluding shares which may be received upon the exercise
of options to acquire shares of Common Stock), or approximately
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29.8% of the outstanding shares of Common Stock. Included among the 5,199,991
shares of Common Stock owned beneficially by Actava's directors, executive
officers and affiliates is an aggregate of 4,413,598 shares of Common Stock, or
approximately 25.3% of the outstanding shares of Common Stock, owned by Triton.
In its Schedule 13D Amendment, Triton announced that it was opposed to the
Mergers. It is anticipated that Triton will vote such shares of Common Stock
against the Merger Agreement.
The affirmative vote of the holders of a majority of all of the issued and
outstanding shares of Common Stock will also satisfy the requirement of the NYSE
for stockholder approval in connection with issuances of common stock by NYSE
issuers where the common stock to be issued controls 20% of the voting power
outstanding before the issuance of the stock or where the number of shares to be
issued is or will be equal to 20% of the number of shares of common stock
outstanding before the issuance.
MITI
In accordance with the terms and conditions of the MITI Stockholders'
Agreement, the affirmative vote of the holders of 65% or more of all of the
issued and outstanding shares of MITI Common Stock is required to approve the
MITI Merger as provided for in the Merger Agreement. In lieu of holding a
Special Meeting of the MITI Stockholders with respect to the proposal to approve
and adopt the Merger Agreement, MITI Stockholders will be asked to act by
written consent in accordance with Section 228 of the DGCL with respect to this
proposal. In addition, each MITI Stockholder may be asked to terminate, waive
and release all of its rights and claims under the MITI Stockholders' Agreement.
As of the record date established for the MITI Action by Written Consent,
directors, executive officers and affiliates of MITI owned beneficially an
aggregate of 1,213,269 shares of MITI Common Stock (excluding shares which may
be received upon the exercise of MITI Options), or approximately 70.7% of the
outstanding shares of MITI Common Stock. Included among the 1,213,269 shares of
MITI Common Stock owned beneficially by MITI's directors, executive officers and
affiliates are an aggregate of 957,414 shares of MITI Common Stock, or
approximately 55.8% of the outstanding shares of MITI Common Stock, owned
beneficially by the Metromedia Holders. If all shares held by directors,
executive officers and affiliates of MITI (including the Metromedia Holders who
have indicated that they will vote in favor of the Merger Agreement if the
Merger Agreement is approved by the requisite vote of the Actava Stockholders
and Serling Stockholders) are voted in favor of the Merger Agreement, the vote
will be sufficient to assure approval of the proposal to approve the Merger
Agreement.
Sterling
The affirmative vote of the holders of a majority of all the issued and
outstanding shares of Sterling Common Stock (whether or not represented in
person or by proxy at the Sterling Special Meeting) is required to approve the
Sterling Merger as provided for in the Merger Agreement.
As of the record date for the Sterling Special Meeting, directors, executive
officers and affiliates of Sterling owned beneficially an aggregate of 2,653,800
shares of Sterling Common Stock, or approximately 23.7% of the outstanding
shares of Sterling Common Stock. Furthermore, 6,400,000 shares, or approximately
57.1% of the outstanding shares of the Sterling Common Stock, are held by the
Sterling Voting Trust. It is anticipated that the Sterling Voting Trust and all
such directors, executive officers and affiliates will vote their shares in
favor of the proposal to approve the Merger Agreement. Accordingly, if all such
shares held by the Sterling Voting Trust and directors, executive officers and
affiliates of Sterling are voted as anticipated, the vote will be sufficient to
assure approval of the Merger Agreement.
ORION, ACTAVA AND STERLING PROXIES
All properly executed proxy cards delivered pursuant to these solicitations
and not revoked will be voted at the respective meetings in accordance with the
directions given. Stockholders should specify
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their respective choices on the accompanying proxy cards. IF NO SPECIFIC
INSTRUCTIONS ARE GIVEN WITH REGARD TO THE MATTERS TO BE VOTED UPON, THE SHARES
OF ORION COMMON STOCK, THE SHARES OF COMMON STOCK OR THE SHARES OF STERLING
COMMON STOCK, AS THE CASE MAY BE, REPRESENTED BY A SIGNED PROXY CARD WILL BE
VOTED "FOR" EACH OF THE PROPOSALS LISTED ON THE RESPECTIVE PROXY CARDS. If any
other matters properly come before the Orion Special Meeting, the Actava Special
Meeting or the Sterling Special Meeting, as the case may be, the persons named
as proxies will vote upon such matters according to their judgment.
All proxy cards delivered pursuant to this solicitation are revocable at any
time prior to the Orion Special Meeting, the Actava Special Meeting, or the
Sterling Special Meeting at the option of the persons executing them, in the
case of Orion Stockholders, by giving written notice to the Secretary of Orion,
by delivering a later dated proxy card or by voting in person at the Orion
Special Meeting, in the case of Actava Stockholders, by giving written notice to
the Secretary of Actava, by delivering a later dated proxy card or by voting in
person at the Actava Special Meeting, or in the case of Sterling Stockholders,
by giving written notice to the Secretary of Sterling, by delivering a later
dated proxy card or by voting in person at the Sterling Special Meeting. All
written notices of revocation and other communications with respect to
revocations of proxies should be addressed by Orion Stockholders to: Orion
Pictures Corporation, 1888 Century Park East, Seventh Floor, Los Angeles, CA
90067, Attention: John W. Hester, Secretary, by Actava Stockholders to: The
Actava Group Inc., 945 East Paces Ferry Road, Suite 2210, Atlanta, GA 30326,
Attention: Walter M. Grant, Secretary, and by Sterling Stockholders to: MCEG
Sterling Incorporated, 1888 Century Park East, Suite 1777, Los Angeles, CA
90067, Attention: Kathleen E. Morris, Secretary. In addition, both proxies and
revocations of proxies may be given by Orion Stockholders and Actava
Stockholders by delivering to Chemical Mellon Shareholder Services, by means of
facsimile at (201) 296-4956, or by Sterling Stockholders by delivering to
Sterling by means of facsimile at (310) 282-8303, in each case, before 6:00
p.m., New York City time, on the business day immediately preceding the
Meetings, both sides of an executed form of proxy or notice of revocation
bearing a later date than the earlier delivered proxy.
HOLDERS OF ORION COMMON STOCK ARE REQUESTED TO COMPLETE, DATE AND SIGN THE
ACCOMPANYING PROXY AND RETURN IT PROMPTLY TO ORION IN THE ACCOMPANYING
POSTAGE-PAID ENVELOPE. HOLDERS OF COMMON STOCK ARE REQUESTED TO COMPLETE, DATE
AND SIGN THE ACCOMPANYING PROXY AND RETURN IT PROMPTLY TO ACTAVA IN THE
ACCOMPANYING POSTAGE-PAID ENVELOPE. HOLDERS OF STERLING COMMON STOCK ARE
REQUESTED TO COMPLETE, DATE AND SIGN THE ACCOMPANYING PROXY AND RETURN IT
PROMPTLY TO STERLING IN THE ACCOMPANYING POSTAGE-PAID ENVELOPE.
Orion, Actava and Sterling will each bear their own costs of soliciting
proxies. Proxies will initially be solicited by each of Orion, Actava, and
Sterling by mail, but directors, officers and selected employees of each company
may solicit proxies from stockholders personally or by telephone, telecopy or
other forms of communication. Such directors, officers and employees will not
receive any additional compensation for such solicitation. Each of Orion, Actava
and Sterling also will request brokerage houses, nominees, fiduciaries and other
custodians to forward soliciting materials to beneficial owners, and Orion,
Actava and Sterling, as the case may be, will reimburse such persons for their
reasonable expenses incurred in doing so. All expenses incurred in connection
with the solicitation of proxies will be borne by Orion, Actava, and Sterling,
as the case may be. In addition Actava may utilize the services of Corporate
Investor Communications, Inc. to solicit proxies from Actava Stockholders
personally or by telephone, telecopy or other forms of communication at a cost
of $4,000, plus the reimbursement of reasonable out-of-pocket costs and
expenses.
MITI will not be soliciting proxies from the MITI Stockholders pursuant to
these solicitations. MITI will instead ask its stockholders to complete, date
and sign the written consent and the separate waiver form it may be providing to
the MITI Stockholders and to return it promptly to: Metromedia International
Telecommunications, Inc., 41 West Putnam Avenue, Greenwich, CT 06830, Attention:
Elizabeth Brown, Secretary. MITI will bear its own costs in connection with the
MITI Action by Written Consent.
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PROPOSAL NO. 1--THE PROPOSED MERGERS
THE PROPOSED MERGERS
General
Subject to the conditions set forth therein, the Merger Agreement provides
for the simultaneous mergers of (i) Orion with and into OPC Mergerco, a newly
formed, wholly-owned subsidiary of Actava, (ii) MITI with and into MITI
Mergerco, a newly formed, wholly-owned subsidiary of Actava, and (iii) Sterling
with and into Actava. OPC Mergerco, as the surviving corporation of the Orion
Merger, will be renamed "Orion Pictures Corporation" and will continue the
business and operations of Orion and Sterling (see below). MITI Mergerco, as the
surviving corporation of the MITI Merger, will be renamed "Metromedia
International Telecommunications, Inc." and will continue the business and
operations of MITI. Actava, as the Surviving Corporation of the Sterling Merger,
will be renamed "Metromedia International Group, Inc." and will then transfer
the operating assets of Sterling to New Orion.
Securities of Actava (including shares of Common Stock, and options and
other securities exercisable for or convertible into shares of Common Stock)
will remain outstanding following the Effective Time with the same terms as in
effect prior to the Effective Time.
A toll-free number (800-846-1635) has been established from which
stockholders, commencing from the date of this Joint Proxy Statement/Prospectus
and continuing until the date of the Meetings, can obtain information regarding
the (i) Orion Exchange Ratio, the MITI Exchange Ratio and the Sterling Exchange
Ratio, (ii) the Actava Average Closing Price and (iii) the number of outstanding
shares of Orion Common Stock, MITI Common Stock and Sterling Common Stock, in
each case, as of each such date.
Orion Exchange Ratio
Pursuant to the terms of the Merger Agreement, each holder of Orion Common
Stock will be entitled to receive the number of whole shares of Common Stock
equal to the number of shares of Orion Common Stock owned by such holder
immediately prior to the Effective Time multiplied by the Orion Exchange Ratio,
plus cash in lieu of fractional shares. As set forth in the Merger Agreement, if
the Actava Average Closing Price is greater than or equal to $10.50, the Orion
Exchange Ratio shall be equal to a fraction, the numerator of which is
11,428,572 and the denominator of which is the number of shares of Orion Common
Stock outstanding on the business day immediately preceding the Determination
Date. If the Actava Average Closing Price is less than $10.50, the Orion
Exchange Ratio shall be determined by solving for "Y" in the following formula
and dividing "Y" by the number of shares of Orion Common Stock outstanding on
the business day immediately preceding the Determination Date:
120,000,000
----------------------------
"Y" = Actava Average Closing Price.
The Merger Agreement provides that it is a condition precedent to the obligation
of Actava to consummate the Mergers that the Actava Average Closing Price not be
less than $8.25. The Actava Average Closing Price for the Common Stock on
September 20, 1995 was $16.38125 and on September 20, 1995, there were
20,000,000 shares of Orion Common Stock outstanding. Accordingly, the Orion
Exchange Ratio would have been .57143 on September 20, 1995.
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MITI Exchange Ratio
Pursuant to the terms of the Merger Agreement, each holder of MITI Common
Stock will be entitled to receive the number of shares of Common Stock equal to
the number of shares of MITI Common Stock owned by such holder immediately prior
to the Effective Time multiplied by the MITI Exchange Ratio, plus cash in lieu
of fractional shares. As set forth in the Merger Agreement, if the Actava
Average Closing Price is greater than or equal to $10.50, the MITI Exchange
Ratio shall be equal to a fraction, the numerator of which is 9,523,810 and the
denominator of which is the number of shares of MITI Common Stock outstanding on
the business day immediately preceding the Determination Date. If the Actava
Average Closing Price is less than $10.50, the MITI Exchange Ratio shall be
determined by solving for "Y" in the following formula and dividing "Y" by the
number of shares of MITI Common Stock outstanding on the business day
immediately preceding the Determination Date:
100,000,000
-----------------------------
"Y" = Actava Average Closing Price.
The Actava Average Closing Price for the Common Stock on September 20, 1995 was
$16.38125 and on September 20, 1995, there were 1,716,198 shares of MITI Common
Stock outstanding. Accordingly, the MITI Exchange Ratio would have been 5.54937
on September 20, 1995.
MITI Options and other rights exercisable for MITI Common Stock will remain
outstanding following the Effective Time and, without any action on the part of
the holder thereof, will be converted into options or other rights to purchase
shares of Common Stock, with a proportional adjustment being made to the
exercise price of and the number of shares subject to each such MITI Option or
other rights to reflect the MITI Exchange Ratio in the MITI Merger.
Sterling Exchange Ratio
Pursuant to the terms of the Merger Agreement, each holder of Sterling
Common Stock will be entitled to receive the number of shares of Common Stock
equal to the number of shares of Sterling Common Stock owned by such holder
immediately prior to the Effective Time multiplied by the Sterling Exchange
Ratio, plus cash in lieu of fractional shares. The Sterling Exchange Ratio will
be determined based upon the Actava Average Closing Price and the number of
shares of Sterling Common Stock outstanding prior to the Determination Date. As
set forth in the Merger Agreement, the Sterling Exchange Ratio will be
determined in accordance with one of the following three methods depending on
the Actava Average Closing Price:
1. If the Actava Average Closing Price is less than $10.50, then the
Sterling Exchange Ratio will be determined by solving for "Y" in the
following formula and dividing "Y" by the number of shares of Sterling
Common Stock outstanding on the business day immediately preceding the
Determination Date:
6,000,000
----------------------------
"Y" = Actava Average Closing Price;
2. If the Actava Average Closing Price is greater than or equal to
$10.50 and less than or equal to $14.875, then the Sterling Exchange Ratio
will be equal to a fraction, the numerator of which is 571,428 and the
denominator of which is the number of shares of Sterling Common Stock
outstanding on the business day immediately preceding the Determination
Date; or
3. If the Actava Average Closing Price is greater than $14.875, the
Sterling Exchange Ratio will be determined by solving for "Y" in the
following formula and then dividing "Y" by the
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number of shares of Sterling Common Stock outstanding on the business day
immediately preceding the Determination Date:
8,500,000
----------------------------
"Y" = Actava Average Closing Price.
The Actava Average Closing Price for the Common Stock on September 20, 1995 was
$16.38125 and on September 20, 1995, there were 11,215,000 shares of Sterling
Common Stock outstanding. Accordingly, the Sterling Exchange Ratio would have
been .04627 on September 1, 1995.
The Metromedia Holders
Currently, the Metromedia Holders collectively own a majority of the fully
diluted shares of Orion and MITI, or approximately 56.1% of the outstanding
Orion Common Stock and approximately 55.8% of the outstanding MITI Common Stock.
Immediately following the Effective Time (assuming (i) that Determination Date
occurred on September 20, 1995, (ii) that certain amounts owed by Orion and
affiliates of Orion and MITI to the Metromedia Holders as of such date are
converted into Common Stock and (iii) the exercise of all outstanding options to
acquire shares of Common Stock), the Metromedia Holders would have collectively
owned approximately 33.3% of the outstanding shares of Common Stock of the
Surviving Corporation and will be the Surviving Corporation's largest
stockholder. It is a condition to Orion's obligation to consummate the Orion
Merger that the amount of nonrecourse financing provided by an affiliate of
Metromedia to Orion and its affiliates and the amount of financing provided by
an affiliate of Metromedia to MII be either refinanced or repaid in full or
converted into shares of Common Stock, at Orion's option, in the manner
specified in the Contribution Agreement. See "PROPOSAL NO. 1--THE PROPOSED
MERGERS--Terms and Conditions of the Contribution Agreement." In addition,
Metromedia, as the majority stockholder of Orion and whose designees, together
with a member of Orion's management, constitute a majority of the members of the
Board of Directors of Orion, will, pursuant to the Merger Agreement, be entitled
to designate six of the ten members of the Surviving Corporation's Board of
Directors at the Effective Time. The size of the Surviving Corporation's Board
of Directors is subject to downward adjustment under certain circumstances. See
"PROPOSAL NO. 1--THE PROPOSED MERGERS--Management and Operations After the
Mergers."
Surrender of Stock Certificates
Following the Effective Time, each holder of Orion Common Stock, MITI Common
Stock and Sterling Common Stock will be required to surrender to Chemical Mellon
Shareholder Services, the Exchange Agent, the stock certificate(s) representing
the shares of Orion Common Stock, MITI Common Stock or Sterling Common Stock, as
the case may be, which have been converted into shares of Common Stock pursuant
to the Mergers. The Exchange Agent will then issue to each of the holders of
Orion Common Stock, MITI Common Stock and Sterling Common Stock who surrender
their certificates, stock certificates evidencing the shares of Common Stock to
which such stockholder is entitled. See "PROPOSAL NO. 1--THE PROPOSED
MERGERS--Surrender of Stock Certificates and Receipt of Merger Consideration."
No fractional shares of Common Stock will be issued in any of the conversions,
but cash will be paid in lieu of such fractional shares. See "PROPOSAL NO.
1--THE PROPOSED MERGERS--Fractional Shares." The shares of Common Stock to be
issued pursuant to the Orion Merger, the MITI Merger or the Sterling Merger, as
the case may be, will be freely transferable except by certain stockholders of
Orion, MITI and Sterling who are deemed to be "affiliates" of the Surviving
Corporation. The shares of Common Stock issued to such affiliates will be
restricted in their transferability in accordance with rules and regulations
promulgated by the Commission. See "INFORMATION REGARDING ACTAVA--Restrictions
on Resale of Common Stock by Affiliates."
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BACKGROUND OF THE MERGERS
The following is a brief description of the background of the proposed
Mergers, as well as certain important terms of the Mergers and the Merger
Agreement. A copy of the Merger Agreement is attached hereto as Appendix A, and
is incorporated herein by reference. The information concerning the Merger
Agreement in this Joint Proxy Statement/Prospectus is qualified in its entirety
by reference to the full text of the Merger Agreement.
In March 1994, Actava announced that its Board of Directors had appointed a
committee of independent directors to select the successor to its former
President and Chief Executive Officer, Charles R. Scott. In April 1994, the
Board of Directors of Actava elected John D. Phillips as Actava's President and
Chief Executive Officer and as successor to Mr. Scott. After assuming the
position of Chief Executive Officer, Mr. Phillips undertook a review of Actava's
operating companies with the goal of developing strategies to improve Actava's
operations, earnings and liquidity. Based on this review, Mr. Phillips
recommended and the Actava Board of Directors approved the following
transactions designed to improve Actava's liquidity: (i) in July 1994, Actava
entered into a contract to sell its Texas real estate investment for $9 million
in cash (which sale was consummated in June 1995); and (ii) in August 1994,
Actava sold its 50% interest in Qualex Inc. (its photofinishing business) to
Eastman Kodak Company ("Kodak") in return for $50 million in cash and a $100
million non-interest bearing promissory note from Kodak ($50 million of which
was received on February 13, 1995 and $50 million of which was received on
August 11, 1995). These sales provided Actava with financial stability and
enhanced liquidity and helped position Actava to take advantage of new business
opportunities while servicing its existing debt obligations. In addition,
effective as of December 6, 1994, Actava consummated the Actava-Roadmaster
Exchange Transaction pursuant to which Actava transferred to Roadmaster all of
the issued and outstanding stock of certain of Actava's subsidiaries in the life
sports and leisure industry in exchange for an aggregate consideration of
19,169,000 shares of Roadmaster common stock, which currently represents
approximately 39% of the outstanding shares of Roadmaster common stock.
Roadmaster is a publicly traded company and its common stock is listed on the
NYSE under the symbol "RDM". Actava's Board of Directors believed that the
Actava-Roadmaster Exchange Transaction would create more value for the Actava
Stockholders than Actava could create by continuing to operate its sports
subsidiaries.
Prior to becoming Actava's President and Chief Executive Officer, Mr.
Phillips served from May 1989 until September 1993 as President and Chief
Executive Officer of Resurgens Communications Group, Inc. ("Resurgens") and from
June 1985 until October 1988 as President and Chief Operating Officer of
Advanced Telecommunications Corporation ("ATC"). Both Resurgens and ATC were
solely engaged in the telecommunications business, and Metromedia and certain of
its affiliates were investors in both Resurgens and ATC. At the time Metromedia
sold its interests in Resurgens and ATC, respectively, Metromedia and certain of
its affiliates owned a convertible note and warrants in Resurgens which, if
converted or exercised, as the case may be, into equity pursuant to the terms
thereof would have constituted approximately 36.95% of the common equity of
Resurgens (such convertible note and warrants were never converted or exercised)
and approximately 10% of the common equity of ATC. In connection with his
election as Actava's President and Chief Executive Officer, Mr. Phillips
informed the Board of Directors of Actava of his interest in the
telecommunications business because of his prior experience in this business and
because of his belief that the telecommunications business has greater growth
prospects than the businesses in which Actava was then involved. Mr. Phillips
also expressed interest in discussing possible transactions with Metromedia
because of his prior business relationship with Metromedia while serving as
President of each of Resurgens and ATC.
In June 1994, Mr. Phillips initiated discussions with Metromedia involving a
possible transaction involving Actava and Metromedia. As a result of these
discussions, Metromedia proposed a transaction involving Orion and MITI, both of
which were controlled by Metromedia and its affiliates. Mr. Phillips and the
management of Metromedia concluded that they could enhance the value of Actava,
Orion and
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MITI by combining the companies to create a strategically positioned and global
media, entertainment and communications company. These discussions between Mr.
Phillips and Metromedia's management led to subsequent discussions described
below in August 1994 involving the managements of Orion and MITI.
Orion's management concluded that Actava and MITI would complement Orion. A
combination with Actava would provide Orion with greater financial resources and
increased flexibility to refinance its existing indebtedness which contains
substantial restrictions on the operation of Orion's business and generally
prohibits Orion from producing or acquiring filmed product except on a
non-recourse basis. Orion's management believes that it will be able to enhance
the marketability and value of Orion's library by re-entering the business of
producing and acquiring new motion pictures. See "PROPOSAL NO. 1--THE PROPOSED
MERGERS--Financing Arrangements." In addition, Orion's management believed that
a combination with MITI would provide Orion with certain operating synergies
including the possibility of an outlet for the distribution of its extensive
film and television library in foreign markets served by MITI.
MITI's management and Metromedia considered Actava and Orion a good
strategic fit for MITI. Actava could provide greater financial resources for
MITI to finance its capital expenditure requirements and to develop and expand
its business. In addition, MITI's management believed that a business
combination with Orion would be beneficial to MITI because Orion would provide a
natural source of programming for MITI's cable television operations.
During August 1994, negotiations among the managements of Actava, Orion,
MITI and Metromedia and their respective advisors on the principal terms of a
possible business combination between Actava, Orion and MITI accelerated. On
August 9, 1994, representatives of Actava's senior management met with
representatives of Metromedia to discuss the basic terms of a possible
combination of Actava and Orion. Representatives of Metromedia proposed that
Orion Stockholders receive at least $6.00 per share in the form of Common Stock
for their shares of Orion Common Stock and that the Metromedia Holders receive
shares of capital stock of Actava with enhanced voting rights so that such
holders could maintain voting control of the combined entity. Because
representatives of Metromedia, the holder of a controlling interest of Orion
Common Stock, indicated that they would not accept less than $6.00 per share,
and because $6.00 per share represented a premium to the then prevailing stock
price, Orion determined that $6.00 per share was a reasonable price for the
Orion Common Stock. On August 17, 1994, the same parties again met and at this
meeting representatives of Metromedia proposed a four-way business combination
among Orion, Actava, MITI and Sterling. At that meeting, the parties discussed
the proposed four-way combination and representatives of Metromedia proposed
that Actava acquire Orion (again valuing each share of Orion Common Stock at a
price not less than $6.00 per share), MITI (for an aggregate price of not less
than $100 million) and Sterling (for an aggregate price of not less than $6
million and not more than $8.5 million), in each case using shares of Common
Stock as the consideration. Actava's senior management considered the prices to
be paid for Orion, MITI and Sterling to be reasonable in light of the financial
information available at such date and in light of the fact that any agreement
reached by Actava at this date would be non-binding and subject to legal and
financial due diligence. Metromedia asked its financial advisor to prepare a
preliminary term sheet on this basis, which would also provide that the
Metromedia Holders receive a class of common stock of Actava with enhanced
voting rights. On August 18 and 19, 1994, senior management of Sterling and
Orion met with representatives of Metromedia to discuss the possible combination
and to discuss the basic financial terms of the transaction, which senior
management of Sterling indicated were acceptable to them.
Sterling was considered a good strategic addition to the Surviving
Corporation's operations because it could offer more programming for MITI due to
its then existing library of approximately 250 titles and could itself benefit
from the greater financial resources of the Surviving Corporation. Immediately
prior to participating in the negotiations with respect to the letter of intent
pertaining to this
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transaction, Sterling's management had initiated contacts with investment
bankers, private investors and companies engaged in the entertainment industry
with respect to developing (i) strategic alliances for the production and
acquisition of motion picture product and (ii) sources of additional financing.
While Sterling was not at that time expressly seeking a business combination,
Sterling was interested in a combination that would have accomplished the
foregoing goals. See "PROPOSAL NO. 1--THE PROPOSED MERGERS--Reasons for the
Mergers; Board Recommendations--Sterling's Reasons for the Sterling Merger" with
respect to alternatives considered by Sterling.
On August 29, 1994, senior management of each of Orion, Actava, MITI and
Sterling and Metromedia and their respective counsel met to discuss and
negotiate draft letters of intent which had been prepared by Orion's counsel and
included exchange ratios, which were simply formulas based on (i) the basic
financial terms that the parties had previously discussed at their August 17,
1994 meeting and (ii) the number of shares of stock of each company outstanding
at the consummation of the transaction.
On August 31, 1994, management of Actava, Orion, MITI and Sterling reached
an agreement in principle on the basic terms of the Mergers and the parties
signed certain non-binding letters of intent which set forth such basic terms.
The letters of intent generally provided for the basic exchange ratios for the
transaction and provided further that each of the Mergers was subject to a
number of conditions precedent, including, among other things, the preparation
and negotiation of a merger agreement satisfactory to the parties, satisfactory
completion of a due diligence review, approval by the respective Boards of
Directors and stockholders of Orion, Actava, MITI, and Sterling, the refinancing
of Orion's existing indebtedness, consummation of each of the other Mergers and
receipt of all requisite regulatory approvals. The parties agreed that, as part
of the transaction, the Metromedia Holders would be issued the then contemplated
Class A Common Stock, which provided for three votes per share on all matters
voted upon by the Surviving Corporation's stockholders (other than the election
of directors). The parties agreed that the Metromedia Holders would receive
shares of Class A Common Stock because they controlled in excess of 50% of the
fully diluted voting power of each of Orion and MITI and it was a precondition
to their willingness to enter into and consummate the Mergers that they maintain
voting control of the Surviving Corporation. The letters of intent further
provided that the Surviving Corporation would be named "Metromedia International
Group, Inc." and would be managed by a three person Office of the Chairman
consisting of John Kluge, the current Chairman of Orion and MITI, as Chairman,
Stuart Subotnick, Orion's and MITI's current Vice Chairman, as Vice Chairman,
and John Phillips, the current President and Chief Executive Officer of Actava,
as President and Chief Executive Officer. Finally, the letters of intent
contemplated that Actava would provide up to $55 million of interim financing on
a secured basis to Orion, Sterling and MITI prior to consummation of the
proposed business combination.
As provided for in the letters of intent, Actava and Metromedia entered into
the Actava-Metromedia Credit Agreement under which Actava agreed to make certain
loans to Metromedia in an amount not to exceed an aggregate of $55 million.
Under the terms of the Actava-Metromedia Credit Agreement, Metromedia may use
the proceeds of such loans to make advances to or to pay obligations on behalf
of Orion, Sterling and MITI. As of September 20, 1995, Metromedia had borrowed
$55 million from Actava pursuant to the Actava-Metromedia Credit Agreement. All
loans made by Actava to Metromedia under the Actava-Metromedia Credit Agreement
are secured by the shares of stock of Orion and MITI owned by Metromedia and its
affiliates. In addition, Mr. Kluge, the Chairman, President and Chief Executive
Officer of Metromedia, has personally guaranteed the outstanding principal
amount of the loans. The Actava-Metromedia Credit Agreement provides that
interest is payable on the principal amount of all loans at an annual rate equal
to the prime rate announced from time to time by Chemical Bank (8.75% as of
September 20, 1995). Interest on all outstanding loans increases to the prime
rate plus three percent per annum if a party other than Actava terminates
discussions relating to the proposed business combination. All loans are due and
payable on the earlier of (i) the Effective Time, (ii) 90 days after the
termination of the Merger Agreement, or (iii) December 31, 1995. It is currently
anticipated that the amounts outstanding under the Actava-
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Metromedia Credit Agreement will be repaid upon consummation of the Mergers;
however, the repayment by Metromedia to Actava of the amounts outstanding under
the Actava-Metromedia Credit Agreement will result in no net gain to the
Surviving Corporation because Metromedia used the proceeds of the loans under
the Actava-Metromedia Credit Agreement to make advances to or pay obligations of
Orion, Sterling and MITI and all of such amounts will be repaid by the Surviving
Corporation to Metromedia upon the consummation of the Mergers.
From February 1995 through April 1995, Orion, Actava, MITI and Sterling were
involved in a due diligence review and also were preparing and negotiating the
terms of a definitive merger agreement. The delay between the execution of
letters of intent and the commencement of the due diligence investigations and
negotiation of a definitive merger agreement was due largely to Actava's
involvement with the Actava-Roadmaster Exchange Transaction, the preparation of
internal budgets by the parties, the preparation of audited financial statements
for MITI and the formulation of a proposal regarding the refinancing of Orion's
indebtedness, the substantial completion of all of which was required as a
condition to the negotiation of a definitive merger agreement.
On April 12, 1995, Orion, Actava, MITI and Sterling entered into the Initial
Merger Agreement. Thereafter, in response to certain issues raised in connection
with the negotiation of the term sheet for New Orion's credit facility and to
facilitate the listing of the Surviving Corporation's Common Stock on the NYSE
or AMEX or the quotation thereof on the NASDAQ/NMS (which is a condition to the
consummation of the Mergers) and for certain other considerations, Actava,
Orion, MITI and Sterling agreed to amend and restate in its entirety the Initial
Merger Agreement and to amend certain related ancillary agreements
(collectively, the "Amendments"). As a result, the Merging Parties, following
the approval by their respective Boards of Directors, executed the Merger
Agreement on September 27, 1995. The Amendments generally provided for, among
other things, (i) the merger of Orion and MITI with and into newly formed,
wholly-owned subsidiaries of Actava (the Initial Merger Agreement had provided
for the merger of Orion and MITI directly with and into Actava),
(ii) establishing the Orion Exchange Ratio, the MITI Exchange Ratio and the
Sterling Exchange Ratio on the Determination Date (i.e., the day which is five
days prior to the Meetings) to allow stockholders of each of Actava, Orion, MITI
and Sterling to make a more informed investment decision in voting whether to
approve the Mergers (the Initial Merger Agreement provided that the Exchange
Ratio would be fixed on the business day immediately prior to the Effective
Time), (iii) the elimination of the Share Exchange which had provided that
immediately following the Effective Time the Metromedia Holders would receive
shares of Class A Common Stock in exchange for their shares of Common Stock
received in the Mergers (the Initial Merger Agreement provided for the Share
Exchange pursuant to which the Metromedia Holders would have received such Class
A Common Stock), (iv)(a) dividing the Board of Directors into three classes,
with each class to be elected, in staggered three year terms, (b) prohibiting
stockholder action by written consent in lieu of a meeting, (c) limiting the
right to call special meetings of stockholders to the Chairman or Vice Chairman
of the Board of Directors of the Surviving Corporation and (d) establishing
certain procedures stockholders must follow to nominate directors for election
to the Surviving Corporation's Board of Directors (clauses (a), (b), (c) and (d)
above are collectively referred to as the "Governance Amendments;" the Initial
Merger Agreement did not provide for any of the Governance Amendments), (v) the
inclusion of a covenant in the Merger Agreement providing for the adoption of a
stockholder rights plan by the Surviving Corporation's Board of Directors (the
Initial Merger Agreement did not provide for the adoption of a stockholder
rights plan) and (vi) the agreement by the Surviving Corporation to register
under the Securities Act the shares of Common Stock owned by the Metromedia
Holders on a Form S-3 Registration Statement pursuant to Rule 415 under the
Securities Act (the "Shelf Registration") which will be declared effective on or
prior to the Effective Time and will be continuously kept effective by the
Surviving Corporation until all of the shares covered by such Shelf Registration
are sold (the Initial Merger Agreement provided that the Metromedia Holders,
under certain circumstances and subject to certain conditions, could demand that
the Surviving Corporation register under the Securities Act their shares of the
Surviving Corporation's stock). For a more detailed description of the
Amendments, including a
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description of the mergers of Orion and MITI with and into subsidiaries of
Actava, see "PROPOSAL NO. 1--THE PROPOSED MERGERS--The Proposed Mergers;" for a
description of the mechanism to determine the Exchange Ratio, see "PROPOSAL NO.
1--THE PROPOSED MERGERS--Orion Exchange Ratio," "--MITI Exchange Ratio" and
"--Sterling Exchange Ratio;" for a description of the Governance Amendments and
the stockholder rights plan, see "INFORMATION REGARDING ACTAVA--Description of
Actava Capital Stock;" and for a description of the Shelf Registration, see
"PROPOSAL NO. 1--THE PROPOSED MERGERS--Registration Rights Agreement."
Orion Board Deliberations
Since the execution of the letters of intent among the parties relating to
the proposed Mergers, management of Orion has kept members of its Board of
Directors informed as to the status of the proposed Mergers.
On March 2, 1995, Orion's Board of Directors formed the Orion Special
Committee to consider the terms of the Initial Merger Agreement and to make a
recommendation to the full Board of Directors of Orion regarding the Initial
Merger Agreement. The Orion Special Committee also considered the terms of the
Merger Agreement and made a recommendation to the full Board of Directors of
Orion regarding the Merger Agreement. The Orion Special Committee was formed
because Orion's Board of Directors is composed of a majority of persons who are
affiliated with Metromedia and because of the Board of Directors' view that the
Orion directors affiliated with Metromedia could be viewed as having an interest
in the transactions contemplated by the Merger Agreement in addition to the
interests of Orion Stockholders generally in light of the MITI Merger and the
then contemplated Share Exchange. The members of the Orion Special Committee are
Michael I. Sovern, Joel R. Packer and Raymond L. Steele, each of whom Orion
considers an independent director. Messrs. Packer and Steele were two of the
three directors selected to Orion's Board of Directors at the request of Orion's
unsecured creditors in connection with the consummation of the Plan. See
"INFORMATION REGARDING ORION-- Management's Discussion and Analysis of Financial
Condition and Results of Operations." The third member of Orion's Board of
Directors selected by Orion's unsecured creditors in connection with
consummation of the Plan, Stephen Wertheimer, elected not to serve on the Orion
Special Committee because he is involved in active negotiations with Metromedia
on a matter unrelated to the Mergers, to Orion and to Mr. Wertheimer's duties as
a director of Orion. Mr. Steele has approached representatives of Metromedia
regarding their interest in making an investment in several potential
transactions. Metromedia has declined to participate or has not yet taken action
with respect to any such potential transaction. In light of the lack of any
substantive discussions between Metromedia and Mr. Steele regarding these
transactions, Mr. Steele and the Orion Board of Directors determined that Mr.
Steele could serve on the Orion Special Committee.
The Orion Special Committee held eight separate meetings to consider the
terms of the Orion Merger as provided for in the Initial Merger Agreement and
the Merger Agreement. These meetings are described below:
. At a meeting held on March 2, 1995, Michael I. Sovern was selected as
chairman of the Orion Special Committee. At this meeting, Mr. Sovern noted
that the first order of business would be to retain the services of
independent legal counsel and an independent investment banking firm to
review the terms of the proposed transaction.
. At a meeting held on March 15, 1995, the Orion Special Committee
decided to retain Davis Polk as its independent counsel. Once retained,
representatives from Davis Polk discussed with the Orion Special Committee
the process for selecting an independent financial advisor for the Orion
Special Committee.
. At a meeting of the Orion Special Committee held on March 16, 1995,
members of the Orion Special Committee heard presentations from
representatives of several investment banking firms regarding their possible
retention as financial advisor to the Orion Special Committee. At this
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meeting Alex. Brown was retained to render independent financial advice to
the Orion Special Committee.
. The next meeting of the Orion Special Committee was held on March 28,
1995. At this meeting, a representative from Alex. Brown discussed with the
Orion Special Committee the valuation methodologies they intended to utilize
in connection with the proposed transaction and reported to the committee
certain discussions representatives of Alex. Brown had with members of
Orion's management. Representatives of Davis Polk also reviewed with the
Orion Special Committee certain terms of the draft Initial Merger Agreement.
. At a meeting of the Orion Special Committee held on April 11, 1995,
Alex. Brown presented to the Orion Special Committee its preliminary report
regarding the fairness of the proposed transaction, including its valuation
methodologies and its preliminary conclusions regarding the valuation. A
member of Orion's senior management and Orion's counsel were invited to this
meeting and reviewed with the Orion Special Committee the status and certain
issues concerning the refinancing of the indebtedness of Orion as well as
the timing of the execution of the Initial Merger Agreement. At this
meeting, Davis Polk, at the request of the Orion Special Committee, raised
with representatives of Orion's senior management and Orion's counsel
certain issues that the Orion Special Committee had raised with respect to
the draft of the Initial Merger Agreement and ancillary agreements including
the need under certain circumstances to limit the rights of the Metromedia
Holders, as the sole holders of the then contemplated Class A Common Stock,
to elect directors to the Surviving Corporation's Board of Directors.
. The Orion Special Committee held another meeting on April 27, 1995. At
this meeting, Alex. Brown presented its oral opinion (which was later
confirmed in writing) regarding the fairness from a financial point of view
of the proposed transaction and the valuation analyses Alex. Brown had
undertaken with respect to each of the parties to the Merger Agreement. The
Orion Special Committee discussed the valuations performed by Alex. Brown as
well as the financial alternatives that might be available to Orion in the
absence of the proposed transaction and the imminence of Orion's default
under certain of its indebtedness. Also at that meeting, plaintiffs' counsel
in certain stockholder litigation filed against Orion in connection with the
Mergers made a presentation to the Orion Special Committee and raised with
the committee certain concerns it had with the terms of the transaction
generally and specifically with the terms of the then contemplated Class A
Common Stock (which under the Initial Merger Agreement would have been
issued to the Metromedia Holders) and with certain provisions of the
Registration Rights Agreement. The committee held further discussions
regarding the rights of holders of the then contemplated Class A Common
Stock to elect directors to the Surviving Corporation's Board of Directors
regardless of their equity interest in the Surviving Corporation and
instructed Davis Polk to negotiate an amendment to the Initial Merger
Agreement which would provide a downward adjustment in the event the
aggregate equity interest in the Surviving Corporation of the holders of the
then contemplated Class A Common Stock fell below certain levels.
. At a meeting of the Orion Special Committee held on May 5, 1995,
representatives from Alex. Brown presented certain additional information
relating to the fairness opinion delivered at the previous meeting, which is
summarized below. See "PROPOSAL NO. 1--THE PROPOSED MERGERS--Opinions of
Financial Advisors--Orion." Representatives from Davis Polk also reported
that Metromedia had agreed generally that the number of directors appointed
by the holders of the then contemplated Class A Common Stock would be
reduced as the equity holdings of the holders of the Class A Common Stock
fell below 15 percent. After further discussion with counsel, the Orion
Special Committee voted unanimously to recommend to the full Orion Board
that it approve and recommend the Initial Merger Agreement. The committee
noted that it would review its recommendation when the final terms of the
refinancing plan for the Orion Senior Indebtedness and Orion Subordinated
Indebtedness had been finalized.
. The Orion Special Committee held another meeting on September 13,
1995. At this meeting, the committee considered and discussed with its
advisors the Amendments to the Initial
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Merger Agreement and the Restated Certificate of Incorporation of the
Surviving Corporation. Orion's counsel reviewed the terms of the commitment
letter with Chemical Bank for New Orion's credit facility and the expected
timing of that financing arrangement. Representatives of Alex. Brown
presented its oral opinion, which was later confirmed in writing, that, as
of such date, nothing had come to Alex. Brown's attention that would lead it
to change its earlier opinion regarding the fairness from a financial point
of view of the Orion Merger. The Orion Special Committee voted unanimously
to recommend that the full Orion Board of Directors approve and recommend
the Merger Agreement.
The full Board of Directors of Orion held a meeting on May 17, 1995, which
was attended by Orion's counsel and its financial advisor, Donaldson, Lufkin and
Jenrette Securities Corp. ("DLJ"). DLJ has historically acted as a financial
advisor to Orion with respect to certain corporate transactions. It was
contemplated at that time that DLJ would be retained to act as Orion's financial
advisor in connection with its then contemplated refinancing plan for the Orion
Subordinated Indebtedness. DLJ attended this meeting to answer questions about
such contemplated refinancing plan, but did not deliver any reports or prepare
any opinions with respect thereto. DLJ did not participate in the discussions
and no questions were asked of DLJ by the Orion Board at the May 17, 1995
meeting. At this meeting, Orion's counsel reviewed in detail the terms of the
Initial Merger Agreement. Members of the Orion Board asked questions and engaged
in a discussion regarding the terms of the Initial Merger Agreement. At this
meeting, the Orion Special Committee reported to the full Orion Board regarding
its unanimous recommendation and representatives of Alex. Brown provided a
summary to the full Orion Board of the presentation that it made to the Orion
Special Committee regarding the various analyses it had undertaken in connection
with delivering its fairness opinion to the Orion Special Committee. The full
Board of Directors of Orion, by unanimous vote of those directors present,
approved the Initial Merger Agreement at the May 17, 1995 meeting.
The full Board of Directors of Orion held a telephonic meeting on September
13, 1995, in which Orion's counsel participated. At this meeting, Orion's
counsel reviewed in detail the terms of the Merger Agreement, described the
principal changes effectuated by the Amendments and described the terms of the
proposed financing arrangements with Chemical Bank. The full Board of Directors
then received a report of the Orion Special Committee regarding its unanimous
recommendation of the Merger Agreement. Members of the Orion Board asked
questions regarding the Amendments and the refinancing plan. In particular,
members of Orion's Board of Directors asked questions regarding the specific
terms of New Orion's credit facility, including which portion of the New Orion
credit facility is to be guaranteed by Metromedia. The Orion Board also
discussed the potential anti-takeover effect of the Amendments and whether such
provisions were typically part of charters of other public companies. Following
such discussion, the full Board of Directors of Orion, by unanimous vote of
those directors present, approved the Merger Agreement at the September 13, 1995
meeting.
In the event the Merger Agreement is not approved or the Mergers are not
otherwise consummated, Orion's Board of Directors intends to instruct management
to seek a waiver of the event of default which occurred on August 31, 1995,
under certain of the Orion Subordinated Indebtedness, to seek means to refinance
the Orion Senior Indebtedness and Orion Subordinated Indebtedness or to seek
other financing. There can be no assurance that any of the foregoing would be
successful and as a result of the occurrence of the Event of Default and the
possibility of an acceleration of its indebtedness, Orion may be forced to seek
protection under chapter 11 of the Bankruptcy Code if the Mergers are not
consummated. See "INFORMATION REGARDING ORION--Management's Discussion and
Analysis of Financial Condition and Results of Operation--Liquidity and Capital
Resources."
Each member of the Orion Special Committee received a fee of $20,000 for
service on the Orion Special Committee and fees of $1,000 for each meeting
attended, such fees totalling $28,000 for Mr. Sovern, and $27,000 for each of
Mr. Packer and Mr. Steele for their services on the Orion Special Committee.
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Actava Board Deliberations
During its initial consideration of the Mergers, Actava's Board of Directors
consisted of nine members. They were John E. Aderhold, Michael E. Cahr, J.M.
Darden, III, John Imlay, Clark A. Johnson, Anthony F. Kopp, Richard Nevins, John
D. Phillips and Carl E. Sanders. Messrs. Cahr and Nevins were designated by
Triton to serve as directors pursuant to the Triton Stockholders Agreement. Mr.
Darden resigned as a member of the Board of Directors of Actava on June 7, 1995,
and Mr. Kopp resigned as a member of the Board of Directors of Actava on June 9,
1995. The letters of resignation submitted to Actava by Messrs. Darden and Kopp
did not provide reasons for their resignations. As a result of these
resignations, the Board of Directors of Actava has consisted of seven members
since June 9, 1995.
The Board of Directors of Actava held six separate meetings to consider the
proposed business combination with Orion, MITI and Sterling. All of the members
of the Board of Directors attended each of the six meetings or participated in
the meetings by telephone, except that Mr. Aderhold did not participate in a
meeting held on February 20, 1995 and Mr. Kopp was unable to participate in most
of a meeting held on March 19, 1995 due to a problem with a telephone
connection. In addition to the formal meetings of the Board of Directors,
Actava's directors exchanged correspondence regarding the Mergers, the material
terms of which are summarized below. The deliberations by Actava's Board of
Directors are summarized below:
. At a meeting of the Board of Directors held on February 6, 1995, Mr.
Phillips presented a detailed report to Actava's directors on the current
status of Actava and on the reasons why the Mergers, in his opinion, would
be in the best interests of the Actava Stockholders. The directors of Actava
at this meeting also heard a presentation from representatives of First
Boston regarding First Boston's credentials for rendering an opinion to the
Board of Directors on the fairness of the Orion Exchange Ratio, Sterling
Exchange Ratio and MITI Exchange Ratio (collectively referred to as the
"Exchange Ratio") and the then contemplated Share Exchange, taken as a
whole, to the Actava Stockholders from a financial point of view.
Presentations were also made to Actava's directors by Richard J. Sherwin,
Co-President of MITI, Leonard White, President of Orion, and John Hyde,
President of Sterling. The presentations included a review of the history,
business and prospects of each of MITI, Orion, and Sterling, respectively.
The non-management directors of Actava held an executive session at this
meeting during which all members of Actava's management, including Mr.
Phillips, were excused from the meeting. During the executive session, there
was an extensive discussion regarding whether an independent committee of
directors should be formed to review the Mergers and to consider the
alternatives available to Actava. Following this discussion, the
non-management directors of Actava agreed that the full Board of Directors
would meet frequently to consider the Mergers and that an independent
committee of directors was not necessary or required. The primary reasons
for determining that an independent committee was not necessary or required
were that (i) Actava's outside legal counsel advised Actava's Board of
Directors that, under the circumstances of this transaction, Delaware law
would not require the formation of an independent committee of directors to
review the Mergers and that each director would be obligated to be fully
informed about the Mergers whether or not an independent committee had been
established for the purposes of reviewing and recommending the Mergers to
the full Board of Directors, (ii) it would have been difficult to appoint a
committee that would have adequately represented the views of all of the
members of the Board of Directors, and (iii) the non-management directors
would have the opportunity to hold additional executive sessions at future
meetings during which all members of Actava's management, including Mr.
Phillips, could be excused from the meeting. The non-management directors
further agreed that the investment banker retained to render a fairness
opinion with respect to the Mergers and the then contemplated Share Exchange
would report directly to the Board Directors and would not be compensated
with a fee that would be contingent upon consummation of the Mergers.
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. A telephonic meeting of Actava's Board of Directors was held on
February 20, 1995. The directors at this meeting ratified a decision made by
the Executive Committee of the Board of Directors of Actava on February 15,
1995 to retain First Boston to render an opinion to the Board of Directors
of Actava on the fairness of the Exchange Ratio and the then contemplated
Share Exchange, taken as a whole, to the Actava Stockholders from a
financial point of view. The motion to ratify the selection of First Boston
was approved by a vote of six to two. Mr. Nevins and Mr. Cahr voted against
the motion. They pointed out that Triton, which at that time owned
approximately 25% of the outstanding shares of Common Stock, had publicly
announced its opposition to the Mergers on February 15, 1995. See
"INFORMATION REGARDING ACTAVA--Other Developments." Messrs. Nevins and Cahr
felt that Actava should not continue to pursue the Mergers in light of
Triton's opposition.
. Actava's Board of Directors held another meeting on February 27, 1995.
At this meeting, the directors heard reports on the status of Actava's due
diligence investigation regarding the Mergers. In addition, Stuart
Subotnick, Executive Vice President of Metromedia and Vice Chairman of Orion
and MITI, made a presentation to Actava's directors regarding Metromedia.
This presentation included a discussion of the history of Metromedia's
relationship with Orion and MITI and a discussion of Mr. Subotnick's views
regarding the reasons for the Mergers and the prospects for the Surviving
Corporation if the Mergers are consummated. There was also a discussion at
this meeting regarding Triton's opposition to the Mergers. Mr. Nevins,
speaking for Triton, described the Mergers as a combination of troubled
assets and start-up ventures. He also said that the Mergers were announced
prematurely without an adequate evaluation or due diligence on the part of
Actava's management. Mr. Nevins further commented that if the Mergers are
consummated Actava would be investing in excess of $100 million in MITI
compared to Mr. Nevin's understanding of a total investment in MITI of
approximately $50 million, of which approximately $25 million had been
invested by Metromedia and its affiliates. After expressing the view that
the Mergers could not be consummated in light of Triton's opposition, Mr.
Nevins made a motion that Actava terminate further consideration of and
expenses relating to the Mergers. The motion made by Mr. Nevins was seconded
by Mr. Cahr but was defeated by a vote of seven to two. Messrs. Nevins and
Cahr were the only directors who voted in favor of the motion. The directors
who opposed the motion expressed the view that Actava should proceed with
its due diligence investigation relating to the Mergers and that the Board
of Directors should receive the opinion of First Boston as to the fairness
of the consideration to be received by the Actava Stockholders from a
financial point of view before making a final decision on the Mergers.
. At a meeting held on March 19, 1995, representatives of First Boston
made a presentation to Actava's directors regarding certain preliminary
financial analyses relating to the proposed Mergers. In addition, Frederick
Beilstein, Senior Vice President and Chief Financial Officer of Actava, made
a presentation regarding the proposal that was then under consideration for
the refinancing of certain indebtedness of Orion and Actava in connection
with the Mergers. At the time of this meeting, it was contemplated that the
Surviving Corporation would offer to issue new zero coupon notes, combined
with warrants to purchase shares of Common Stock, in exchange for all of the
Orion Subordinated Indebtedness and all of Actava's outstanding 6 1/2%
Convertible Debentures due 2002 (the "Exchange Offers"). It also was
contemplated that the Surviving Corporation would enter into a new credit
facility with a syndicate of banks and would use the proceeds of the new
credit facility to repay the Orion Senior Indebtedness. The Exchange Offers
subsequently were abandoned after the managements of Actava and Orion
concluded that they would be time consuming and difficult to accomplish. In
lieu of the Exchange Offers, the Surviving Corporation will refinance the
Orion Subordinated Indebtedness in the manner described elsewhere in this
Joint Proxy Statement/Prospectus. See "PROPOSAL NO. 1--THE PROPOSED
MERGERS--Financing Arrangements." The directors of Actava were also
presented with a draft of the Initial Merger Agreement, and there was a
presentation regarding the material terms of the Initial Merger Agreement.
There was also a discussion at this meeting regarding alternatives to the
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Mergers. Following the various presentations that were made at this meeting,
Mr. Phillips recommended that Actava's Board of Directors approve the
Mergers. No motions regarding the Mergers, however, were made at this
meeting.
. Following the meeting of Actava's Board of Directors held on March 19,
1995, Messrs. Darden and Nevins each wrote separate letters to the other
Actava directors expressing their respective concerns about the proposed
Mergers, including that (i) the financing for the Surviving Corporation that
was then being contemplated would be difficult to accomplish, would not
provide adequate additional capital for the Surviving Corporation to finance
its ongoing operations and, therefore, would make it highly likely that the
Surviving Corporation would need to sell its Snapper division or its
interest in Roadmaster, (ii) Orion and Sterling are weak participants in the
motion picture industry, which is a highly competitive, capital intensive
and volatile business, (iii) the Mergers involve the use of Actava's balance
sheet to finance businesses more properly financed privately in the venture
capital market, (iv) MITI is a start-up venture facing significant
political, social and economic risks associated with operating a business in
Eastern Europe and the former Soviet Republics, (v) the opportunities
presented by the Mergers may be better pursued by a privately held company
or by a large company that could pursue these opportunities with only a
fraction of its capital, and (vi) the consummation of the Mergers could take
a significant amount of time during which MITI and Orion would continue to
consume cash.
. Mr. Phillips responded to the concerns of Messrs. Darden and Nevins in
separate letters to them. In his responses, which were sent to all of the
members of Actava's Board of Directors, Mr. Phillips noted that (i) Actava
had been advised that the then anticipated financing for the Surviving
Corporation could be accomplished without significant difficulty, (ii)
although current market conditions are not ripe for completing a debt
financing for companies doing business in emerging markets, the Surviving
Corporation could effectively manage its cash needs by delaying certain
projects and, if necessary, by selling select assets, including its Snapper
division and investment in Roadmaster, (iii) although the Surviving
Corporation intends to follow a conservative plan relating to new film
production, Orion has an impressive film library which will provide to the
Surviving Corporation the requisite film content for a communications
company to operate in the motion picture industry, (iv) the risks associated
with MITI are outweighed by the potential for growth of the company, the
large number of licenses it holds, the diversity of the types of licenses
involved and the countries and cities in which such licenses have been
issued and (v) First Boston's analysis states that the Mergers enhance the
inherent value of the Common Stock.
. Actava's Board of Directors met again on April 12, 1995. At this
meeting, the directors heard a presentation from First Boston regarding
certain financial considerations relating to the proposed Mergers, and First
Boston rendered its oral opinion (which was later confirmed in writing)
regarding the fairness of the Exchange Ratio and the then contemplated Share
Exchange, taken as a whole, to the Actava Stockholders from a financial
point of view. See "PROPOSAL NO. 1--THE PROPOSED MERGERS--Opinions of
Financial Advisors--Actava." The directors also reviewed a revised draft of
the Initial Merger Agreement and considered the terms of the Initial Merger
Agreement and the advantages and disadvantages of the Mergers, including the
reasons for the Mergers and the risk factors relating to the businesses of
the Surviving Corporation. Finally, the directors also discussed
alternatives to the Mergers and discussed a summary of the then proposed
Exchange Offers. Each member of Actava's Board of Directors was given the
opportunity to ask questions and to comment on the Mergers. Mr. Nevins
started by questioning the wisdom of purchasing Orion on a basis which
requires Actava to pay for Orion's movie production business, which does not
currently exist. He also maintained that Orion would be facing bankruptcy if
the Mergers did not occur. Mr. Darden questioned whether other third parties
would pay the values placed by First Boston on Orion's film library. Mr.
Kopp said that the Mergers have numerous positive aspects, but he was
concerned that Mr. Kluge is using the transaction to eliminate his guaranty
of Orion's indebtedness and to obtain access to Actava's cash and other
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financial resources. Mr. Imlay commented favorably on the opportunities
presented by the Mergers and on the quality of the people who will be
involved in the future operations of the Surviving Corporation. Mr. Aderhold
also commented favorably on the management of the Surviving Corporation and
on the quality of the opinion provided to the Board of Directors by First
Boston. Mr. Cahr said he had personal experience doing business in Russia
and Eastern Europe over the past five years. He questioned the values placed
by First Boston on the businesses of MITI, and he commented that the risks
of the Eastern European joint ventures are significant. Mr. Johnson
complimented Mr. Phillips for his accomplishments as Actava's Chief
Executive Officer and said he is impressed with the opportunities presented
by the telecommunications and entertainment industries. Mr. Sanders said he
believed there will be less risk in pursuing the Mergers than doing nothing.
He also observed that Actava would have the right to pursue a more
attractive alternative if such an alternative is presented to the Board of
Directors before the Mergers are consummated. Messrs. Johnson and Sanders
also expressed the view that the stockholders of Actava should be given the
opportunity to vote on the Mergers. After all the directors had had the
opportunity to express their views, Mr. Johnson made a motion, which was
seconded by Mr. Sanders, that Actava's Board of Directors approve the
Initial Merger Agreement and the then contemplated Share Exchange Agreement
and recommend that the Actava Stockholders vote to approve the Initial
Merger Agreement and the then contemplated Share Exchange Agreement. The
motion was adopted by a vote of 5 to 4. The directors voting for the motion
were Messrs. Aderhold, Imlay, Johnson, Phillips and Sanders. Messrs. Cahr,
Darden, Kopp and Nevins voted against the motion.
. The final meeting of Actava's Board of Directors at which the Mergers
were considered was held on September 15, 1995. At this meeting, Mr.
Beilstein made a presentation regarding the financing plan for the Surviving
Corporation. This presentation included a description of the New Orion
credit facility and the proposed $35 million credit facility for the
Surviving Corporation and a review of the plans for using the proceeds of
the New Orion credit facility and the Surviving Corporation's $35 million
credit facility to refinance the Orion Senior Indebtedness and the Orion
Subordinated Indebtedness. See "PROPOSAL NO. 1--THE PROPOSED
MERGERS--Financing Arrangements." Mr. Beilstein also discussed the future
financing needs of the Surviving Corporation. See "RISK FACTORS--Leverage
and Debt Service Payments of the Surviving Corporation" and "--Future
Financing Needs." Following Mr. Beilstein's presentation, representatives of
First Boston informed the Board of Directors that First Boston had continued
to monitor the parties involved in the Mergers and their respective
businesses and that nothing had come to the attention of First Boston that
would cause it to change the opinion that it delivered to the Board of
Directors on April 12 1995. First Boston subsequently rendered an opinion
dated the date of this Joint Proxy Statement/Prospectus on the fairness of
the Exchange Ratio, taken as a whole, to the Actava Stockholders from a
financial point of view. See "PROPOSAL NO. 1--THE PROPOSED MERGERS--Opinions
of Financial Advisors--Actava." There was also a presentation at this
meeting on the Merger Agreement with emphasis on the differences between the
Initial Merger Agreement and the Merger Agreement. See "PROPOSAL NO. 1--THE
PROPOSED MERGERS--Background of the Mergers." After the various
presentations had been concluded, Mr. Nevins commented that he voted against
the Mergers at the meeting of the Board of Directors held on April 12, 1995
because he felt that Actava was paying too much for the assets of the other
parties to the Mergers and because he believed that the then contemplated
financing plan was not credible. Mr. Nevins then observed that the recent
increases in the market value of the Common Stock have convinced him that
the market does not share his views regarding the value of Orion and MITI.
He also emphasized that he now believes an enterprise with the Surviving
Corporation's market valuation will be able to raise the additional
financing that it needs. Mr. Nevins concluded by saying he now intends to
vote in favor of the Mergers. Mr. Cahr expressed his agreement with the
comments made by Mr. Nevins. An executive session of the Board of Directors
was then held at which all members of Actava's management, including Mr.
Phillips, were excused from the meeting. Following the executive session,
Actava's Board of Directors unanimously approved the
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Merger Agreement and recommended that the Actava Stockholders vote to
approve the Merger Agreement.
In the event that the Mergers are not consummated, Metromedia will be
required to repay all amounts owed by Metromedia to Actava under the
Actava-Metromedia Credit Agreement. See "PROPOSAL NO. 1--THE PROPOSED
MERGERS--Interests of Certain Persons in the Mergers." Such amounts will be due
ninety days from the termination of the Merger Agreement, but in no event later
than December 31, 1995. At September 20, 1995, the amount Metromedia had
borrowed under the Actava-Metromedia Credit Agreement was $55 million. Actava's
management would then utilize Actava's financial resources to enhance
stockholder value by (i) continuing to operate Actava's Snapper division with an
emphasis on improving operating results and increasing its value through
strategic business combinations involving other consumer durable product
companies, (ii) seeking other potential merger partners for a business
combination with Actava, and (iii) continuing to hold Actava's investment in
Roadmaster and participating in its management through Actava's representation
on the Board of Directors of Roadmaster. In addition, Actava would reduce its
overhead expenses and would consider the advisability of utilizing its cash
liquidity to prepay a portion of its long-term indebtedness.
MITI Board Deliberations
At an August 31, 1994 meeting of the Executive Committee of the Board of
Directors of MITI, the Executive Committee of MITI unanimously approved the
terms of the letter of intent with Actava relating to the proposed MITI Merger.
The Executive Committee of the Board of Directors of MITI is comprised of John
Kluge, Stuart Subotnick, Richard J. Sherwin, Carl Brazell, Jr. and John Stanton.
Each of the members of the Executive Committee, other than Mr. Stanton,
participated in the August 31, 1994 meeting. Prior to the meeting, the members
of the Board of Directors of MITI were not aware of the discussions among
Actava, MITI, Orion and Sterling with respect to the proposed Mergers. The
Executive Committee noted at the meeting, however, that the letter agreement
with Actava was nonbinding and was subject to the satisfaction of a number of
conditions precedent, including the approval of the Board of Directors and
stockholders of MITI. Promptly following the execution and delivery by MITI of
the letter of intent with Actava, the remaining members of the Board of
Directors of MITI were apprised that MITI had entered into the letter of intent
and were advised that the proposed MITI Merger would be the principal topic of
discussion at the next scheduled meeting of the Board of Directors of MITI.
At a meeting held on September 28, 1994, the Board of Directors of MITI
noted that a telephonic meeting of the Executive Committee of the Board of
Directors had been held on August 31, 1994 at which time the four members of the
Executive Committee participating in this meeting approved the terms of the
August 31, 1994 letter of intent with Actava relating to the proposed MITI
Merger. A presentation with respect to the proposed MITI Merger was made at the
September 28, 1994 MITI Board meeting by certain representatives of Metromedia
who serve as directors on the MITI Board. Richard J. Sherwin, a Co-President and
a director of MITI, briefly outlined the principal terms of the proposed MITI
Merger and explained that pursuant to the terms of the proposed MITI Merger the
stockholders of MITI would receive approximately 5.5 shares of Common Stock for
each share of common stock of MITI, subject to upward adjustment if the Actava
Average Closing Price is less than $10.50 per share. Mr. Subotnick and Silvia
Kessel, both of whom serve as directors of MITI and officers of Metromedia, then
outlined the principal terms of the proposed mergers between Orion and Actava
and Actava and Sterling including the terms of the Orion Exchange Ratio, the
Sterling Exchange Ratio and the then contemplated Share Exchange Agreement. They
also indicated to the MITI Board that the August 31, 1994 letter of intent
between Actava and MITI provided for the making of loans by Actava in the
aggregate amount of $55 million for the benefit of MITI, Orion and Sterling and
advised the MITI Board that the necessary financing documents for these loans
would be completed shortly and that a portion of such loans would be available
to MITI in the near future. Mr. Sherwin then suggested to the Board that MITI
should retain an independent financial advisor to analyze the proposed MITI
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Merger and to render an opinion with respect to the fairness from a financial
point of view of the consideration payable to the MITI Stockholders pursuant to
the proposed MITI Merger. The directors participating in this MITI Board meeting
authorized the Executive Committee of the Board of Directors to select an
investment banking firm to serve as MITI's financial advisor in connection with
the proposed MITI Merger and to render an opinion to the Board of Directors as
to the fairness from a financial point of view of the consideration to be paid
to the MITI Stockholders in connection with the proposed MITI Merger.
A telephonic meeting of the Executive Committee of MITI's Board of Directors
was held on March 23, 1995. The Executive Committee at this meeting unanimously
agreed to retain GKM to serve as MITI's financial advisor in connection with the
proposed MITI Merger and to render an opinion to the Board of Directors of MITI
as to the fairness from a financial point of view of the consideration to be
paid to the MITI Stockholders in connection with the proposed MITI Merger.
On April 12, 1995, MITI's Board of Directors met to consider the proposed
MITI Merger and the terms of the Initial Merger Agreement. A representative of
GKM was present at the meeting and delivered GKM's oral opinion that the value
of the consideration to be paid to the MITI Stockholders in the MITI Merger is
fair, from a financial point of view, to the MITI Stockholders. Because six of
the twelve members of MITI's Board of Directors are designated to serve on the
MITI Board by the MITI Stockholders who are affiliated with Metromedia and a
seventh member of the MITI Board is a director of an investment banking
institution which, at the time MITI's Board of Directors considered the Initial
Merger Agreement, was serving as an advisor to Orion in connection with the then
contemplated Exchange Offers, the Board of Directors of MITI determined that in
light of the Orion Merger and the then contemplated Share Exchange these seven
directors could be viewed as having an interest in the transactions contemplated
by the Initial Merger Agreement in addition to the interests of the MITI
Stockholders generally. As a result, the Board of Directors of MITI determined
that the MITI Stockholders' Agreement required that the Initial Merger Agreement
be approved by a majority of the remaining five members of MITI's Board of
Directors who do not have an interest in the transactions contemplated by the
Initial Merger Agreement in addition to the interests of the MITI Stockholders
generally. Before voting on whether to approve the Initial Merger Agreement, the
directors of MITI raised a number of questions with the representatives of GKM
present at the MITI Board Meeting as to the various factors considered by GKM in
rendering its opinion that the value of the consideration to be paid to the MITI
Stockholders in connection with the MITI Merger is fair from a financial point
of view to the MITI Stockholders. The directors were interested, among other
things, in obtaining more specific details as to the various public and private
companies whose financial performance GKM compared to that of MITI and the
various United States and foreign transactions in the wireless cable, paging,
fixed wireless telephony, radio broadcasting and international long distance
telephony industries which GKM assessed in arriving at such fairness opinion.
The members of the Board also discussed whether MITI had sufficient financial
resources to continue to develop and expand its various communications
businesses at this time or whether MITI would have to seek additional debt or
equity financing from other parties in the event that the Board decided not to
approve the execution and delivery by MITI of the Initial Merger Agreement. The
Board noted that OPIC had recently agreed to execute a commitment letter with
MITI that, subject to the execution and delivery of definitive financing
documents, would provide MITI and its affiliates with loan guarantees enabling
MITI and its affiliates to borrow up to $29.9 million which could be used
exclusively for MITI's five operating wireless cable television systems. The
Board also discussed the fact that if MITI did not proceed with the proposed
MITI Merger, it would have to seek significant additional debt or equity
financing from other third parties, in addition to OPIC, in order to support its
existing communications projects and to expand into potential new markets such
as China. After this lengthy discussion, the MITI directors not affiliated with
Metromedia and the full MITI Board of Directors approved the Initial Merger
Agreement.
After the parties had negotiated the Amendments, in light of the Orion
Merger and the fact that the Merger Agreement provided Orion with the right to
designate a majority of the Surviving
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Corporation's Board of Directors at the Effective Time, MITI determined that the
MITI Stockholders' Agreement required that the Merger Agreement be approved by
the five members of MITI's Board of Directors who do not have an interest in the
transactions contemplated by the Merger Agreement, in addition to the interests
of the MITI Stockholders generally.
The Board of Directors of MITI approved the terms of the Merger Agreement by
unanimous written consent as of September 15, 1995.
Sterling Board Deliberations
The Sterling Board of Directors considered the effect of the Sterling Merger
on Sterling and its stockholders at four separate meetings over the eight months
preceding the Board's approval of the Initial Merger Agreement. During this
period, Sterling Board members were provided with, among other things,
information pertaining to the business, financial condition and prospects of
each of Actava, Orion, MITI and Sterling. In addition, Sterling management
during this period also attempted, without success, to identify other parties
that might have an interest in combining with or acquiring Sterling on terms at
least as favorable as those in the Initial Merger Agreement. See "PROPOSAL NO.
1--THE PROPOSED MERGERS--Reasons for the Mergers; Board
Recommendations--Sterling's Reasons for the Sterling Merger."
On April 11, 1995, Sterling's Board of Directors held a meeting to consider
the proposed Sterling Merger and the terms of the Initial Merger Agreement. The
Sterling Board authorized the retention of Houlihan Lokey to render an opinion
with respect to the fairness of the value of the consideration to be received by
the Sterling Stockholders. The Board discussed the terms and conditions of the
Initial Merger Agreement (including the transactions contemplated thereby) and
the advantages and disadvantages of the Mergers and the risks relating to the
businesses of the Surviving Corporation. The Board also considered alternatives
to the Mergers. Houlihan Lokey presented an oral report to the Sterling Board
with respect to the analyses it performed and advised the Board that, in its
opinion, the value of the consideration to be received by the Sterling
Stockholders was fair from a financial point of view. After discussion, the
Board of Directors of Sterling unanimously approved the Initial Merger
Agreement.
The Board of Directors of Sterling held another meeting on September 14,
1995. At this meeting, the Sterling Board reviewed the financing plan for the
Surviving Corporation and the Amendments. The Sterling Board discussed the terms
of the financing to be made available to the Surviving Corporation including the
sources of such funds, the funds to be available to New Orion and the plans for
refinancing the Orion Senior Indebtedness and Orion Subordinated Indebtedness.
Members of the Sterling Board also discussed the differences between the Initial
Merger Agreement and the Merger Agreement, including the elimination of the
Share Exchange, the proposed adoption of a stockholder rights plan for the
Surviving Corporation, the classified board of directors of the Surviving
Corporation, the capital structure of the Surviving Corporation following the
Mergers and the change in the mechanism of determining the Sterling Exchange
Ratio. The Sterling Board was advised that the Amendments were proposed in
response to certain issues raised in connection with the financing plan for the
Surviving Corporation and to facilitate the listing of the Surviving
Corporation's Common Stock on the NYSE, AMEX or NASDAQ/NMS. The full Board of
Directors of Sterling, by unanimous vote, approved and adopted the Merger
Agreement at the September 14, 1995 meeting.
In the event the Sterling Merger is not consummated, Sterling's management
anticipates continuing to operate Sterling as it has in the past while seeking
additional sources of financing to expand its business operations.
Following the approval of each of the Boards of Directors of Orion, Actava,
Sterling and MITI, authorized officers of Orion, Actava, Sterling and MITI
executed the Merger Agreement.
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REASONS FOR THE MERGERS; BOARD RECOMMENDATIONS
Orion's Reasons for the Orion Merger
In reaching its decision to recommend or approve the Merger Agreement, the
Orion Special Committee and the Board of Directors of Orion consulted with their
respective advisors and independently considered the material factors described
below. Based upon its independent review of such factors and the respective
reviews of the business and operations of all the parties, the Orion Special
Committee recommended approval of and the Board of Directors of Orion approved
the Merger Agreement.
The Orion Special Committee and the Board of Directors of Orion considered
the following favorable factors in reaching the conclusion to approve the Merger
Agreement:
. Historically, Orion was engaged primarily in the financing, production
and distribution of motion pictures for the worldwide theatrical market,
including distribution of motion pictures financed and produced by others
for which it would receive a fee. In addition, Orion distributed motion
pictures to the worldwide home video, free television, cable and pay
television markets. Although the agreements entered into in connection with
the Plan severely restricted Orion's ability to produce or acquire new
motion picture product, Orion retained its well regarded distribution
apparatus during and after the completion of its bankruptcy proceedings, and
this distribution apparatus remains a valuable asset which continues to
attract producers of motion picture product that lack the distribution
capabilities required to exploit a film. Accordingly, Orion believes that by
merging with a subsidiary of Actava and by refinancing the Orion Senior
Indebtedness and Orion Subordinated Indebtedness, which is a condition to
the consummation of the Merger Agreement and the transactions contemplated
thereby, the Surviving Corporation will be able to attract a greater supply
of new motion picture product for its distribution apparatus through either
new production or the acquisition of motion picture product produced by
third parties. Orion believes that it was able to negotiate more favorable
terms for the fees it received for distributing and licensing its product
when it was viewed in the entertainment industry as a more financially
stable enterprise with a steady supply of motion picture product. Presently,
certain covenants in the Orion Senior Indebtedness and Orion Subordinated
Indebtedness limit Orion's activities to exploiting its existing film
library and other assets; Orion may only engage in development, production
and theatrical distribution activities relating to new product if such
activities are financed on a 100% nonrecourse basis to Orion. Orion has only
been able to attract such financing from Metromedia and its affiliates.
Orion's management believes that with these covenants and other restrictions
removed, the Surviving Corporation will be able to acquire quality motion
picture product to supply its existing distribution apparatus which in turn
will augment the value of its library assets.
. Orion has not been able to satisfy its payment obligations under its
Indentures during its current fiscal year, which began on March 1, 1995,
thereby leading to an event of default under such indentures as of August
31, 1995. The event of default gives the trustee under such indentures the
right to accelerate payment under such indentures. If an acceleration under
such indentures occurs, Orion, absent the refinancing contemplated to occur
in connection with the Mergers or other financing arrangements, may be
forced to seek protection under chapter 11 of the Bankruptcy Code. If a
payment acceleration does not occur before the consummation of the Mergers,
the Mergers and the refinancing of Orion's indebtedness, which will be
completed in connection therewith, will prevent Orion from having to seek
such bankruptcy protection.
. As a result of the Mergers, the Orion Stockholders will hold equity
interests in a company with substantially larger annual revenues, greater
financial resources, greater access to capital markets and more stockholder
liquidity than those of Orion as a separate entity.
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. In addition, the Orion Special Committee considered the opinion of
Alex. Brown that the consideration to be received by Orion's public
stockholders in connection with the proposed Mergers is fair from a
financial point of view to such stockholders and the analyses performed by
Alex. Brown in connection with such opinion. A more complete description of
the financial analyses performed by Alex. Brown is set forth below in
"PROPOSAL NO.1--THE PROPOSED MERGERS--Opinions of Financial
Advisors--Orion."
Notwithstanding expectations of Orion's management regarding the benefits to
be realized from the combination of Orion, Actava, MITI and Sterling, no
assurance can be given that the Surviving Corporation will be able to realize
such benefits and to compete effectively against certain other competitors which
possess significantly greater resources and marketing capabilities than it. See
"SURVIVING CORPORATION PRO FORMA COMBINING FINANCIAL STATEMENTS" and "RISK
FACTORS."
The Orion Special Committee and Board of Directors also recognized certain
risks and uncertainties associated with the Mergers and the business of the
Surviving Corporation:
. MITI is essentially a start-up operation whose business is highly
speculative and capital intensive.
. MITI operates in an area of the world where political, economic and
social instability can lead to substantial business risks.
In analyzing the proposed transactions and in its deliberations regarding
its recommendation of the Merger Agreement, the Orion Special Committee
considered a number of other factors in addition to the advantages and
disadvantages set forth above, including Orion's current financial condition and
prospects as a stand-alone company and the advantages of the Mergers to the
Orion Stockholders, such as potentially enhanced stockholder value due to the
larger revenue base and potential for improved earnings per share. In this
process, the Orion Special Committee reviewed information provided by the
managements of Actava, MITI and Sterling concerning the financial performance,
condition, business operations and prospects of Actava, MITI and Sterling, and
the substantial future capital requirements related to such operations. The
Orion Special Committee concluded that the opportunities for growth related to
these businesses outweighed the risks. In addition, the Orion Special Committee
considered the proposed structure of the transactions and the terms of the
Merger Agreement and other documents to be executed in connection with the
Mergers. The Orion Special Committee did not perform its own independent
analysis of the financial fairness of the Orion Merger. Instead, the Orion
Special Committee considered and relied upon but did not adopt the opinion of
its financial advisor that the value of the consideration to be received by
Orion's public stockholders in connection with the proposed Mergers is fair,
from a financial point of view, to such stockholders. The Orion Special
Committee, which was formed in part because of the potential conflict of
interest created by the Metromedia Holders' majority ownership of Orion and
MITI, also requested and reviewed (and had its financial advisor review)
substantial financial information regarding MITI and its operations. The Orion
Special Committee voted to recommend that the full Board of Directors of Orion
approve the Merger Agreement notwithstanding any potential conflict of interest
created by the Metromedia Holders' majority ownership interest of Orion and
MITI.
The Orion Special Committee also considered the fact that the existing
covenants contained in the Orion Senior Indebtedness and the Orion Subordinated
Indebtedness impose substantial restrictions on Orion's operations; that as a
result of the Mergers and the refinancing of Orion's indebtedness, the combined
enterprise will have greater operational flexibility and greater financial
resources than Orion now possesses; that, absent the refinancing of Orion's
indebtedness, Orion faced the possibility of a near-term payment acceleration
under certain of its indebtedness and the possible need to file for protection
from its creditors under chapter 11 of the Bankruptcy Code; that the Mergers
would provide the Orion Stockholders with the opportunity to maintain a
continuing ownership interest in Orion's existing business while at the same
time participate in a broader based enterprise with media, entertainment and
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telecommunications businesses; that while certain of those businesses presented
risks, they also presented opportunities; that the Orion Stockholders are
currently minority stockholders in a company already majority owned by
Metromedia and its affiliates and accordingly would not be relinquishing control
in connection with the Mergers (following the consummation of which Metromedia
and its affiliates will be the largest stockholder of the Surviving Corporation
and will have substantial influence on the Surviving Corporation); and that the
Orion Stockholders would have greater stockholder liquidity as a result of the
Mergers. The Orion Special Committee considered each of the foregoing in
recommending that the full Board of Directors of Orion approve the Merger
Agreement. The Orion Special Committee did not find it practical to and did not
quantify or attempt to attach relative weight to any of the specific factors
considered by it. The Orion Special Committee also did not distinguish between
those factors that support the financial fairness of the Orion Merger and those
factors that favor the best interests of the Orion Stockholders.
Recommendation of Orion's Board of Directors
At the meeting of Orion's Board of Directors held to consider the Orion
Merger, based on the unanimous recommendation of the Orion Special Committee
that the full Board of Directors of Orion approve the Merger Agreement, the full
Board of Directors of Orion unanimously approved the Merger Agreement as being
in the best interests of Orion and its stockholders. FOR THE REASONS DISCUSSED
ABOVE, THE ORION SPECIAL COMMITTEE UNANIMOUSLY RECOMMENDED THAT THE FULL BOARD
OF DIRECTORS OF ORION APPROVE THE MERGER AGREEMENT AND THE FULL BOARD OF
DIRECTORS OF ORION UNANIMOUSLY APPROVED THE MERGER AGREEMENT AND RECOMMENDS THAT
ORION STOCKHOLDERS VOTE "FOR" THE APPROVAL OF THE MERGER AGREEMENT AND ALL OTHER
MATTERS RELATING TO THE MERGER AGREEMENT TO BE PRESENTED FOR THE CONSIDERATION
AND VOTE OF THE ORION STOCKHOLDERS.
Factors Considered by Actava's Board of Directors
In its deliberations with regard to the Mergers, the Board of Directors of
Actava considered the respective businesses, financial conditions, results of
operations, geographic markets and growth prospects of each of Actava, Orion,
MITI and Sterling in relation to their historical performance and the risk
factors and uncertainties involved in the Mergers. The Board of Directors of
Actava also considered the opinion rendered by First Boston to the effect that,
on and as of the date of such opinion and based upon the procedures and subject
to the assumptions described with respect to such opinion, the Exchange Ratio,
taken as a whole, was fair, from a financial point of view, to the Actava
Stockholders. The Actava Board of Directors did not find it practical to and did
not quantify or attempt to attach relative weights to the specific factors
considered by it. Actava's Board of Directors also did not distinguish between
those factors that support the financial fairness of the Mergers and those
factors that favor the best interests of the Actava Stockholders.
The Board of Directors of Actava considered the following advantages and
benefits of the Mergers to Actava and the Actava Stockholders:
. On April 19, 1994, the Board of Directors of Actava elected John D.
Phillips as President, Chief Executive Officer and a director of Actava. See
"INFORMATION REGARDING ACTAVA--Recent Developments." The Board of Directors
gave Mr. Phillips a mandate to improve Actava's operations and earnings and
to increase stockholder value. Mr. Phillips, who had a background in the
telecommunications industry, recommended to the Board of Directors that
Actava reposition its assets and pursue opportunities in businesses that
have greater growth prospects than the businesses in which Actava was then
engaged. Mr. Phillips specifically recommended that Actava consider
opportunities in the converging media and telecommunications industries. Mr.
Phillips recommended the Mergers because of his belief that the Mergers
would provide long-term growth opportunities for the Actava Stockholders.
Mr. Phillips believes that the
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Surviving Corporation will benefit from an increased demand for
entertainment products both in the United States and throughout the world
and from the strong demand for communications services in Eastern Europe and
the former Soviet Republics. He believes that the Surviving Corporation will
be able to grow rapidly because of the demand for its products and services
and that the Surviving Corporation's growth will result in increased
stockholder value for the Actava Stockholders.
. Mr. Phillips had engaged in business transactions with Metromedia
prior to joining Actava. He recommended to the Board of Directors that
Actava should seek to enter into a transaction that would align the
interests of its stockholders with those of Metromedia. Favorable
consideration was given to the fact that Metromedia, which will be the
largest single stockholder of the Surviving Corporation, is an organization
whose principals, Mr. Kluge and Mr. Subotnick, are successful businessmen
who have the reputation of creating wealth through their business dealings.
Mr. Kluge is widely recognized as one of the wealthiest individuals in the
United States as evidenced by recent articles in leading business magazines
such as Forbes and Fortune, and Mr. Subotnick has been Mr. Kluge's business
partner for a number of years. Mr. Phillips told the Board of Directors that
his prior experiences with Mr. Kluge and Mr. Subotnick had been favorable
and had resulted in the creation of wealth for investors. See "PROPOSAL NO.
1--THE PROPOSED MERGERS--Background of the Mergers." In his presentation to
the Board of Directors, Mr. Subotnick also emphasized that he and Mr. Kluge
have been successful in creating value for their stockholders. For these
reasons, the directors of Actava concluded that Metromedia's interest in the
Surviving Corporation would be instrumental in the success of the Surviving
Corporation.
. Actava's Board of Directors heard presentations from Mr. Subotnick and
from the Presidents of each of MITI, Orion and Sterling. The directors of
Actava concluded that the management teams for MITI, Orion and Sterling are
highly experienced and have the ability to implement the strategies of the
Surviving Corporation and to create long-term value for the stockholders of
the Surviving Corporation. See "PROPOSAL NO. 1--THE PROPOSED
MERGERS--Management and Operations After the Mergers."
. The Mergers provide the Actava Stockholders with the opportunity to
enter into two fast growing businesses--entertainment and wireless
communications services--that have significant barriers to entry and
significant opportunities for growth. The directors of Actava concluded that
the Surviving Corporation will have the opportunity to grow rapidly because
of the expected demand for its products and services and because of the
continuing development of the emerging markets in Eastern Europe and the
former Soviet Republics.
. Orion and Sterling, on a combined basis, have an established worldwide
distribution network that is under utilized and would be difficult to
duplicate. The Mergers provide the Surviving Corporation with the
opportunity to benefit from the synergies between Orion and Sterling, and
between Orion, Sterling and MITI, including (i) reduced distribution and
marketing costs for Orion and Sterling through a combination of their
distribution networks, (ii) reduced corporate overhead resulting from the
combination of the parties involved in the Mergers, and (iii) potential
revenue growth from MITI, Orion and Sterling through the combination of
quality programming and distribution outlets.
. Orion has a strong reputation within the independent film community.
This reputation should provide Orion with access to talent and new film
product. In addition, there is an increasing consumer demand for new
entertainment products. Moreover, new technologies, such as CD ROM and
video-on-demand, are creating new opportunities for selling the existing
film products owned or controlled by Orion and Sterling.
. There is a strong demand for low-cost communications services in
MITI's target markets. The wireless technologies employed by MITI offer
low-cost service, flexibility to accommodate system expansion, and rapid
deployment. MITI has acquired and is continuing to acquire valuable licenses
in these markets and therefore has an opportunity to become a major provider
of communications services in these markets.
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. First Boston was retained by Actava's Board of Directors to assist
Actava in conducting a due diligence investigation concerning the parties to
the proposed Mergers and to provide an opinion to the Board of Directors
that the Exchange Ratio, taken as a whole, is fair to the Actava
Stockholders from a financial point of view. First Boston presented an
analysis of certain financial considerations relating to the Mergers to the
Board of Directors. The Board of Directors considered this analysis, which
included a valuation of each entity involved in the Mergers. A more complete
description of the analysis performed by First Boston is set forth below in
"PROPOSAL NO. 1-- THE PROPOSED MERGERS--Opinions of Financial
Advisors--Actava." The Board of Directors of Actava recognized that there
were no directly comparable or identical transactions to the Mergers.
Although the directors of Actava did not attach relative weight to the
various factors supporting the Mergers, they placed considerable importance
on the opinion of First Boston with respect to the fairness of the Exchange
Ratio, taken as a whole, to the Actava Stockholders from a financial point
of view. The opinion rendered by First Boston was not formally adopted by
Actava's Board of Directors but was accepted and relied upon by the Board of
Directors. Actava's Board of Directors did not perform its own independent
analysis of the financial fairness of the Mergers.
. Actava's Board of Directors also considered the reaction of the stock
markets to the Mergers. The closing sales price reported by the NYSE for the
Common Stock was $13 3/8 on August 30, 1994 (the last closing sales price
available immediately prior to the announcement of the Mergers). Between
August 31, 1994 (the date on which the Mergers were announced) and September
15, 1995 (the date on which the Merger Agreement was approved by Actava's
Board of Directors), the high and low sales prices per share for the Common
Stock as reported by the NYSE were $19.125 and $8.375, respectively. The
closing sale price reported by the NYSE for the Common Stock was $17.375 on
September 15, 1995. Two members of Actava's Board of Directors who voted
against the Initial Merger Agreement decided to vote for the Merger
Agreement because of their belief that the stock markets had reacted
favorably to the Mergers. See "PROPOSAL NO. 1--THE PROPOSED
MERGERS--Background of the Mergers--Actava Board Deliberations."
The Board of Directors of Actava also considered the following risks and
uncertainties associated with the Mergers and the business of the Surviving
Corporation:
. A summary of the risks facing the Surviving Corporation was presented
by Actava's management to Actava's Board of Directors during its
deliberations regarding the Mergers. The risk factors considered by the
Board of Directors included the historical operating performance of the
parties involved in the Mergers, the leverage and debt service obligations
of the Surviving Corporation, the future financing needs of the Surviving
Corporation and the uncertainty as to how those financing needs will be met,
the fact that the motion picture industry is extremely competitive and
involves a substantial degree of risk, the substantial amount of capital
required to participate successfully in the motion picture industry, the
fact that MITI is essentially a start-up business and faces significant
political, social, economic and operating risks, the risks inherent in
foreign investments in general as well as the unique risks involved in
MITI's target markets, the competition that will be faced by MITI and the
possibility of technological and product obsolescence, and the possible
inability of MITI to control the joint ventures in which it has interest.
For a more detailed discussion of these and other risks facing the Surviving
Corporation, see "RISK FACTORS."
. Actava's Board of Directors considered various financing proposals
relating to the Mergers. When the Board of Directors voted on the Initial
Merger Agreement on April 12, 1995, it was contemplated that all of the
Orion Subordinated Indebtedness and all of Actava's outstanding 6%
Convertible Debentures due 2002 would be refinanced by means of the Exchange
Offers. See "PROPOSAL NO. 1--THE PROPOSED MERGERS--Background of the
Mergers--Actava Board Deliberations." Some members of the Board of Directors
expressed concern that the
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Exchange Offers would be difficult to accomplish and ultimately would be
replaced with a new financing plan that would be less favorable to the
Surviving Corporation and detrimental to the Actava Stockholders. There also
was concern that the financing being proposed for the Surviving Corporation
was inadequate in light of the capital needs and debt service requirements
facing the Surviving Corporation. The Board of Directors recognized that the
Surviving Corporation will need to raise additional financing following the
consummation of the Mergers, and some directors expressed concern about the
uncertainty involved in raising this additional financing.
. The Board of Directors recognized that the motion picture industry is
highly competitive and involves a substantial degree of risk. The Surviving
Corporation plans to become involved in motion picture production, which
will require a substantial amount of capital. Concern was expressed
regarding Orion's historical performance and relatively weak position in the
motion picture industry.
. The Board of Directors also recognized that the business of MITI is
highly speculative and that it will take a significant amount of capital to
implement MITI's business plans. The Board of Directors considered the
political, economic and social risks involved in transacting business in
MITI's target markets. It was recognized that MITI is essentially a start-up
business and that as a result it does not have a record for creating
earnings or cash flow.
. By virtue of the Mergers, Actava will be making all of its liquidity
and cash resources available to the Surviving Corporation. Concern was
expressed about whether it was appropriate for Actava to risk all of its
assets on the businesses in which the Surviving Corporation will be
involved.
Certain of the advantages and benefits of and the risks and uncertainties
associated with the Mergers were summarized in letters exchanged by various
members of Actava's Board of Directors during its deliberations regarding the
Mergers. These letters are summarized in "PROPOSAL NO. 1--THE PROPOSED
MERGERS--Background of the Mergers--Actava Board Deliberations."
In addition to considering the advantages and benefits of and the risks and
uncertainties associated with the Mergers and the business of the Surviving
Corporation, the Board of Directors of Actava also considered the following
alternatives to the Mergers:
(1) Business as Usual With Reduced Overhead and Prepayment of Long-Term
Debt. The Board of Directors considered the possibility that Actava could
continue to own and operate its Snapper division and retain its investment
in Roadmaster and could improve its profitability by reducing overhead
expenses and using its cash liquidity to prepay a portion of its long-term
indebtedness. The Board of Directors recognized that this alternative did
not have the risks that are associated with the Mergers but concluded that
the Mergers have greater potential for creating long-term stockholder value.
(2) Investment in Personal Communications Services Industry. Actava's
management reported to the Board of Directors on a possible investment by
Actava in a joint venture to be involved in the Personal Communications
Services ("PCS") industry. Actava's management investigated this possible
investment for several months, conducted preliminary negotiations with
potential joint venture partners, and held discussions with potential
licensees who were to be participants in the licensing process conducted by
the Federal Communications Commission. Management recommended to the Board
of Directors that this opportunity should not be pursued because the
potential licensees lacked sufficient initial capital to obtain key PCS
licenses.
(3) Acquisitions by Actava. Actava's management reported to the Board of
Directors that management had reviewed two potential acquisition
opportunities for Actava. Both of these opportunities involved "turnaround"
situations with highly leveraged entities. After initial reviews,
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management decided not to pursue these acquisitions because each involved a
company that was not well positioned in its industry and that had excessive
debt and declining operating results.
(4) Sale of Actava or Merger of Actava With Another Party. Prior to its
approval of the Initial Merger Agreement, the Board of Directors of Actava
requested First Boston to seek to identify other parties that might be
interested in acquiring Actava or merging with Actava. In connection with
this assignment, First Boston approached potential financial buyers and
potential strategic buyers. A financial buyer was viewed as an entity whose
business is to invest in various but not necessarily related businesses and
to operate its acquired entities separately from each other. A strategic
buyer is an entity that invests in related businesses and seeks to achieve
improved results by combining certain related functions, such as
manufacturing facilities, administrative offices and sales organizations.
First Boston contacted 13 potential financial buyers and 19 potential
strategic buyers on behalf of Actava. As a result of these contacts, three
parties expressed an interest in receiving confidential information
regarding Actava. Confidentiality agreements were signed with each of these
parties and due diligence materials were provided to each party. Two of
these parties held preliminary discussions with First Boston and one party
held a due diligence meeting with Actava's management. Thereafter, all three
parties declined to submit an acquisition or merger proposal to Actava.
Except for these parties, Actava's management has not held any substantive
discussions or negotiations with any other entity concerning an acquisition
or merger with Actava. The Board of Directors of Actava also considered the
fact that Actava has not received any expressions of interest from third
parties, except for the parties mentioned above, since the Mergers were
publicly announced on August 31, 1994.
In considering the Mergers, the Board of Directors recognized that Mr.
Phillips had engaged in business transactions with Metromedia and its affiliates
prior to joining Actava. The Board of Directors did not believe, however, that
Mr. Phillips' prior relationship with Metromedia created a conflict of interest
because Mr. Phillips does not have any current ownership interest in Metromedia,
Orion, Sterling or MITI or any of their respective affiliates. Moreover, Mr.
Phillips was only one of nine members of the Board of Directors of Actava who
voted on the Initial Merger Agreement and one of seven members of the members of
the Board of Directors of Actava who voted on the Merger Agreement.
After considering the factors described above, Actava's Board of Directors
concluded that the Mergers provide the Actava Stockholders with an opportunity
for substantial long-term capital appreciation. The Board of Directors of Actava
further concluded that the Mergers represent the most attractive alternative
currently available to Actava and its stockholders. See "PROPOSAL NO. 1-- THE
PROPOSED MERGERS--Management and Operations After the Mergers." The members of
Actava's Board of Directors recognized the risks associated with the Mergers but
believed that the opportunities for growth presented by the Mergers outweighed
the risks that will be faced by the Surviving Corporation.
In connection with its consideration of the Mergers, Actava's Board of
Directors recognized that the Metromedia Holders would be the largest
stockholder of the Surviving Corporation and would have substantial influence on
the Surviving Corporation. The Board of Directors concluded that notwithstanding
such influence, the Mergers were in the best interests of the Actava
Stockholders because the Metromedia Holders already controlled in excess of 50%
of the fully diluted voting power of both Orion and MITI, the two companies that
own substantially all of the strategic assets necessary for the business of the
Surviving Corporation, and because the Board of Directors believed that the
Metromedia Holders would vote their shares in a manner that would be in the best
interests of all of the stockholders of the Surviving Corporation.
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Recommendation of Actava's Board of Directors
At the meetings of Actava's Board of Directors held to vote on the Initial
Merger Agreement and the Merger Agreement, the directors of Actava considered
the Initial Merger Agreement and the Merger Agreement, respectively. FOR THE
REASONS DISCUSSED ABOVE, THE BOARD OF DIRECTORS OF ACTAVA APPROVED THE INITIAL
MERGER AGREEMENT BY A VOTE OF FIVE TO FOUR AND, FOLLOWING THE RESIGNATIONS OF
TWO MEMBERS OF THE BOARD OF DIRECTORS, THE BOARD OF DIRECTORS UNANIMOUSLY
APPROVED THE MERGER AGREEMENT AND RECOMMENDS THAT THE ACTAVA STOCKHOLDERS VOTE
"FOR" THE APPROVAL OF THE MERGER AGREEMENT AND ALL OTHER MATTERS RELATING TO THE
MERGER AGREEMENT TO BE PRESENTED AT THE ACTAVA SPECIAL MEETING.
MITI's Reasons for the MITI Merger
In reaching its decision to approve the MITI Merger, the Board of Directors
of MITI considered the following factors:
. MITI's business of developing wireless communications systems and
radio stations in Eastern Europe and the former Republics of the Soviet
Union requires the expenditures of substantial funds. Significant amounts of
capital are required to develop and construct operational systems and
attract subscribers to a network. In addition, there is often a significant
lag between such development costs and the recognition of revenue. A
combination with a company with greater financial resources such as Actava
will help provide essential capital to MITI or enable the Surviving
Corporation to acquire the requisite financing that might not be available
to MITI as a stand-alone company to continue to fund its operations.
. Another benefit of the Mergers is that it will give MITI increased
access to quality programming. MITI has significant interests in wireless
cable television systems, which require an abundance of high quality
programming. Following the Effective Time, MITI will have access to New
Orion's substantial library, subject to existing contractual commitments.
. MITI's financial advisor, GKM, undertook an analysis which included a
comparable public company analysis, a selected comparable transaction
analysis and a discounted cash flow analysis, and rendered its opinion,
based on the assumptions set forth therein, that the consideration to be
received by the MITI Stockholders in the MITI Merger is fair to the holders
of MITI Common Stock from a financial point of view. A more complete
description of the financial analyses performed by GKM is set forth below in
"Opinions of Financial Advisers--MITI." The Board of Directors of MITI
considered and relied upon but did not adopt the opinion of its financial
advisor that the value of the consideration to be provided to the MITI
Stockholders in connection with the proposed MITI Merger is fair, from a
financial point of view, to the MITI Stockholders. MITI's Board of Directors
did not perform its own independent analysis of the financial fairness of
the MITI Merger.
Recommendation of MITI's Board of Directors
At the meeting of MITI's Board of Directors held to consider the MITI Merger
and the Initial Merger Agreement, the directors of MITI not affiliated with
Metromedia and the full Board of Directors of MITI approved the Initial Merger
Agreement as being in the best interests of MITI and its stockholders. The Board
of Directors subsequently approved the Merger Agreement by unanimous written
consent. FOR THE REASONS DISCUSSED ABOVE, THE BOARD OF DIRECTORS OF MITI
UNANIMOUSLY APPROVED THE MERGER AGREEMENT AND RECOMMENDS THAT MITI STOCKHOLDERS
VOTE "FOR" THE APPROVAL OF THE MERGER AGREEMENT AND ALL OTHER MATTERS RELATING
TO THE MERGER AGREEMENT TO BE PRESENTED FOR THE CONSIDERATION AND VOTE OF THE
MITI STOCKHOLDERS.
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Sterling's Reasons for the Sterling Merger
In reaching its decision to approve the Merger Agreement, the Board of
Directors of Sterling consulted with its management and advisors, and considered
the factors described below. Based upon its independent review of these factors
and the respective reviews of the business and operations of the other parties,
the Board of Directors of Sterling approved the Merger Agreement.
The Board of Directors of Sterling considered the following favorable
factors in reaching the conclusion to approve the Merger Agreement:
. As part of a larger business entity, Sterling anticipates it will have
access to greater resources, including financial, marketing and personnel
resources, otherwise unavailable to Sterling. Sterling's management believes
that these additional financial resources will enhance its ability to (i)
acquire or obtain licensing or other rights to motion picture product
produced by third parties and (ii) finance the production of motion picture
product. This, in turn, may augment the value of Sterling's library and
distribution rights. It is further anticipated that the additional marketing
experience and resources afforded by the combined entity will provide
greater access and avenues of distribution for Sterling's motion picture
product.
. Sterling's management believes that the combination of Sterling's and
Orion's film libraries will create opportunities to market and distribute
the two libraries in a more efficient manner.
. As a result of the Mergers, the Sterling Stockholders will hold equity
interests in a company with substantially larger annual revenues, greater
financial resources, greater access to capital markets and more stockholder
liquidity than those of Sterling as a separate entity. Sterling Stockholders
will benefit from being a part of an organization with greater financial
resources, because it may provide opportunities for growth currently
unavailable to Sterling as an independent entity and may serve as a cushion
in the event of a downtrend in business. Furthermore, Sterling Stockholders
do not presently have access to an established trading market for their
shares of Sterling Common Stock. As a result of the Sterling Merger,
Sterling Stockholders will own Common Stock and thereby have access to a
trading market providing them with a substantially more liquid investment.
. In addition, the Board of Directors of Sterling considered the
analyses performed by its financial advisor, Houlihan Lokey, which included
discounted cash flow and capitalization of earnings analyses. A more
complete description of the financial analyses performed by Houlihan Lokey
is set forth below in "Opinions of Financial Advisors-Sterling." The Board
of Directors of Sterling did not attach relative weights to any of such
financial analyses.
The Sterling Board also considered the following risks and uncertainties
associated with the Mergers and the business of the Surviving Corporation:
. The risks and uncertainties considered by the Sterling Board included
the historical operating performance of the parties involved in the Mergers,
the future financing needs of the Surviving Corporation and the uncertainty
as to how those financing needs will be met, and the fact that MITI is
essentially a start-up business and faces significant political, social,
economic and operating risks. For a more detailed discussion of these and
other risks facing the Surviving Corporation, see "RISK FACTORS."
In analyzing the proposed transactions and in its deliberations regarding
its recommendation of the Merger Agreement, the Sterling Board considered a
number of other factors in addition to the advantages and disadvantages set
forth above, including Sterling's prospects as a stand-alone company and the
advantages to the Sterling Stockholders in connection with the Mergers,
including potentially enhanced stockholder value due to the larger revenue base
and the long term growth prospects of a combined entity engaged in related
commercial activities. In this process, the Sterling Board discussed
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information provided by the managements of Orion, Actava and MITI concerning the
financial performance, condition, business operations and prospects of Orion,
Actava and MITI and the substantial future capital requirements related to such
operations. The Sterling Board also considered certain of the political, social
and economic risks related to MITI's communications businesses in Eastern Europe
and the former Soviet Republics. The Sterling Board of Directors concluded that
the opportunities for growth related to these businesses outweighed the risks.
In addition, the Sterling Board considered the proposed structure of the
transaction, the terms of the Merger Agreement and other documents to be
executed in connection with the Mergers. The Sterling Board did not perform its
own independent analysis of the financial fairness of the Sterling Merger.
Instead, Sterling Board considered and relied upon but did not adopt the opinion
of its financial advisors that the value of the consideration to be paid to the
Sterling Stockholders in connection with the proposed Mergers is fair, from a
financial point of view, to the Sterling Stockholders. The Sterling Board
considered the increasingly competitive environment in which it was conducting
business. The Sterling Board considered alternatives to the Mergers, including
continuing to operate independently and entering into a business combination
with a third party. Sterling's management attempted unsuccessfully to identify
other parties that had an interest in combining with or acquiring Sterling or
with which Sterling would have an interest in combining. Specifically,
immediately prior to participating in the negotiations with respect to the
letter of intent pertaining to the Mergers, Sterling's management began
initiating contacts with investment bankers, other entertainment companies and
private investors for the purpose of obtaining additional sources of financing,
whether through strategic alliances or in a capital raising transaction. After
the letter of intent was executed, management continued its discussions with
these groups for the purpose of ascertaining whether any competing offers would
emerge that would be in the best interests of Sterling Stockholders. Although no
formal criteria were established, management was seeking a combination or
alliance that would provide a trading market for Sterling Stockholders and
access to financing for further growth and as a cushion in the event of a
downtrend in business. Most of these contacts did not progress past a very
preliminary stage at which point either the contact did not express any interest
in continuing the discussions or Sterling determined not to proceed further. To
the extent Sterling chose not to pursue further conversations, it was because
the prospective suitor (i) was interested in obtaining the services of
Sterling's top management without affording a benefit to Sterling Stockholders,
(ii) did not have potential access to financing, (iii) had a thinly traded
public market, or (iv) offered consideration with a value lower than the value
to be received by Sterling Stockholders in the Sterling Merger. Furthermore, the
Sterling Board believed that the Sterling Merger was a better alternative than
continuing to operate independently because it afforded the Sterling
Stockholders greater access to a public trading market while providing a cushion
in the event of a downtrend in business and the possibility of additional growth
through potentially greater access to financing. The Sterling Board held
discussions with members of Sterling's management to ascertain their views on
the Mergers and their expectations as to the combined enterprise as it would
relate to Sterling's employees and stockholders.
The Sterling Board determined that the Mergers represent opportunities for
the Sterling Stockholders to become participants in the media, entertainment and
communications industries on a global basis. Although following consummation of
the Mergers, the Sterling Stockholders will own approximately 1.2% of the common
equity of the Surviving Corporation, the Sterling Stockholders will hold equity
interests in a company with substantially larger annual revenues and greater
financial resources than those of Orion, Actava, MITI or Sterling as separate
entities.
The Sterling Board did not find it practical to and did not quantify or
attempt to attach relative weight to any of the specific factors considered by
it. The Sterling Board also did not distinguish between those factors that
support the financial fairness of the Sterling Merger and those factors that
favor the best interests of the Sterling Stockholders. Based on its
consideration of the factors described above, the Sterling Board approved the
Merger Agreement as being in the best interests of Sterling Stockholders.
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Recommendation of Sterling's Board of Directors
At the meeting of Sterling's Board of Directors held to consider the
Sterling Merger, the directors of Sterling considered and unanimously approved
the Merger Agreement as being in the best interests of Sterling and its
stockholders. FOR THE REASONS DISCUSSED ABOVE, THE BOARD OF DIRECTORS OF
STERLING UNANIMOUSLY APPROVED THE MERGER AGREEMENT AND RECOMMENDS THAT STERLING
STOCKHOLDERS VOTE "FOR" THE APPROVAL OF THE MERGER AGREEMENT AND ALL OTHER
MATTERS RELATING TO THE MERGER AGREEMENT TO BE PRESENTED AT THE STERLING SPECIAL
MEETING.
OPINIONS OF FINANCIAL ADVISORS
Orion
General. Alex. Brown was retained by the Orion Special Committee to render
an opinion to the Orion Special Committee as to the fairness, from a financial
point of view, to the stockholders of Orion other than the Metromedia Holders
(the "Orion Public Stockholders") of the consideration to be received by the
Orion Public Stockholders pursuant to the Orion Merger. Alex. Brown is a
nationally recognized investment banking firm with substantial experience and
expertise in the media and communications industries. As part of its investment
banking business, Alex. Brown is regularly engaged in the valuation of
businesses and their securities in connection with mergers and acquisitions,
negotiated underwritings, private placements and valuations for estate,
corporate and other purposes. In addition, Alex. Brown regularly publishes
research reports regarding the media and communications industries, and
businesses and securities of publicly owned companies in those industries.
On April 27, 1995, Alex. Brown delivered to the Orion Special Committee an
oral opinion, which was subsequently confirmed in writing, to the effect that,
as of such date and based upon the assumptions made, matters considered and
limits of review as set forth in such opinion, the consideration to be received
by the Orion Public Stockholders in the Orion Merger was fair, from a financial
point of view, to the Orion Public Stockholders (the "Alex. Brown Opinion").
A COPY OF THE ALEX. BROWN OPINION DATED THE DATE OF THIS JOINT PROXY
STATEMENT/PROSPECTUS, WHICH INCLUDES THE ASSUMPTIONS MADE, MATTERS CONSIDERED
AND CERTAIN LIMITATIONS ON THE SCOPE OF REVIEW, IS ATTACHED TO THIS JOINT PROXY
STATEMENT/PROSPECTUS AS APPENDIX C. ORION STOCKHOLDERS ARE URGED TO READ THE
ALEX. BROWN OPINION IN ITS ENTIRETY. THE ALEX. BROWN OPINION IS DIRECTED ONLY TO
THE FAIRNESS, FROM A FINANCIAL POINT OF VIEW, OF THE CONSIDERATION TO BE
RECEIVED BY THE ORION PUBLIC STOCKHOLDERS IN THE ORION MERGER AND DOES NOT
CONSTITUTE A RECOMMENDATION TO ANY ORION STOCKHOLDER AS TO HOW SUCH STOCKHOLDER
SHOULD VOTE. THE SUMMARY OF THE ALEX. BROWN OPINION SET FORTH IN THIS JOINT
PROXY STATEMENT/PROSPECTUS IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO THE FULL
TEXT OF SUCH OPINION.
The assumptions made, matters considered and limitations on the review
undertaken in the April 27, 1995 Alex. Brown Opinion were substantially the same
as those contained in the written opinion dated the date of this Joint Proxy
Statement/Prospectus. In connection with its written opinion dated the date of
this Joint Proxy Statement/Prospectus, Alex. Brown updated, to the extent it
deemed necessary, the analyses it used it to render its opinion dated April 27,
1995 which analyses are more fully described below.
In arriving at its opinion, Alex. Brown, among other things: (i) reviewed
the Merger Agreement and the Preliminary Joint Proxy Statement/Prospectus, (ii)
reviewed certain publicly available financial information concerning Orion,
Sterling and Actava, and certain non-public information, including financial
forecasts, concerning Orion, Sterling, MITI and Actava, (iii) reviewed the
reported price and trading activity for the common stock of Orion and Actava,
(iv) reviewed certain financial and stock market information for Orion and
Actava, and certain financial information for MITI and Sterling, and similar
information for certain other companies whose securities are publicly traded,
(v) reviewed the
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financial terms of certain recent business combinations which Alex. Brown deemed
comparable in whole or in part, (vi) met with the management of Orion, Sterling,
MITI and Actava, respectively, to discuss their respective businesses and
prospects, and (vii) considered such other information and other factors which
Alex. Brown deemed appropriate.
In rendering its opinion, Alex. Brown did not independently verify the
information provided to it, and assumed the accuracy, completeness and fairness
of all such information. With respect to financial forecasts and other
information relating to the prospects of Orion, Sterling, MITI, Actava and the
Surviving Corporation, Alex. Brown assumed that such forecasts and other
information were reasonably prepared and reflected the best currently available
estimates and good faith judgments of Orion, Sterling, MITI and Actava,
respectively, as to the likely future financial performance of Orion, Sterling,
MITI, Actava and the Surviving Corporation. Alex. Brown did not conduct a
physical inspection of the properties or facilities, or make an independent
evaluation or appraisal of the assets, of any of Orion, Sterling, MITI or
Actava, nor was Alex. Brown furnished with any such evaluation or appraisal.
Alex. Brown assumed that MITI and its affiliates have obtained or will obtain
necessary and material governmental permits and authorizations for the conduct
of their operations in Eastern Europe, Russia, the former Soviet Republics, and
elsewhere, that the existing permits and authorizations are valid and
enforceable and that the new permits and authorizations will be valid and
enforceable. Alex. Brown did not make any independent investigation of any legal
matters affecting any of Orion, MITI, Sterling or Actava, and assumed the
correctness of all legal advice given to each of them and to the Orion Special
Committee, including advice as to the tax consequences of the Orion Merger to
Orion and the Orion Public Stockholders. While Alex. Brown believes that its
review as described herein is an adequate basis for the opinion it has
expressed, the opinion is necessarily based upon financial, economic, monetary,
political, market and other conditions that existed and could be evaluated as of
the date of the opinion, and any significant change in such conditions
thereafter would require a reevaluation of the opinion.
In rendering its opinion, Alex. Brown assumed (i) that certain of Orion's
indebtedness will be refinanced according to terms similar to those outlined to
Alex. Brown, and (ii) that the current restrictions on Orion's engaging in the
production and development of motion pictures, both by express provision and by
required payments of available cash flow under certain agreements to which Orion
is a party, will terminate in connection with the Orion Merger. In addition,
Alex. Brown also assumed that absent the Orion Merger, there would be a likely
event of default in 1995 under certain of Orion's indebtedness requiring the
restructuring of those obligations.
Alex. Brown did not express any opinion as to the price at which the Common
Stock will trade subsequent to the Mergers. In addition, Alex. Brown did not
participate in negotiating the terms of the Orion Merger or any other aspect of
the transactions contemplated thereby, and received no instruction to, and did
not, seek or solicit alternative transactions.
In preparing the Alex. Brown Opinion, Alex. Brown performed a variety of
analyses, and considered a variety of factors, of which the material analyses
and factors are described below. The following summary of such analyses and
factors considered does not purport to be a complete description of the analyses
and factors underlying the Alex. Brown Opinion. The preparation of a fairness
opinion is a complex process involving various determinations as to the most
appropriate analyses and factors to consider, and the application of those
analyses and factors under the particular circumstances. As a result, the
process involved in preparing such opinion is not readily summarized. No public
company utilized for reference purposes is identical to Orion or the other
Merging Parties for the business segment for which an analysis is being made,
and none of the acquisitions or other business combinations considered in
connection with the Alex. Brown Opinion is identical to the Orion Merger or any
other of the Mergers.
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In arriving at its opinion, Alex. Brown did not attribute any particular
weight to any one analysis or factor considered by it, but rather made judgments
as to the significance and relevance of, and weight to be attributed to, each
analysis and factor. Alex. Brown did not consider any one analysis or factor to
the exclusion of any other analyses or factors. Further, Alex. Brown's
conclusions involved significant elements of subjective judgment and qualitative
analyses as well as the financial and quantatative analyses. Accordingly, Alex.
Brown believes that its analyses and opinion must be considered as a whole and
that selecting portions of its analyses and factors, without considering all
such analyses and factors, could create a misleading or incomplete view of the
processes underlying the preparation of the Alex. Brown Opinion. In its
analyses, Alex. Brown necessarily made numerous assumptions with respect to
Orion and the other Merging Parties and their affiliates, industry performance,
general business, regulatory, economic, political, market and financial
conditions and other matters, many of which are beyond Orion's and the other
Merging Parties' control. In addition, analyses relating to the value of
businesses or securities do not purport to be appraisals, or to reflect the
prices at which such businesses or securities can actually be sold. Accordingly,
because such estimates are inherently subject to substantial uncertainty, none
of the Merging Parties, the Orion Special Committee, Alex. Brown or any other
person assumes responsibility for their accuracy.
Miscellaneous. Orion agreed to pay Alex. Brown $600,000, of which $150,000
was a retainer fee paid upon Alex. Brown's retention, and $450,000 was payable
upon delivery of the Alex. Brown Opinion. Orion also agreed to pay all of Alex.
Brown's reasonable out-of-pocket expenses, including reasonable fees and
disbursements of counsel, and to indemnify Alex. Brown and each of its
directors, officers, agents, employees and controlling persons against any
liabilities. To the extent officers of Alex. Brown provide testimony (whether in
trial or in deposition) for any action, suit or proceeding related to, or
arising from, Alex. Brown's engagement, Orion agreed to pay Alex. Brown its
customary per diem charge for the services of such officers. In addition, if the
Orion Special Committee requests Alex. Brown to render additional opinions with
respect to materially amended and revised transactions, Alex. Brown will be paid
an additional fee of $100,000 for each such opinion.
In the ordinary course of its business, Alex. Brown and its affiliates may
actively trade the debt and equity securities of the Merging Parties for their
own accounts and for the accounts of customers and, accordingly, may at any time
hold long or short positions in such securities.
Methodology to Ascertain Fairness. In rendering its opinion, Alex. Brown
has, among other things, established a range of values for the stock held by the
Orion Public Stockholders and compared this value with a range of values for the
proposed consideration to be received by the Orion Public Stockholders in the
form of the Common Stock.
The principal methods Alex. Brown used in assessing the value of Orion, the
other Merging Parties and the Surviving Corporation included, among others, the
following: (i) discounted cash flow analysis, (ii) analysis of selected public
companies, (iii) analysis of selected mergers and acquisitions, (iv) library
transfer valuation, (v) stock trading analysis, and (vi) squeeze out transaction
analysis.
As set forth in more detail below, Alex. Brown performed various generally
accepted valuation analyses to derive a range of values for Orion as a stand
alone entity and for Orion's pro-rata share ownership of the Surviving
Corporation and then performed an analysis to compare these ranges as part of
reaching its conclusions. While the Surviving Corporation was valued as a single
combined entity, Alex. Brown also evaluated it on a Sum of Components basis
using the independent valuations of each merger participant which are described
in more detail below. The purpose of using multiple analyses is to approach the
valuation from different perspectives using various methodologies. The
similarity of conclusions (or lack thereof) using these different methods
provides a level of comfort with respect to Alex. Brown's conclusions.
Each of the various analyses performed emphasizes a particular aspect of
value and employs a certain set of assumptions in arriving at a range of values.
For example stock trading analysis focuses
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purely on the market price of the stock over a period of time. The analysis of
selected public companies is market-based as well, but assumes that the public
market price of other companies' stocks provides a proxy for a target company's
valuation. Similarly, the analysis of selected mergers and acquisitions also
provides a market-based assessment of value which, in addition, takes into
account the value of a control premium. In contrast, a discounted cash flow
analysis incorporates future performance into the assessment of value by present
valuing projected cash flows. The squeeze-out analysis combines a market-based
assessment with a control premium calculation. The library transfer methodology,
in contrast to mergers and acquisition analysis, focuses on asset value
benchmarks rather than financial performance benchmarks.
The range of values for the Orion Public Stockholders as determined by Alex.
Brown is approximately $5.08 to $7.40 per share. This is in comparison to the
closing market price of the Orion Common Stock of $5.50 on April 26, 1995.
Through Alex. Brown's analysis of the Surviving Corporation, the range of values
for an equivalent Orion share was determined to be $6.95 to $9.89
Discounted Cash Flow Analysis
The Discounted Cash Flow ("DCF") Analysis approach estimates the enterprise
value based upon a company's projected future operating performance. Using this
technique, an enterprise value is calculated by summing the present value of
projected unlevered free operating cash flows for a determined period plus the
present value of the terminal value at the end of the projection period. The
projected unlevered free operating cash flows, and an estimated terminal
enterprise value are discounted back to the present by a risk-adjusted,
weighted-average cost of capital ("WACC"). This discounted stream of cash flows
produces an enterprise value that represents the value to both debt and equity
holders. The projected unlevered free cash flows in DCF Analysis are derived
from the subject company's projected business plan extending out for a period of
four to five years. In addition, terminal values are calculated using either an
estimated perpetual growth rate of the unlevered free operating cash flows or an
exit multiple based on analyses of similar companies or acquisitions. In
preparing its DCF valuation, Alex. Brown performed various sensitivity analyses
to three principal variables within the DCF methodology: (1) projected cash
flows and (2) the WACC and (3) the terminal growth rate or exit multiple for the
subject company.
Analysis of Selected Public Companies
In this analysis a company is valued by comparing it with publicly-held
companies in reasonably similar lines of business. The subject company together
with the comparable companies may be viewed as alternative investments available
to the prudent investor. The price which the prudent investor is willing to pay
for each company's publicly-traded securities is related to the perceived future
benefits of ownership and the required rate of return on the investment. The
price also reflects an implied market value of the total company (enterprise
value).
After thoroughly analyzing the subject company, a universe of comparable
companies is compiled from various sources including database research, an
industry review, and conversations with management. Due to the limitation of
having publicly-available financial information and market valuations (i.e.
stock prices), this analysis is limited to public companies. Criteria for
selecting comparable companies include, among others, the relative similarity of
(1) lines of business, (2) markets, (3) size of business, (4) growth prospects,
(5) maturity of the business and (6) risks. It is frequently difficult to
identify companies that are truly comparable to the subject company.
Publicly-held corporations differ in terms of product lines, size, financial
structure, organization and corporate strategies. Accordingly, Alex. Brown
believed that it was inappropriate to, and therefore did not, rely solely on the
quantitative mechanics of public company analysis, and also made qualitative
judgments concerning differences between the financial and operating
characteristics of each subject company and its respective comparable public
companies.
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The analytical work performed included, among other things, a detailed
multi-year financial comparison of each company's income statement, balance
sheet and cash flow. Each company's performance, profitability, leverage and
business trends were also examined. Based on this analysis, a number of
financial multiples and ratios were calculated and then reviewed to gauge each
company's relative performance. Several ratios, as noted below, were then
developed to measure the valuation of each comparable company. Specifically, the
total enterprise value (defined as market equity value plus funded debt less
excess cash) for each company was compared to their respective revenues, EBITDA
(earnings before interest, taxes, depreciation and amortization), and EBIT
(earnings before interest and taxes). Although Alex. Brown computed and
considered a number of ratios, it placed more emphasis on those based on
revenues and EBITDA.
The application of this approach utilizes market capitalization multiples
based on current market prices of publicly-traded securities together with
historical financial data of the comparable companies. Selected capitalization
multiples derived in the analysis are then applied to the company's historical
financial results to arrive at indications of total enterprise value. In
addition, this methodology focuses on historical results and is affected by
changes in capital market conditions, both of which may not accurately portray
the future prospects of the business.
Analysis of Selected Merger and Acquisition Transactions
Another generally accepted valuation methodology is the Mergers &
Acquisitions technique. When using this approach, M&A multiples are calculated
based upon the purchase price (including any debt assumed and equity purchased)
paid to acquire companies comparable to the subject company. These multiples are
then applied to the subject company to determine the implied going concern
enterprise value. Unlike public company analysis, the valuation in this
methodology includes a "control" premium and thus, generally produces higher
valuations than the use of public market comparisons. For the purpose of
estimating the enterprise value of the subject company, Alex. Brown used the
transaction values of a selected group of comparable M&A transactions to
determine the multiples of purchase price to EBITDA, EBIT and revenue. These
multiples were then applied to the financial statements of the subject company
to calculate a total enterprise value. Although Alex. Brown computed and
considered a number of ratios, it placed more emphasis on those based on
revenues and EBITDA. As with the public company analysis, since no acquisition
used in any analysis is identical to a target transaction, valuation conclusions
cannot be solely based on quantitative results. The reasons for and the
circumstances surrounding each acquisition transaction are specific to such
transaction and there are inherent differences between the businesses,
operations and prospects of each. Therefore, qualitative judgments must be made
concerning the differences between the characteristics of these transactions and
other factors and issues which would affect the price an acquiror is willing to
pay in an acquisition.
Library Transfer Valuation
This approach values the company's film asset library based on a market
driven assessment of how much these discrete assets could be sold for on a
stand-alone basis. For film libraries, an appraisal would require information
about past library transfers to establish a market clearing rate for library
titles of similar scope, age, quality and marketability. For the purpose of this
approach, after the sale of the library, Orion is assumed to be liquidated. The
library asset value is thereby reduced by funded debt, accounts payable and
accrued liabilities, and then cash, 80% of receivables, and 50% of other assets
are added.
Stock Trading Analysis
This approach compares the stock price for an equity security at various
periods in time to determine the market value of the company. Movement in stock
price in comparison to other benchmarks can be used as an indicator of value. In
Alex. Brown's analysis, the stock trading activity
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over the last 16 months, which included periods both before and after the
Mergers were announced, was used. Benchmarks typically used by Alex. Brown
include the S&P 500 Index, the Dow Jones Industrial Average, and the S&P
Entertainment Index.
"Squeeze-Out" Transaction Analysis
This approach compares transactions in which a majority stockholder in a
company seeks to buy-out the remaining minority stockholders. This analysis
provides an estimate of the premium which minority stockholders may expect to
receive in such a transaction. While this transaction is not a "squeeze-out"
(Orion's minority stockholders maintain an interest in the merged entity), Alex.
Brown believes this analysis provides a useful basis for comparison.
Valuation of Orion. In analyzing the value of Orion, Alex. Brown considered
generally, among other factors, Orion's lack of profitability in the three years
since emerging from bankruptcy, its negative net worth and decreasing levels of
cash, the current constraints on development, production and distribution of
motion picture product, the weak performance in 1995 of Orion's theatrical
titles and previously released product, Orion's highly leveraged capital
structure, and the fact that as of August 31, 1995 Orion was in default on
certain of its existing indebtedness. In addition, Alex. Brown noted that based
upon current estimates of available cash flow, Orion does not believe it will
have sufficient cash to make certain payments on its debt as they become due. In
order to meet such obligations, Orion must obtain a waiver, refinance its
existing debt, or obtain additional sources of financing. Orion's independent
certified public accountants noted in their opinion that this condition raises
substantial doubt about Orion's ability to continue as a going concern. In
valuing Orion, Alex. Brown also considered Orion's difficulties in replenishing
its library from new production, the effect alternative media has had on Orion's
existing library, the increasing importance of new titles in the rental and
sell-through markets, and, with respect to the Orion Public Stockholders, the
position of a minority stockholder where the controlling stockholder is
contemplating a sale, as well as considering Orion's current market value. The
need to refinance will have a negative impact on Orion's standalone value, and
as a result, the values derived through Alex. Brown's analyses may represent an
optimistic value for Orion.
Analysis of Selected Public Companies
Alex. Brown reviewed the actual and estimated financial, operating and stock
market information of selected companies in the television production and
distribution business and, separately, the motion picture production and
distribution business. In selecting public companies for analysis, a combination
of both television and film production companies were considered since a large
component of Orion's cash flow is generated by library sales which are more
stable than cash flows from new film production. Television production tends to
be less risky due to the contractual basis on which existing television series
are developed. The motion picture producers and distributors included: Savoy
Pictures Entertainment, Samuel Goldwyn Co., and Skouras Pictures. The television
producers and distributors included: All-American Communication, King World
Productions, New World Communications and Spelling Entertainment Group.
Alex. Brown computed enterprise value as a multiple of sales, EBITDA, and
EBIT, and equity value as a multiple of last twelve months ("LTM") earnings, and
projected 1995 and 1996 earnings. Of these multiples, Alex. Brown believed that
the multiples based on revenue and EBITDA are the most useful in determining
valuation on a public market basis. The enterprise value as a multiple of
revenues for the selected companies ranged from 1.0x to 5.3x, with a mean and
median (excluding certain extraordinary values) of 1.7x and 1.8x, respectively.
The range of enterprise values of the selected companies as a multiple of EBITDA
ranged from 1.2x to 8.0x, with a mean and median (again excluding certain
extraordinary values) of 2.2x and 2.3x, respectively. Alex. Brown believed that
the appropriate multiple ranges to apply to Orion were, in the case of revenues,
1.5x to 1.8x, and in the case of EBITDA, 2.3x to 2.8x. Due to Orion's lack of
production activity and concentration on distribution of
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its existing library, the range of multiples for revenue were targeted below the
median of the comparables. The range of multiples for EBITDA were targeted above
the median of the comparables since Orion's production cost amortization has
fallen in recent years due to the lack of production.
This analysis indicated an equity value range (based on Orion's revenue for
the fiscal year ended February 28, 1995) of approximately $100.9 million to
$158.3 million, implying a per share value (based on 20,000,000 shares of Orion
Common Stock outstanding) of $5.05 to $7.92. Based on Orion's EBITDA for the
fiscal year ending February 28, 1995, the analysis indicated an equity value
range of $96.5 million to $157.9 million, implying a per share value (based on
20,000,000 shares of Orion Common Stock outstanding) of $4.82 to $7.90.
Analysis of Selected Mergers and Acquisitions
Utilizing publicly available information, Alex. Brown evaluated a series of
transactions involving companies in the film and television production and
distribution industries within the past five years which it believed comparable
to the Orion Merger. The transactions considered included Lorimar Telepictures
Corp./Warner Communications, Inc., Guber-Peters Entertainment/Sony USA Inc., New
Line Cinema Corp./Turner Broadcasting System, Republic Pictures Corp./Spelling
Entertainment Group and RHI Entertainment/Hallmark Cards, Inc.
Alex. Brown computed enterprise value as a multiple of sales, EBITDA and
EBIT, and equity value as a multiple of LTM earnings. Given that Orion's EBIT
and earnings were negative, Alex. Brown concluded that the multiples of revenues
and EBITDA were the appropriate measures to use to determine evaluation on a
comparable transaction basis. The range of enterprise value as a multiple of
revenues for the selected transactions was 1.1x to 6.0x, with a mean and median
(excluding certain extraordinary values) of 2.0x and 1.9x, respectively, and the
enterprise value of the selected acquisitions as a multiple of EBITDA ranged
from 2.5x to 4.3x, with a mean and median (again excluding certain extraordinary
values) of 2.9x and 2.7x, respectively. Alex. Brown believed the appropriate
multiple range to use in valuing Orion, in the case of revenues, ranged from
1.4x to 1.7x, and in the case of EBITDA from 2.3x to 2.7x.
This analysis indicated an equity value range (based on Orion's revenue for
the fiscal year ended February 28, 1995) of $81.8 million to $139.1 million,
implying a per share value (based on 20 million shares of Orion Common Stock
outstanding) of $4.09 to $6.96. Based on Orion's EBITDA for the fiscal year
ended February 28, 1995, this analysis indicated an equity value range of $96.5
million to $145.7 million, implying a per share value (based on 20 million
shares of Orion Common Stock outstanding) of $4.83 to $7.28.
Discounted Cash Flow Analysis
Alex. Brown performed a discounted cash flow analysis of the projected cash
flow of Orion for the 1995 to 2000 fiscal years for two different scenarios, one
assuming that the current restrictions on Orion's production activities remained
in place, and the other assuming that Orion is able to engage in production of
motion picture and television titles. However, Orion would need to restructure
its debt to engage in production activities, and it currently does not have the
financial resources to do so. Utilizing those projections, Alex. Brown
calculated a range of implied values based upon the discounted net present value
of the sum of (i) the projected stream of unlevered free cash flows, and (ii)
projected terminal value of Orion based upon assumed perpetual growth rates. For
the no production scenario, a terminal growth rate of -2% was used, to account
for a decreasing value of an aging film library, and a range of discount rates
from 20% to 24% was used to reflect the riskiness of Orion's cash flows due to
its financial distress. For the production scenario, a terminal growth rate of
+2% was used based on a constant level of production over time, and discount
rates between 17% and 19% were used, based on the weighted average cost of
capital of selected companies. In evaluating the production scenario, Alex.
Brown also considered the likelihood that the required restructuring of certain
of Orion's debt to allow Orion to engage in production would result in
substantial equity dilution for Orion's stockholders.
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The discounted cash flow analysis indicated an equity value range for the no
production scenario of $39.9 million to $79.8 million, implying a per share
value (based on 20 million shares of Orion Common Stock outstanding) ranging
from $1.99 to $3.99. For the production scenario, the indicated equity value
range was $166.8 million to $217.9 million, implying a per share value (based on
20 million shares of Orion Common Stock outstanding) of $8.34 to $10.90. Alex.
Brown placed very little emphasis on the valuation derived from the production
scenario due to the need to restructure Orion's debt as a condition to engaging
in production activities.
Library Transfer Analysis
Alex. Brown analyzed Orion's library, and examined certain other library
transfer transactions, to derive a value for Orion based on its library. Because
the valuation of motion picture feature titles is different than those of
made-for-tv movies or made for-tv series, and in turn those of made-for-video
product, and the value of rights with respect to a particular title is a
function of the geographic, media and temporal limitations of Orion's
distribution rights, Alex. Brown employed various discounts and scaling factors
to derive an adjusted title count, to enable it to more accurately assess the
value of Orion's library compared to other transactions involving transfers of
significant motion picture title libraries. Using this adjusted title count,
Alex. Brown analyzed the library value and number of titles involved in the
transactions/library sales by Paramount Pictures, MCA, United Artists, Warner
Brothers, Columbia Pictures and MGM, deriving multiples based on both the number
of titles and the number of key titles. Alex. Brown applied these multiples to
the respective title counts to arrive at a total enterprise value. Equity value
was calculated by subtracting the net liabilities of Orion under a liquidation
scenario, assuming 80% realization by Orion on its receivables, and 50%
realization by Orion on all other assets. This indicated an equity value range
based on all titles of $104.8 million to $144.1 million, implying a per share
value (based on 20 million shares of Orion Common Stock outstanding) between
$5.24 and $7.21.
As discussed above, Alex. Brown used a variety of valuation techniques to
value Orion which resulted in an aggregate equity valuation range of $39.9
million to $217.9 million. A comparison of these techniques indicate similar
valuation ranges for the Public Companies, Mergers and Acquisitions and
Comparable Library Transfer analyses. The Discounted Cash Flow analyses is a
more subjective analysis due to its reliance on certain assumptions regarding
Orion's cash flows (including production versus no production scenarios). Based
on the above, Alex. Brown determined a summary equity value range of $101.5
million to $147.8 million, implying a per share value range (based on 20 million
shares of Orion Common Stock outstanding) of $5.08 to $7.40. In comparison,
Orion's equity market value as of April 26, 1994 was $5.50 per share.
Stock Trading Analysis
Alex. Brown also analyzed the trading activity of Orion for the period
January 1, 1994 to April 26, 1995. Such time frame included a period both before
and after the merger announcement on August 31, 1994. Orion's stock price during
this period ranged from a high of $6.88 per share (on March 4, 1994), to a low
of $2.75 per share (on June 24, 1994), with an average price (from January 1,
1994 through April 26, 1995) of $5.24 per share. Orion's closing price one day
and four weeks prior to the announcement of the Orion Merger was $3.56 and
$4.50, respectively.
As part of its analyses, Alex. Brown compared Orion's stock performance
during this 16 month period to the performance of Actava's stock price. Actava's
stock price during this period ranged from a high of $13.00 per share (on August
26, 1994), to a low of $6.00 per share (on April 1, 1994), with an average price
(from January 1, 1994 through April 26, 1995) of $9.17 per share. Actava's
closing price one day and four weeks prior to the announcement of the Orion
Merger was $13.13 and $10.25, respectively. The fluctuation of Orion's stock in
relation to Actava's stock was very disparate in the months leading up to the
merger announcement. Since the merger announcement, except for brief
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periods in November and December of 1994, both stocks have traded in relation to
one another. This would be expected given the terms of the Merger Agreement.
Finally, Alex. Brown also compared Orion's stock performance to the S&P 500
Index, the Dow Jones Industrial Index and the S&P Entertainment Index. The
purpose of this analysis is to observe the behavior of the target company's
stock price in relation to broad market indices, as well as specific industry
indices and the entrance of new information about the company into the market
place over this course of time. These analyses showed that Orion has marginally
under performed both the Dow Jones Industrials and the S&P 500 for most of the
period since the Orion Merger was announced. This is contrasted by Orion's
pre-merger performance which was substantially below that of the broader indices
for most of the period. Orion's stock performance in relation to the S&P
Entertainment Index was lower since the merger announcement, as it did not
benefit from the momentum experienced by entertainment companies of significant
scale and scope. These trends could be caused by the stock market's discounting
of the Orion Common Stock due to the uncertainty with respect to the
consummation of the Orion Merger. Conversely, prior to the announcement of the
merger, the financial viability of Orion as a stand-alone entity was the driving
factor which affected the stock's trading levels. The S&P Entertainment Index
includes the Disney Company, King World Productions, Time Warner, Inc. and
Viacom, Inc.
"Squeeze Out" Analysis
Although Alex. Brown does not consider the Orion Merger a "squeeze out,"
Alex. Brown also analyzed the consideration that might by received by the Orion
Public Stockholders based on a review of open market transactions where a
majority shareholder of a company sought to buy out the remaining minority
shareholders. Alex. Brown analyzed 30 transactions since 1991 in which minority
shareholders were bought out by majority owners. Based on these transactions,
Alex. Brown derived premiums over the market price one day and four weeks prior
to the announcement date. Based on this analysis, and based on Orion's share
price of $3.56 one day prior to the announcement date, and $4.50 four weeks
prior to the announcement date, Alex. Brown derived an implied share value on a
"squeeze out" analysis ranging from $4.45 to $5.67.
Valuation of Actava. In analyzing the value of Actava, Alex. Brown
principally utilized three methodologies: (i) selected public companies
analysis, (ii) selected mergers and acquisitions analysis, and (iii) discounted
cash flow analysis, as well as considering Actava's current market value. In
valuing Actava, Alex. Brown applied these methodologies to Snapper to determine
Snapper's implied enterprise value or implied market capitalization, calculated
the value of cash flows at the corporate level using a discounted cash flow
analysis and reflected Actava's investment in Roadmaster at current market value
to determine Actava's total enterprise value, and then subtracted Actava's net
debt to determine its equity value.
Analysis of Selected Public Companies
Alex. Brown reviewed and compared certain actual and estimated financial,
operating and stock market information of Actava and selected companies in the
lawn and garden industry. These companies included Black & Decker Corp., Deere &
Company and Toro Company. Alex. Brown computed enterprise value as a multiple of
sales, EBITDA and EBIT, and equity value as a multiple of LTM earnings and
projected 1995 and 1996 earnings. Alex. Brown did not use the net income
multiples since Snapper had a net loss, and did not consider the EBIT multiples
meaningful since it produced a value significantly different (and below) the
other two methods. The range for enterprise value as a multiple of revenues was
from 0.6x to 1.2x, with a mean and median of 0.9x, and as a multiple of EBITDA
ranged from 6.2x to 7.9x, with a mean of 7.0x and a median of 6.8x. Based on the
relative cost structures of the companies, Alex. Brown believed the appropriate
multiples for valuing Snapper based on the selected public companies analysis
ranged, in the case of revenues, from 0.5x to 0.8x, and in the case of EBITDA
from 5.9x to 6.5x. This analysis indicated an equity value range (based on last
twelve
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month or "LTM" revenues) of $98.7 million to $173.5 million, and an implied
equity valuation (based on LTM EBITDA), ranging from $78.9 million to $89.6
million.
Analysis of Selected Mergers and Acquisitions
Using publicly available information, Alex. Brown selected mergers and
acquisitions in the lawn and garden industry which it believed comparable to the
Mergers. Transactions in the lawn and garden industry included Club Car,
Inc./Clark Equipment, Tiger Corp./Alamo Group, Ever-Greens Lawns Corp./Barefoot
Inc., Republic Tool and Manufacturing/The Scotts Company and Clark
Equipment/Ingersoll. Alex. Brown derived the total enterprise value as a
multiple of sales, EBITDA and EBIT, and equity as a multiple of LTM earnings.
Alex. Brown did not use the multiples based on earnings due to Snapper's net
loss. The range of multiples for total enterprise value as a function of sales
were from 0.4x to 1.5x, with a mean and median (excluding certain extraordinary
values) of 0.9x and 1.0x, respectively. As a multiple of EBITDA, the range was
from 5.5x to 11.6x, with a mean and median (again excluding certain
extraordinary values) of 8.9x and 9.2x, respectively. As a function of EBIT, the
multiples ranged from 11.1x to 52.5x, with a mean and median (excluding
extraordinary values) of 13.4x and 13.0x, respectively. Alex. Brown believed the
appropriate multiples to apply to Snapper ranged from 0.5x to 0.8x in the case
of revenues, from 7.0x to 8.0x in the case of EBITDA and from 10.0x to 12.0x in
the case of EBIT. These analyses indicated an implied equity value range of
Actava between $69.9 million and $89.1 million based on LTM EBIT, between $98.5
million and $116.3 million based on LTM EBITDA, and between $98.7 million and
$173.5 million based on LTM revenue.
Discounted Cash Flow Analysis
Alex. Brown performed a discounted cash flow analysis of the projected
unlevered free cash flow of Actava for the 1995 to 1998 fiscal years, using a
terminal value derived by applying a multiple to Snapper's projected 1998
EBITDA. Actava's corporate cash flows were assumed to terminate at the end of
the projected period. Alex. Brown applied discount rates ranging from 11% to 13%
to Snapper's cash flows and a discount rate of approximately 6% to Actava's
corporate cash flows to reflect the short term nature of its receivables. This
analysis indicated a total equity value range of $98.0 million to $107.6
million.
The valuation methodologies described above resulted in a range of values
from $69.9 million to $173.5 million. A comparison of valuation ranges for the
various techniques indicated similar value ranges for the Public Companies
analysis based on revenue multiples, the Merger and Acquisition analysis based
on both revenue and EBITDA multiples and the Discounted Cash Flow analysis.
Based on all of these analyses, Alex. Brown derived a summary equity value range
for Actava of $102.9 million to $121.3 million.
Valuation of MITI. In analyzing the value of MITI, Alex. Brown principally
used three methodologies: (i) selected public companies analysis, (ii) selected
acquisition analysis, and (iii) discounted cash flow analysis. For purposes of
the selected public companies and selected acquisition analyses, Alex. Brown
separated MITI into three business sectors: wireless cable, wireless voice and
data (paging, small mobile radio and telephony), and radio. Under each
methodology, Alex. Brown calculated total enterprise value, and then subtracted
net debt to arrive at equity value.
Analysis of Selected Public Companies
In evaluating MITI, Alex. Brown identified three distinct lines of business
in which MITI participates and sought to establish valuation ranges for each of
these areas individually in this analysis. Alex. Brown reviewed certain actual
and estimated financial, operating and stock market information of selected
companies in the wireless cable, wireless voice and data and broadcast radio
segments. Since MITI accounts for each of its joint ventures separately, Alex.
Brown was able to calculate MITI's financial performance in each line of
business.
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For wireless cable, Alex. Brown used American Telecasting, Heartland
Wireless, People's Choice-TV Corp., and Preferred Entertainment Corp. for both
revenue multiples analysis and for line of sight household multiple ("LOSHH")
analysis, and, in addition, ACS Enterprises, American Wireless, CableMaxx, CAI
Wireless, National Wireless and Wireless Cable of Atlanta for LOSHH analysis
only. LOSHH analysis values a wireless cable operator based on the number of
households which have an unobstructed reception path from the transmission
source. The actual LOSHH figure is derived from demographic information
including population, average household size, and shadow factors, which estimate
the percentage of households obstructed due to topography. For wireless cable,
revenue multiples were examined for only those cable systems that were more
mature. Alex. Brown analyzed enterprise value as a multiple of 1995 projected
revenues, 1996 projected EBITDA, and LOSHH. For this business segment,
enterprise value as a multiple of 1995 projected revenues ranged from 5.8x to
7.6x, with a median of 6.7x, enterprise value as a multiple of 1996 projected
EBITDA ranged from 23.4x to 53.4x, with a median (excluding extraordinary
values) of 26.4x, and enterprise value as a multiple of LOSHH ranged from $28 to
$62, with a median of $39.
For the wireless voice and data segment, Alex. Brown used A+ Communications,
American Paging, Arch Communications, Metrocall, Mobile Telecommunications
Technologies, Page America, Paging Networks and ProNet. Alex. Brown analyzed the
enterprise value of these companies as a multiple of revenues and EBITDA. In
this sector, the range of enterprise value as a multiple of revenues was from
2.3x to 5.8x, with a mean of 3.6x and a median of 3.3x, and, as a multiple of
EBITDA, ranged from 8.8x to 22.6x, with a mean of 13.7x and a median of 11.7x.
For the broadcast radio sector, Alex. Brown utilized EMMIS Broadcasting,
Evergreen Media, EZ Communications and Heftel Broadcasting. (Alex. Brown also
considered Clear Channel Communications and Infinity Broadcasting in its
financial analysis but excluded them from the ratio analysis due to their
significantly larger size). Alex. Brown analyzed the enterprise value of these
four companies as a multiple of revenues and EBITDA. In this business segment,
enterprise value as a multiple of revenues ranged from 2.9x to 7.4x, with a mean
of 4.2x and a median of 3.3x, and enterprise value as a multiple of EBITDA
ranged from 9.8x to 10.9x with a mean and median of 10.4x.
In valuing MITI based on revenue multiples, Alex. Brown believed that the
appropriate multiple ranges were 5.0x to 5.8x for wireless cable, 2.5x to 3.1x
for wireless voice and data and 2.6x to 3.2x for radio broadcasting. This
analysis indicated an equity valuation ranging from $206.5 million to $251.4
million. In valuing MITI based on LOSHH multiples for the wireless cable
segment, and EBITDA multiples for the wireless voice and data and radio
broadcasting segments, Alex. Brown believed the appropriate range for LOSHH to
be $28 to $30 for wireless cable and, for EBITDA, the appropriate ranges were
determined to be 8.5x to 9.5x in the case of wireless voice and data, and 8.0x
to 9.0x in the case of radio broadcasting. This analysis yielded an equity
valuation range from $205.8 million to $227.4 million.
Analysis of Selected Mergers and Acquisitions
As with the public company analysis, Alex. Brown separated MITI into three
distinct lines of business for the purpose of valuation using selected mergers
and acquisitions. Utilizing publicly available information, Alex. Brown
evaluated a series of transactions involving companies in the wireless cable,
wireless voice and data and radio broadcasting sectors which Alex. Brown
believed were reflective of the distinct business lines in which MITI is
engaged. In reviewing these transactions, Alex. Brown considered the prices paid
as a multiple of LOSHH ( in the case of wireless cable), subscribers (in the
case of wireless voice and data) and EBITDA (in the case for all business
segments).
In conducting the selected acquisition analysis for the wireless cable
sector, Alex. Brown considered 28 transactions from May, 1993 to April, 1995.
These transactions ranged in purchase price from $1 million to $670 million with
an average size of approximately $57 million. All of these transactions involved
properties operating in domestic markets. For the purpose of valuing the
wireless cable
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component of MITI, Alex. Brown placed more weight on the LOSHH multiple as a
measure for valuation. Of the selected transactions in the cable industry, the
LOSHH multiple ranged from $6 to $138, with a weighted average of $34 and a
straight average of $41.
In analyzing selected transactions in the wireless voice and data sector,
Alex. Brown considered 28 transactions from January, 1993 to April, 1995 which
ranged in purchase price from $7 million to $600 million with an average
purchase price of $96 million. The subscriber multiples for wireless voice and
data ranged from $132 per subscriber to $1,334 per subscriber with a mean of
$421 per subscriber and a median of $344 per subscriber. The EBITDA multiples
for wireless voice and data transactions ranged from 6.1x to 20.1x, with a mean
of 10.9x and a median of 10.4x. Alex. Brown placed more weight on the EBITDA
multiples in valuing the wireless voice and data segment of MITI.
In analyzing selected transactions in the radio broadcasting sector, Alex.
Brown considered 72 transactions between February, 1994 and December, 1994. The
range of purchase price for the transactions were $0.5 million to over $70
million with an average of $16 million. All of these transactions involved
properties operating in domestic markets. In this segment, the selected
transactions had multiples of EBITDA ranging from 6.9x to 13.0x and an average
multiple of 9.3x.
In valuing MITI based on the selected acquisition transactions, Alex. Brown
believed the appropriate multiple ranges were, for LOSHH, $30 to $33 in the case
of wireless cable and, for EBITDA, 9.0x to 10.0x in the case of wireless voice
and data, and 8.5x to 9.5x in the case of broadcast radio. This analysis of
selected acquisition transactions indicated an equity valuation range between
$220.8 and $246.6 million.
Discounted Cash Flow Analysis
Alex. Brown performed a discounted cash flow analysis of the projected
unlevered free cash flow of MITI for years 1995 through 1999. Alex. Brown
applied discount rates ranging from 22% to 25%, with a terminal value growth
rate of 9% applied to 1999 cash flow. The high discount rates were used to
reflect the additional risks intrinsic to assets in emerging businesses and
emerging economies. This analysis indicated an equity value ranging from $117
million to $199.5 million.
As described above, the total range of equity values was $117.0 million to
$251.4 million. Each method produced varying ranges of value. Alex. Brown tended
to place more weight on the Public Companies and Mergers and Acquisitions
analyses while placing less emphasis on the Discounted Cash Flow, which
demonstrated a high degree of sensitivity to certain assumptions. Based on these
analyses, Alex. Brown derived a summary equity value range for MITI of $187.5
million to $237.5 million.
Valuation of Sterling. In analyzing the value of Sterling, Alex. Brown
principally used selected public companies analysis, selected mergers and
acquisitions analysis and discounted cash flow analysis. For the selected public
companies and selected mergers and acquisitions analyses, Alex. Brown used the
same companies and acquisitions which were used in the comparable valuation
methodologies for Orion. However, since Alex. Brown did not assess Sterling as
having the same critical mass to provide additional value through liquidity in a
publicly traded entity as Orion, and since Sterling has a large component of
riskier consulting-based revenues, the multiples applied by Alex. Brown to
Sterling in valuing it have been discounted from those used for Orion, and were
at the low end of the multiple range. Alex. Brown believed the appropriate
multiple of revenue to use in valuing Sterling on a selected public companies
basis was in range of 0.8x to 1.2x, and in the case of EBITDA ranged from 1.0x
to 1.4x. Alex. Brown felt that the appropriate range of multiples to use in
valuing Sterling based on selected transactions were 0.8x to 1.2x in the case of
revenues, and 2.0x to 2.5x in the case of EBITDA.
Based on these analyses, the valuation based on selected public companies
indicates equity values based on revenues ranging from $6.1 million to $9.3
million, and based on EBITDA ranging from $4.0 million to $5.8 million. The
valuation based on selected acquisitions indicates equity values based
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on revenues ranging from $6.1 million to $9.3 million, and based on EBITDA
ranging from $8.5 million to $10.8 million.
Discounted Cash Flow Analysis
Alex. Brown performed a discounted cash flow analysis of the projected
unlevered free cash flows of Sterling for the years 1995 through 1999, based on
a discount from Sterling's management revenue projections to bring them more
into line with historical performance. Alex. Brown applied discount rates
ranging between 17% and 19% based on the weighted average cost of capital of
selected companies, and applied a terminal value growth rate to the 1999 cash
flow of 2%. Based on this analysis, Alex. Brown derived an equity value ranging
from $6.7 million to $7.8 million.
As described above, the total range of equity values was $4.0 million to
$10.8 million. Alex. Brown placed more weight on the revenue multiple as a basis
for valuation in Public Companies and Mergers and Acquisitions analyses due to
Sterling's size and the nature of its business (high component of
consulting-based revenues). The Discounted Cash Flow analysis showed a higher
value range, as it incorporated future growth in Sterling's cash flows. Based on
the analyses, Alex. Brown derived a summary equity value range for Sterling of
$6.3 million to $8.6 million.
Valuation of Surviving Corporation. In analyzing the value of the Surviving
Corporation, Alex. Brown principally utilized methodologies based on selected
public companies analysis, selected mergers and acquisitions analysis,
discounted cash flow analysis and a sum of components analysis. With respect to
this part of its analyses, Alex. Brown viewed the Surviving Corporation as a
global, integrated media, entertainment and wireless communications company
based on the combination of its film production capabilities, its film and
television libraries and its various wireless communications franchises in the
developing countries of Eastern Europe and elsewhere. As further described
below, Alex. Brown's analyses of selected public companies and selected mergers
and acquisitions included a different set of companies and transactions which
were determined to be comparable to the Surviving Corporation's business. With
respect to the discounted cash flow analyses, Alex. Brown reviewed the pro-forma
combined financial statements included elsewhere in this Joint Proxy
Statement/Prospectus, as well as certain projected financial information which
was provided to Alex. Brown by the Merging Parties. In analyzing the Surviving
Corporation, Alex. Brown considered the difficulty in projecting any benefits
from combining the Merging Parties, and accordingly, with the exception of
assuming the refinancing of Orion's debt, enabling production of new motion
pictures, did not assume any synergistic benefits from the Mergers.
Analysis of Selected Public Companies
Alex. Brown reviewed certain actual and estimated financial, operating and
stock market information of selected companies in the media and entertainment
industries. Alex. Brown felt that diversified, international integrated media
companies were appropriate comparisons for the Surviving Corporation. The
companies selected by Alex. Brown were The Walt Disney Company, The News
Corporation Ltd., Time Warner Inc., and Turner Broadcasting System. For each of
these companies, Alex. Brown determined the enterprise value as a multiple of
sales, EBITDA and EBIT and equity value as a multiple of LTM earnings and
projected 1995 and 1996 earnings. Alex. Brown used the multiples of revenues and
EBITDA to value the Surviving Corporation based on the selected public
companies. For the selected public companies, the range of enterprise value as a
multiple of sales was 1.7x to 3.2x, with a mean and median (excluding
extraordinary values) of 2.5x. Enterprise value as a multiple of EBITDA had a
range of 8.4x to 18.7x, with a mean and median (excluding extraordinary values)
of 8.9x. Alex. Brown used a multiple range of 2.2x to 2.6x in the case of
revenue, and 7.5x to 8.5x in the case of EBITDA, to value the Surviving
Corporation based on selected public companies. This analysis indicated an
equity value range of $617.8 million to $798.8 million based on revenues, or an
implied per share value (for each share of Orion after being converted in the
Orion Merger and assuming 67.99 million shares outstanding after conversion at
$10.50/share) based on revenues ranging from $8.86 to
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$11.45, and an implied equity value range based on EBITDA of $574.1 million to
$701 million, implying a per share value (for each share of Orion after being
converted in the Orion Merger and assuming 67.99 million shares outstanding
after conversion at $10.50/share) based on EBITDA ranging from $8.44 to $10.31.
Analysis of Selected Mergers and Acquisitions
Utilizing publicly available information, Alex. Brown evaluated a series of
transactions involving companies in the entertainment and media industries which
it deemed comparable. Alex. Brown considered the total enterprise value
indicated for each of these transactions as a multiple of sales, EBITDA and
EBIT, and equity as a multiple of LTM earnings. The transactions considered by
Alex. Brown included Columbia Pictures/Sony USA, Warner Communications/Time
Inc., MGA-UA/Pathe, Paramount Communications/Viacom, Inc. and MCA
Inc./Matsushita Electric. Alex. Brown felt that the multiples of revenue and
EBITDA were the appropriate ones to used in valuing the Surviving Corporation
based on the selected transactions. The range for the selected transactions of
total enterprise value as a multiple of revenue was from 1.9x to 3.1x, with a
mean and median of 2.6x and 2.9x, respectively, and as a multiple of EBITDA
ranged from 4.4x to 39.9x, with a mean and median (excluding extraordinary
values) of 7.4x and 4.6x, respectively. For the purpose of valuation, the
selected range of multiples for revenues were 1.9x to 2.6x, and for EBITDA, 6.4x
to 7.4x. The selected acquisition analysis indicated an equity value range,
based on revenues, of $482.1 million to $798.8 million, and an implied per share
value, based on revenues, (for each share of Orion after being converted in the
Orion Merger, and assuming 67.99 million shares of the Surviving Corporation
outstanding after conversion at $10.50/share) ranging from $7.09 to $11.74, and
an implied equity value range based on EBITDA from $434.5 million to $561.4
million, and an implied per share value based on EBITDA (for each share of Orion
after being converted in the Orion Merger, and assuming 67.99 million shares of
the Surviving Corporation outstanding after conversion at $10.50/share) ranging
from $6.39 to $8.05.
Discounted Cash Flow Analysis
Alex. Brown performed a discounted cash flow analysis using projected
unlevered cash flows of the Surviving Corporation for the years 1995 to 1999
(based, in the case of 1999, on Alex. Brown's estimate reflecting MITI's 1999
projection, the 1999 combined Orion/Sterling projection with production and the
projected 1998 Actava cash flow). Alex. Brown applied discount rates ranging
from 13.25% to 15.25% to these projected cash flows, based on the weighted
average cost of capital of selected companies, and assumed a terminal value
growth rate of 4%. This discounted cash flow analysis indicated an equity value,
ranging from $597.2 million to $857 million, implying a per share value (for
each share of Orion after being converted in the Orion Merger, and assuming
67.99 million shares outstanding after conversion at $10.50/share) ranging from
$8.56 to $12.29.
Sum of Components
In addition to valuing the Surviving Corporation as a whole, utilizing the
selected public company, selected merger and acquisition transactions and
discounted cash flow analyses, through Alex. Brown's analysis of each of the
individual companies Alex. Brown also arrived at a total equity value for the
Surviving Corporation based on the summation of the total enterprise valuation
range for each of the Merging Parties less the pro-forma combined net debt of
the Surviving Corporation. For Orion, Actava, Sterling and MITI the total
enterprise value ranges were estimated to be, respectively, $287 million to $333
million, $299 million to $317 million, $7 million to $9 million and $199 million
to $248 million. The pro-forma combined net debt for the Surviving Corporation
was approximately $377 million. In assessing a value using the sum of components
methodology, Alex. Brown assumed the combined entity would be valued as the sum
of its component parts. This analysis was factored into Alex. Brown's overall
valuation for the Surviving Corporation.
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This analysis indicated an equity valuation range from approximately $415
million to $530 million, implying a per share value (for each share of Orion
after being converted in the Orion Merger, and assuming 67.99 million shares
outstanding after conversion at $10.50/share) ranging from approximately $6.10
to $7.80.
Alex. Brown also performed a contribution comparison, examining at different
valuation levels (based on various, different assumptions) the contribution to
the total equity value of the Surviving Corporation by each of the Merging
Parties based on different prices for the Common Stock. Alex. Brown compared the
percentage of the Surviving Corporation's combined equity value contributed by
each of the Merging Parties with the percentage ownership of the Surviving
Corporation to be held by the stockholders of each of the Merging Parties after
the Mergers. The equity value contributed by each component of the merger was
based on the mid-point of the summary valuation range for each such Merging
Party, derived from various analyses performed on each of the Merging Parties
described previously. Alex. Brown's analyses indicated that Orion was
contributing approximately 27.3% of the total equity of the Surviving
Corporation, and that, depending on the Average Closing Price of the Common
Stock at the Effective Time, the percentage of the Surviving Corporation owned
by the Orion Stockholders after the Orion Merger would range between 29.4% and
32.1% assuming an Average Closing Price ranging from $8.50 to $10.50.
As described above, the total range of equity values was $415.0 million to
$857.5 million. Within this range the Public Companies, Merger and Acquisition
and Discounted Cash Flow analysis produced valuations in the upper portion of
the range. For the multiples-based Public Companies and Mergers and Acquisitions
analyses, the higher ranges were the result of the market expansion expected
when the merger participants are combined. The Discounted Cash Flow analysis
yielded higher ranges through its valuation of future cash flows. The Sum of
Component calculation, which utilized the summary equity valuation ranges of
each merger participant, offered a lower equity value range as it did not assume
any synergies between merger participants. Based on these analyses, Alex. Brown
derived a summary equity value range for the Surviving Corporation of $472.3
million to $672.3 million or $6.95 to $9.89 per Orion share. In comparison, the
Surviving Corporation's equity market value, based on the aggregate number of
shares to be outstanding after the consummation of the Mergers and Actava's
stock price as of April 26, 1994, was $398.0 million or $5.85 per Orion share.
Actava
General. First Boston was retained by Actava to advise it with respect to
the fairness to the stockholders of Actava, from a financial point of view, of
the Exchange Ratio taken as a whole. First Boston is an internationally
recognized investment banking firm and was selected by Actava based on First
Boston's experience and expertise. As part of its investment banking business,
First Boston is regularly engaged in the valuation of businesses and securities
in connection with mergers and acquisitions, negotiated underwritings,
competitive biddings, secondary distributions of listed and unlisted securities,
private placements and valuations for estate, corporate and other purposes.
On April 12, 1995, First Boston delivered to the Actava Board an oral
opinion, which was subsequently confirmed in writing, to the effect that, as of
such date and based upon and subject to certain matters stated therein, the
Exchange Ratio and the then contemplated Share Exchange, taken as a whole, were
fair to the Actava Stockholders from a financial point of view. First Boston
subsequently rendered its written opinion to the Actava Board, dated the date
hereof, to the effect that, as of such date and based upon and subject to
certain matters stated therein, the Exchange Ratio, taken as a whole, was fair
to the Actava Stockholders from a financial point of view. The assumptions made,
matters considered (other than the Share Exchange, which was eliminated
following the Amendments and therefore was not considered in connection with the
opinion dated the date hereof) and limitations on the review undertaken in the
April 12, 1995 opinion were substantially the same as those contained in the
opinion dated the date hereof which is attached hereto as Appendix B. In
connection with its
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written opinion dated the date hereof, First Boston updated, to the extent it
deemed necessary, the analyses used to render its opinion dated April 12, 1995,
which analyses are more fully described below.
In arriving at its opinion, First Boston (i) reviewed the Merger Agreement
and certain publicly available business and financial information relating to
the Merging Parties, (ii) reviewed certain other information, including
financial forecasts, provided to First Boston by the Merging Parties, (iii) met
with the Merging Parties' respective managements to discuss the respective
businesses and prospects of each of the Merging Parties, (iv) considered certain
financial and stock market data of the Merging Parties and compared such data
with similar data for publicly-held companies in businesses similar to those of
the Merging Parties, (v) considered, to the extent publicly available, the
financial terms of certain other business combinations and other transactions
which have recently been effected, (vi) held discussions with the respective
managements of the Merging Parties concerning certain strategic and financial
benefits anticipated from the Mergers and (vii) considered such other
information, financial studies, analyses and investigations and financial,
economic and market criteria which First Boston deemed relevant.
First Boston assumed that MITI has obtained all material governmental
permits and authorizations for the conduct of its existing operations in Eastern
Europe and Russia, and that such permits and authorizations are valid and
enforceable. Although First Boston made no independent investigation with
respect to such permits and authorizations, has assumed no responsibility with
respect to the existence, validity and enforceability thereof and has relied
upon management of Actava, management of MITI and their respective
representatives with respect to all such matters, nothing came to First Boston's
attention during the course of its engagement that caused it to believe that the
foregoing assumptions are unreasonable. With respect to MITI's pre-operational
and prospective operations, First Boston considered, based upon discussions with
management of Actava, management of MITI and their respective representatives,
the risks of obtaining all material governmental permits and authorizations, and
the risks with respect to the validity and enforceability thereof. First Boston
also considered, based upon discussions with management of Actava, management of
MITI and their respective representatives, the risk of the loss by MITI of its
right to conduct its operations, either through the loss of permits or
authorizations or through some other form of expropriation of its businesses or
assets. First Boston's opinion was rendered during a period of volatility in
Eastern Europe and Russia, and there can be no assurance that the analysis of
any such risks will be accurate. First Boston's opinion is also necessarily
subject to the absence of further material developments with respect to the
financial, economic, monetary, political, market and other conditions in Eastern
Europe and Russia from those prevailing on the date of the opinion.
In connection with its review, First Boston did not assume any
responsibility for independent verification of any of the foregoing information
and relied upon its being complete, accurate and fair in all respects. With
respect to the financial forecasts and other data reviewed by First Boston,
First Boston assumed that such forecasts and other data were reasonably prepared
on bases reflecting the best currently available estimates and good faith
judgments of the Merging Parties' respective managements as to the future
financial performance of the Merging Parties and the strategic and operating
benefits anticipated from the Mergers. First Boston was informed by the
management of Orion that fundamental assumptions inherent in such management's
projections for Orion include (i) management's plan to renew Orion's production
and development of motion pictures, an activity in which Orion is currently
substantially restricted in pursuing under the existing provisions of certain
agreements to which Orion is a party, and (ii) the termination of provisions in
certain agreements to which Orion is a party which require Orion to deposit and
distribute its net cash flow in a specified manner. The termination of these
existing provisions is a condition to consummation of the Mergers, and First
Boston assumed that such provisions will no longer be in effect following the
consummation of the Mergers. First Boston also assumed that the Mergers will be
treated as a tax-free reorganization for federal income tax purposes. In
addition, First Boston did not make an independent evaluation or appraisal of
the assets or liabilities (contingent or otherwise) of the Merging Parties, nor
was it furnished with any such evaluations or
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appraisals. The opinion of First Boston is necessarily based upon financial,
economic, monetary, political, market and other conditions as they existed and
could be evaluated as of the date of its opinion. First Boston is not expressing
any opinion as to what the value of the Common Stock actually will be or the
prices at which such Common Stock will trade, subsequent to the Mergers. First
Boston made no independent investigation of any legal matters affecting any of
the Merging Parties and assumed the correctness of all legal advice given to the
Merging Parties. First Boston did not participate in negotiating the terms of
the Mergers and First Boston's opinion does not in any manner address Actava's
underlying business decision to effect the Mergers. In connection with its
engagement, First Boston approached third parties to solicit indications of
interest in a possible acquisition of Actava and held preliminary discussions
with certain of these parties prior to the date of the opinion.
The full text of First Boston's written opinion dated the date hereof, which
sets forth the assumptions made, matters considered and limitations on the
review undertaken, is attached as Appendix B to this Joint Proxy
Statement/Prospectus and is incorporated herein by reference. Holders of Common
Stock are urged to read this opinion carefully in its entirety. First Boston's
opinion is directed to the Actava Board of Directors and the fairness to the
Actava Stockholders, from a financial point of view, of the Exchange Ratio taken
as a whole, and does not address any other aspect of the Mergers and does not
constitute a recommendation to any stockholder as to how such stockholder should
vote at the Actava Special Meeting. First Boston expressed no opinion as to the
consideration to be received by any stockholder of Orion, Sterling or MITI in
the Mergers. The summary of the opinion of First Boston set forth in this Joint
Proxy Statement/Prospectus, both with respect to the April 12, 1995 opinion and
the confirmation thereof dated the date hereof, is qualified in its entirety by
reference to the full text of such opinion.
In preparing its opinion to the Actava Board of Directors, dated April 12,
1995, First Boston performed a variety of financial and comparative analyses and
considered a variety of factors of which the material analyses and factors are
described below. The following summary of such analyses does not purport to be a
complete description of the analyses underlying First Boston's opinion. The
preparation of a fairness opinion is a complex analytic process involving
various determinations as to the most appropriate and relevant methods of
financial analyses and the application of those methods to the particular
circumstances and, therefore, such opinion is not readily susceptible to summary
description.
In arriving at its opinion, except as specifically set forth below, First
Boston did not attribute any particular weight to any analysis or factor
considered by it, but rather made qualitative judgments as to the significance
and relevance of each analysis and factor. Accordingly, First Boston believes
that its analyses must be considered as a whole and that selecting portions of
its analyses and factors, without considering all analyses and factors, could
create a misleading or incomplete view of the processes underlying such analyses
and its opinion. In its analyses, First Boston made numerous assumptions with
respect to the Merging Parties and their affiliates, industry performance,
general business, regulatory, economic, political, market and financial
conditions and other matters, many of which are beyond the control of the
Merging Parties. The estimates contained in such analyses are not necessarily
indicative of actual values or predictive of future results or values, which may
be significantly more or less favorable than those suggested by such analyses.
In addition, analyses relating to the value of businesses or securities do not
purport to be appraisals or to reflect the prices at which businesses or
securities actually may be sold. Accordingly, because such estimates are
inherently subject to substantial uncertainty, none of the Merging Parties,
First Boston or any other person assumes responsibility for their accuracy.
Miscellaneous. Pursuant to the terms of First Boston's engagement, Actava
has paid First Boston $500,000 for rendering its opinion. Actava has also agreed
to reimburse First Boston for its out-of pocket expenses, including the fees and
expenses of legal counsel and other advisors, and to indemnify First Boston and
certain related persons or entities against certain liabilities, including
liabilities under the federal securities laws, relating to or arising out of its
engagement. If First Boston's engagement had
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been terminated by either Actava or First Boston prior to the delivery of the
fairness opinion, Actava would have been required to compensate First Boston for
its reasonable fees incurred based on time spent, up to an amount of $100,000,
plus reasonable out-of-pocket expenses.
In the ordinary course of its business, First Boston and its affiliates may
actively trade the debt and equity securities of the Merging Parties for their
own account and for the accounts of customers and, accordingly, may at any time
hold a long or short position in such securities.
Methodology to Ascertain Fairness. First Boston's determination that the
Exchange Ratio, taken as a whole, is fair to the Actava Stockholders from a
financial point of view begins with an assessment of the intrinsic value of the
Surviving Corporation after the Mergers. For purposes of its opinion, First
Boston assumed the value of the Surviving Corporation to equal the sum of the
equity values of the entities comprising the Surviving Corporation. A
description of the methodologies used to determine the equity value of the
individual entities comprising the Surviving Corporation is presented below. In
deriving the value of the Surviving Corporation First Boston did not adjust for
the value of any synergies or cost savings which could be realized as a result
of the combination of Orion, MITI and Actava.
Once the intrinsic value of the Surviving Corporation was implied, the value
to be realized by the Actava Stockholders was computed. This value was based on
the aggregate value of the Surviving Corporation multiplied by the percentage of
the Surviving Corporation to be owned by the Actava Stockholders. Under the
terms of the Mergers, the Actava Stockholders will own approximately 43.6% of
the common equity of the Surviving Corporation. The intrinsic equity value range
of the Surviving Corporation was estimated to be between $405 million and $575
million or $10.06 per share and $14.28 per share.
The value to be held by the Actava Stockholders was then compared to the
intrinsic value of Actava (described below) as well as to Actava's market price
as of April 5, 1995. The range of value to be received by the Actava
Stockholders is approximately $10.06--$14.28 per Actava share. This compares to
Actava's closing price of $9.625 per share on April 5, 1995 (a premium to market
of 4%-- 48%) and to the intrinsic value of Actava prior to the Mergers of
approximately $5.67--$7.40 per Actava share (premium to the intrinsic equity
value midpoint of 31%--87%).
The assessment that the Exchange Ratio, taken as a whole, is fair to the
Actava Stockholders was based in part on a wide range of sensitivity studies in
which the values of the Surviving Corporation's constituent entities (and, as a
result, the value of the Surviving Corporation) were altered in response to
differing assumptions about the underlying businesses.
The sensitivity analyses showed that for a substantial majority of
scenarios, the value to be held by the Actava Stockholders exceeded Actava's
market value as of April 5, 1995. The value range to be held by the Actava
Stockholders following the Mergers exceeded the market price of Actava shares as
of April 5, 1995 by (17%) to 118% and the midpoint of the intrinsic equity value
range of Actava prior to the Mergers by 5%--174%.
To test the hypothesis that a premium to market equal to the premium to be
received in conjunction with the transaction may be available to the Actava
Stockholders, First Boston, prior to execution of the Initial Merger Agreement,
contacted a number of parties it believed might be interested in acquiring
Actava. At that time, none of such parties indicated an interest in pursuing an
acquisition transaction at a price at or above market.
Valuation of The Actava Group. In analyzing the value of Actava, First
Boston first derived an intrinsic asset or enterprise value for Actava's
operating asset (i.e., wholly owned Snapper) by performing (1) a discounted cash
flow analysis, (2) a comparable companies analysis and (3) a comparable
transactions analysis.
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To arrive at a total equity value of Actava, First Boston started with
Snapper's intrinsic enterprise value and then subtracted Actava's net debt.
Actava's net debt equals Actava's total consolidated debt (including debt
attributable to Snapper) plus other liabilities (such as self-insurance claims,
pension liability and other accrued liabilities) less all cash and cash-like
assets. Included in cash and cash-like assets are: cash, notes receivable,
Roadmaster stock at market value and other cash-like assets. As a result of
Actava's cash position, its net debt was approximately $17 million at the time
of the opinion. Hence, Actava's total equity value was found by subtracting $17
million from Snapper's intrinsic enterprise value.
Discounted Cash Flow Analysis
First Boston performed a discounted cash flow analysis of the projected
unlevered free cash flows of Snapper for the fiscal years ended December 31,
1995 through 2003, based upon certain operating and financial assumptions,
forecasts and other information provided by Actava management. For purposes of
such analysis, First Boston utilized a discount rate of 13% and terminal year
operating cash flow multiples of 5.0x--6.0x. The terminal value represented 70%
- -73% of Snapper's enterprise value. The discounted cash flow analysis, based on
two operating scenarios which differed in assumptions regarding growth in
working capital, resulted in an enterprise valuation reference range for Snapper
of approximately $115 million to $145 million.
Comparable Company Analysis
First Boston reviewed and compared certain actual and estimated financial,
operating and stock market information of Actava and Roadmaster and selected
companies in the lawn and garden equipment industry. Lawn and garden equipment
companies included Toro Company, Lesco Inc., Alamo Group Inc., Arctco Inc. and
Club Car Inc. (the "Comparable Lawnmower Companies"). First Boston compared
enterprise values as a multiple of projected fiscal 1995 revenues and operating
cash flow and compared equity values as a multiple of projected fiscal 1995 net
income. Specifically, the Comparable Lawnmower Companies traded at median 1995
projected revenues, operating cash flow and net income multiples of 1.0x, 7.1x
and 12.6x, respectively. First Boston derived the appropriate valuation range
for Snapper by comparing Snapper's business to those of the Comparable Lawnmower
Companies. After determining which Comparable Lawnmower Companies best matched
Snapper's business profile (specifically, those with more similar product lines
and financial performance; i.e., Toro Company, Lesco Inc. and Alamo Group),
First Boston multiplied Snapper's relevant projected operating statistics by an
appropriate range of multiples (i.e., 0.5x--0.6x 1995 projected sales,
5.5x--7.0x 1995 projected operating cash flow and 27.2x--31.2x 1995 projected
net income) based on the trading performance of the Comparable Lawnmower
Companies that best matched Snapper. This analysis resulted in an enterprise
valuation reference range for Snapper of approximately $115 million to $145
million. In the case of Roadmaster, a less-than-majority owned affiliate, First
Boston utilized Roadmaster's market valuation as of April 5, 1995 as its
benchmark.
Comparable Transaction Analysis
Using publicly available information, First Boston analyzed the purchase
prices and multiples paid in selected merger or acquisition transactions in the
lawn and garden equipment industry. Transactions in the lawn and garden
equipment industry included Club Car Inc./Clark Equipment Company, Massey
Ferguson Group/AGCO Corp., Tiger Corp./Alamo Group Inc., the Homelite Division
of Textron Inc./Deere & Company, Ever-Green Lawns Corp./Barefoot Inc., Republic
Tool & Manufacturing/The Scotts Company (the "Selected Lawnmower Transactions").
First Boston compared enterprise purchase prices as a multiple of latest
available 12 month sales and operating cash flow and compared equity purchase
prices as a multiple of net income. Specifically, the Selected Lawnmower
Transactions yielded median sales, operating cash flow and net income multiples
of 0.5x, 6.3x and 15.0x, respectively. First Boston derived the appropriate
valuation range for Snapper by comparing Snapper's business to those of the
acquired companies in the Selected Lawnmower Transactions. After
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determining which acquired company best matched Snapper's business profile and
also examining the qualitative aspects of the relevant precedent transactions,
First Boston multiplied Snapper's relevant operating statistics by an
appropriate range of multiples (i.e., 0.5x--0.6x trailing sales, 7.1x--9.0x
trailing operating cash flow) based on the valuation multiples implied by the
most comparable precedent transactions. First Boston also contacted potential
acquirers of Snapper who indicated their assessment of appropriate private
market multiples for a company similar to Snapper. These analyses indicated an
enterprise value reference range for Snapper of approximately $115 million to
$145 million.
Summary Valuation
The Comparable Company Analysis, Comparable Transaction Analysis and
Discounted Cash Flow Analysis for Snapper resulted in an aggregate enterprise
valuation range of $115 million to $145 million. After adjusting for net debt,
this analysis resulted in a total equity valuation range for Actava of
approximately $98 million to $128 million, with equity market value of $167
million (as of April 5, 1995).
Valuation of Orion and Sterling. In analyzing the value of Orion, First
Boston utilized three principal methodologies: (1) discounted cash flow
analysis, (2) comparable company analysis, and (3) comparable transaction
analysis. In arriving at an intrinsic value of Orion through these
methodologies, First Boston treated the acquisition of Sterling as a
consolidated component of Orion and incorporated the value of Sterling by
utilizing management's pro forma financial projections which include Sterling's
operations.
Discounted Cash Flow Analysis
First Boston performed a discounted cash flow analysis of the projected
unlevered free cash flows of Orion (such projected cash flows included the
activities of Sterling) for the fiscal years ended February 28, 1996 through
2000 based upon certain operating and financial assumptions, forecasts and other
information provided by the managements of Orion and Sterling.
First Boston examined two principal categories of projected cash flows: (i)
future cash flows from existing contracts and (ii) projected cash flows based on
management projections. First Boston applied different discount rates to the two
categories of projected cash flows to reflect the risk associated with attaining
the cash flows. Projected cash flows in category (i) were discounted at the cost
of debt for the contractual counterparts (i.e., 5%--8%). Projected cash flows in
category (ii) were discounted using the appropriate weighted average cost of
capital for major entertainment companies engaged in film production and
distribution and entities in the entertainment software sector, or 15% to 18%.
To arrive at the enterprise value of Orion and Sterling beyond the projected
periods, First Boston calculated terminal values for Orion and Sterling using
two methods, perpetual growth rates and multiples of EBITD, and discounted the
resultant terminal values to the present. First Boston applied perpetual growth
rates of 3% to 5% to free cash flow and terminal multiples of 6.0x to 8.0x the
projected EBITD in year 2000. The terminal value represented 55% to 60% of
Orion's enterprise value.
The results of the discounted cash flow analysis generated an intrinsic
enterprise value range for Orion and Sterling of approximately $348 million to
$399 million implying an equity value range of approximately $144 million to
$195 million.
Comparable Company Analysis
First Boston reviewed and compared certain actual and estimated financial,
operating and stock market information of Orion and selected companies in the
film production and distribution industry. The filmed entertainment companies
included: The Walt Disney Company, Time Warner, Viacom, Turner Broadcasting
Systems, The News Corporation, and Polygram (the "Comparable Filmed
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Entertainment Companies"). Orion's current public market valuation reflects the
limitations imposed through its bankruptcy reorganization which precludes any
new production of motion pictures.
First Boston's comparable company analysis was undertaken assuming
consummation of the combination of Orion and Sterling and the initiation of a
limited production schedule. First Boston compared enterprise values as a
multiple of projected 1995 revenues and operating cash flow and considered
equity values as a multiple of projected 1995 net income of the companies in
this peer category. Specifically, the Comparable Filmed Entertainment Companies
traded at median 1995 projected revenues, operating cash flow and net income
multiples of 2.1x, 11.1x and 21.8x, respectively. First Boston derived the
appropriate valuation range for the combined Orion and Sterling by comparing
Orion's/Sterling's business to those of the Comparable Filmed Entertainment
Companies. After determining which Comparable Filmed Entertainment Companies
best matched Orion's/Sterling's business profile, First Boston multiplied
Orion's/Sterling relevant operating statistics by an appropriate range of
multiples (i.e., 2.9x--3.3x 1995 projected sales and 7.4x--8.3x 1995 projected
operating cash flow) based on the trading performance of the comparable Filmed
Entertainment Companies that best matched Orion/Sterling. This analysis resulted
in an intrinsic enterprise value of Orion and Sterling of approximately $355
million to $397 million or an equity value range of approximately $151 million
to $194 million. First Boston utilized Orion's/Sterling's current market equity
value, $116 million (as of April 5, 1995), as its lower valuation boundary on
the comparable company valuation.
Comparable Transaction Analysis
Utilizing publicly available information, First Boston evaluated a series of
transactions involving companies in the film production and distribution
industry by considering the prices paid for the target companies and the implied
multiples of historical revenues, operating cash flow and net income. First
Boston's comparable transaction analysis was undertaken assuming consummation of
the combination of Orion and Sterling and the initiation of a limited production
schedule. Transactions considered include: RHI Entertainment / Hallmark Cards,
Blockbuster Entertainment / Viacom, New World Entertainment / New World
Communications Group, Four Star Production & Genesis Entertainment / New World
Communications Group, Paramount Communications / Viacom, Republic Pictures /
Spelling Entertainment, New Line Cinema / Turner Broadcasting, Castle Rock
Entertainment / Turner Broadcasting, Time Warner Entertainment L.P. / US WEST,
Spelling Entertainment / Blockbuster Entertainment, TVS Entertainment /
International Family Entertainment, Time Warner Entertainment L.P. / ITOCHU
Corporation and Toshiba Corporation, Hanna-Barbera Productions / Turner
Broadcasting, and MCA / Matsushita Electric Company (the "Selected Filmed
Entertainment Transactions"). Specifically, the Selected Filmed Entertainment
Transactions yielded median sales, operating cash flow and net income multiples
of 1.9x, 14.3x and 31.5x, respectively. First Boston derived the appropriate
valuation range for Orion/Sterling by comparing Orion's/Sterling's business to
those of the acquired companies in the Selected Filmed Entertainment
Transactions. After determining which acquired company best matched
Orion's/Sterling's business profile and also examining the qualitative aspects
of the relevant precedent transactions, First Boston multiplied
Orion's/Sterling's relevant operating statistics by an appropriate range of
multiples (i.e., 2.0x--2.5x trailing sales and 9.0x--11.0x trailing operating
cash flow) based on the valuation multiples implied by the most comparable
precedent transactions. This analysis produced an intrinsic enterprise value
range for Orion and Sterling of approximately $376 million to $460 million
implying an equity value range (after deducting net debt) of approximately $172
million to $256 million.
Valuation of MITI. In analyzing the value of MITI, First Boston utilized
three principal methodologies: (1) discounted cash flow analysis, (2) comparable
company analysis, and (3) comparable transaction analysis. First Boston
attributed more weight to the discounted cash flow analysis than the other two
analyses in connection with the valuation of MITI. Because MITI's assets are
principally investments in joint ventures, First Boston's analysis focused on
the value of those ventures. While management's projections for MITI treat the
ventures as equity investments and consolidate the
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performance of the ventures using the equity method for accounting purposes, the
aggregation of MITI's pro rata share of the enterprise values and equity values
for each joint venture, less consolidated unallocated net debt of the ventures,
was the basis upon which First Boston valued MITI.
For each of the three methodologies employed, First Boston categorized
MITI's ventures into three groups: Operational ventures include those currently
offering service to customers; Pre-operational ventures include ventures under
construction and expected to be offering service in the coming six to nine
months; Prospective ventures include those in an early stage of development.
Discounted Cash Flow Analysis
First Boston performed a discounted cash flow analysis of the projected
unlevered free cash flows of each of MITI's ventures for the projected years
1995 through 1999 based upon certain operating and financial assumptions,
forecasts and other information provided by management. First Boston applied
discount rates of 20% to 23% and determined terminal values utilizing both
multiples of terminal year EBITDA (6x--7x) as well as perpetual growth rates
(5%--9%) applied to year 5 unlevered free cash flow. MITI's terminal value
represented 70%--80% of the Operational ventures' enterprise value and all of
the enterprise value from the Pre-operational and Prospective ventures.
Operational ventures, however, account for approximately 80% of MITI's equity
value on average. In summary the discounted cash flow analysis resulted in a
consolidated intrinsic enterprise valuation range of $223 million to $273
million, implying an equity value (after deducting consolidated net debt) of
approximately $163 million to $213 million.
Comparable Company Analysis
First Boston reviewed and compared certain actual and estimated financial,
operating and stock market information of selected companies in the five
different segments where MITI's joint ventures serve customers currently or
intend to do so in the future. These businesses are wireless cable television,
radio broadcasting, radio paging, fixed-wireless telephony, and international
long distance telephony.
In establishing the values of MITI's joint ventures in the wireless cable
television sector, First Boston assessed the public market trading valuation
multiples of: American Telecasting Inc., Cablemaxx Inc., Heartland Wireless
Communications Inc., and People's Choice TV Corporation. Publicly traded
wireless cable companies remain in an early development stage and, as such,
First Boston utilized the median multiple of projected 1995 revenues of the peer
group (i.e., 4.5x) and applied these to the projected 1995 (or present value of
1996 and 1999) revenues of MITI's wireless cable television ventures in order to
develop an enterprise value for each venture.
In establishing the values of MITI's joint ventures in the radio paging
sector, First Boston considered the public market trading values of: American
Paging, A+ Communications, Arch Communications Group, Metrocall Inc., MTEL, Page
America Group, Paging Network, ProNet and USA Mobile Communications. First
Boston utilized the median multiples typically applied in public market
valuations of companies in this sector in arriving at values for MITI's paging
ventures, namely multiples of 2.5x projected 1995 revenues and 10.0x projected
operating cash flow and applied the respective multiples to the projected 1995
(or present value of 1996 and 1999) operating cash flow of MITI's radio paging
ventures in order to develop an enterprise value for each venture.
In establishing the values of MITI's joint ventures in the radio
broadcasting sector, First Boston assessed the public market trading valuation
multiples of: Clear Channel Communications, Infinity Broadcasting, Saga
Communications, Evergreen Media, EZ Communications, Broadcasting Partners, SFX
Broadcasting, Jacor Communications, Emmis Broadcasting, Heftel Broadcasting, and
Paxson Communications. First Boston utilized the median multiple of projected
1995 operating cash flow of the peer group (i.e., 8.5x) and the median multiple
of projected 1995 revenues of the peer group (i.e., 3.0x) and applied it to the
projected 1995 (or present value of 1996 and 1999) operating cash flow and
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revenues, respectively, of MITI's radio broadcasting ventures in order to
develop an enterprise value for each venture.
In establishing the values of MITI's joint ventures in the fixed-wireless
telephony sector, First Boston assessed the public market trading valuation
multiples of companies engaged in providing local loop telephone services. Since
MITI's ventures are typically on a municipal or sub-regional scale, First Boston
focused on the following companies which offer local loop (wired and wireless)
services: ALLTEL, Century Telephone Enterprises, Cincinnati Bell, C-TEC, Lincoln
Telecommunications, Frontier Corporation (formerly RochesterTel), Southern New
England Telecommunications, Telephone & Data Systems, and Pacific Telecom. First
Boston utilized the median multiple of projected 1995 revenues of the peer group
(i.e., 2.0x) and applied it to the projected 1995 (or present value of 1996 and
1999) revenues of MITI's fixed-wireless telephony ventures in order to develop
an enterprise value for each venture.
In establishing the values of MITI's joint ventures in the international
long distance telephony sector (Geocom), First Boston assessed the public market
trading values of companies engaged in long distance services in Russia
including: Petersburg Long Distance and Rostelcom. First Boston utilized the
median multiple of projected 1995 revenues of the peer group (i.e., 3.0x) and
the median multiple of projected 1995 operating cash flow of the peer group
(i.e. 5.0x) and applied it to the projected 1995 (or present value of 1996 and
1999), operating cash flow of the Geocom venture in order to derive an
enterprise value for the venture.
The comparable company analysis resulted in a MITI reference enterprise
valuation range of $225 million to $240 million and an equity valuation range of
$165 million to $180 million.
Comparable Transaction Analysis
Utilizing publicly available information, First Boston evaluated a series of
transactions involving companies in the wireless cable television, radio
broadcasting, radio paging, fixed-wireless telephony, and international long
distance telephony sectors by considering the prices paid for the target
companies and the implied multiples of historical revenues, operating cash flow,
operating income and net income, and units in service (subscribers). First
Boston's comparable transaction analysis determined the potential intrinsic
enterprise value of each venture by multiplying the appropriate multiples for
each respective industry sector by MITI's relevant operating statistics in order
to derive an enterprise value for each venture.
Recent transactions considered in determining appropriate valuation
multiples for the wireless cable industry included: Microband Wireless Cable /
CAI Wireless Systems, Peoples Cable / American Telecasting, Antenna Vision /
American Telecasting, Microband Wireless Cable / HB Communications, Freson
Wireless Cable / American Telecasting, MetroTen & MetSat / ACS Enterprises,
Family Entertainment Network and Wireless Entertainment Network / American
Telecasting. The relevant median valuation statistics for the peer group were
5.5x sales for the last twelve months and $1,700 per subscriber.
Recent transactions considered in determining appropriate multiples for the
radio paging industry included numerous transactions which are currently pending
regulatory approval but which are expected to close including: PageAmerica
(Florida & California systems) / Paging Network, Dial-A-Page / Teletouch
Communications, Dial Page (paging operations) / MobileMedia Communications,
International Paging Corp. / ProNet, Beepers Plus / Teletouch Communications,
Beta Tele-Page / Arch Communications, Data Transmission / Arch Communications,
SNET Paging / Paging Network, PCI / USA Mobile, Metropolitan Houston Paging /
ProNet, Carrier Paging / ProNet, SigNet Paging / ProNet, Beeper Company of
America / Arch Communications, Groom Enterprises / Arch Communications, United
States Paging Corp. / MTEL, Skytel Corp. / MTEL, Becker Beeper / Arch
Communications, ComTech / Paging Network, All City Paging / ProNet, Premier Page
/ USA Mobile, All City
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Paging / Metrocall, FirstPAGE / Metrocall, Chicago Communications Services /
ProNet and Radio Call Company / ProNet. The relevant median valuation multiple
for the peer group was 9.5x operating cash flow for the last twelve months.
Recent transactions considered in determining appropriate multiples for the
radio broadcasting industry included: WXRT, WSCR / Group W Radio, Trumper
Communications (KKCW) / Citicasters, BPI Communications / Evergreen Media,
Sconnix Broadcasting (KFKF) and Noble Broadcasting (KBEQ) / EZ Communications,
Alta Gulf (WGUL) / Citicasters, US Radio (KKZR) / Salem Communications, Albimar
Communications (WKYS) / Radio One, Noble Broadcasting (KMJQ, KYOR) / Clear
Channel, TK Communications (KLUV) / Infinity Broadcasting, EZ Communications
(WTPX) / New Age Broadcasting. The relevant median valuation multiple for the
peer group was 10.5x operating cash flow for the last twelve months.
Recent transactions considered in determining appropriate multiples for the
telephony ventures included transactions involving the sale of long distance and
fixed local access lines on a local or regional scale including: US WEST /
Pacific Telecom, ALLTEL / Citizens Utilities, Alascom (Pacific Telecom) / AT&T
and IDB Communications / LDDS Metromedia. The relevant median valuation multiple
for the peer group was 2.0x sales for the last twelve months.
The comparable transaction analysis resulted in an enterprise valuation
range of $250 million to $280 million and an equity valuation range of $190
million of $220 million for MITI's stake in the respective ventures.
MITI
General. GKM was retained by MITI to render an opinion to the Board of
Directors of MITI as to the fairness, from a financial point of view, to the
MITI Stockholders of the consideration to be received by the MITI Stockholders
in the MITI Merger.
On April 12, 1995, GKM delivered its oral opinion (the "GKM Opinion") to the
Board of Directors of MITI to the effect that, as of April 12, 1995, based upon
the assumptions made, matters considered and limits of review as set forth in
such opinion, the consideration to be received by the MITI Stockholders in the
MITI Merger is fair to the holders of MITI Common Stock from a financial point
of view. GKM subsequently confirmed the GKM Opinion by delivery of its written
opinion dated the date of this Joint Proxy Statement/Prospectus (the "GKM Proxy
Opinion"). In arriving at the GKM Proxy Opinion, GKM updated, to the extent it
deemed necessary, the analyses used to render the GKM Opinion, which analyses
are more fully described below.
A COPY OF THE GKM PROXY OPINION DATED THE DATE OF THIS JOINT PROXY
STATEMENT/PROSPECTUS, WHICH INCLUDES THE ASSUMPTIONS MADE, MATTERS CONSIDERED
AND CERTAIN LIMITATIONS ON THE SCOPE OF REVIEW, IS ATTACHED TO THIS JOINT PROXY
STATEMENT/PROSPECTUS AS APPENDIX D. MITI STOCKHOLDERS ARE URGED TO READ THE GKM
PROXY OPINION IN ITS ENTIRETY. THE GKM PROXY OPINION IS DIRECTED ONLY AS TO THE
FAIRNESS FROM A FINANCIAL POINT OF VIEW OF THE CONSIDERATION TO BE RECEIVED BY
THE HOLDERS OF THE MITI COMMON STOCK IN THE MITI MERGER AND DOES NOT CONSTITUTE
A RECOMMENDATION TO ANY MITI STOCKHOLDER AS TO HOW SUCH STOCKHOLDER SHOULD VOTE.
IN RENDERING ITS OPINION, GKM HAS ASSUMED, AS INSTRUCTED BY MITI, THAT THE
AGGREGATE VALUE OF CONSIDERATION TO BE RECEIVED BY THE MITI STOCKHOLDERS
PURSUANT TO THE MITI MERGER IS $100 MILLION. GKM'S ASSUMPTION WITH RESPECT TO
THE VALUE OF THE CONSIDERATION IS BASED ON THE FORMULA SET FORTH IN THE MERGER
AGREEMENT WHICH PROVIDES THAT THE MITI EXCHANGE RATIO WILL VARY BASED ON THE
ACTAVA AVERAGE CLOSING PRICE OF THE COMMON STOCK SUCH THAT THE AGGREGATE MARKET
VALUE OF THE COMMON STOCK TO BE ISSUED TO THE MITI STOCKHOLDERS IN CONNECTION
WITH THE MITI MERGER SHALL BE NOT LESS THAN $100 MILLION. THE SUMMARY OF GKM'S
OPINION SET FORTH IN THIS JOINT PROXY STATEMENT/ PROSPECTUS IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO THE FULL TEXT OF THE GKM PROXY OPINION.
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In arriving at its opinion, GKM, among other things: (i) reviewed certain
internal business, operating and financial information, including financial
forecasts, furnished to GKM by MITI, (ii) discussed the past and current
operations and financial condition and the prospects of MITI with members of
senior management of MITI, (iii) compared the financial performance of MITI with
that of certain comparable publicly traded companies, (iv) reviewed the
financial terms, to the extent publicly available, of certain comparable
acquisition transactions, (v) reviewed the Merger Agreement, drafts of the Joint
Proxy Statement/Prospectus, certain other documents related to the Mergers and
MITI's arrangements with its joint venture partners and (vi) conducted such
other analyses, performed such other investigations and considered such other
matters as GKM deemed necessary to arrive at its opinion, including, but not
limited to, GKM's assessment of general economic, market and monetary conditions
in the United States and, in particular, in those foreign countries in which
MITI operates, in light of the political, economic and social risks associated
with foreign investments.
In addition, GKM relied upon and assumed, without independent verification,
the accuracy and completeness of all financial and other information supplied or
otherwise made available to it by MITI and relied upon the assurances of the
management of MITI that all financial information and financial forecasts
provided to GKM by MITI were reasonably prepared on a basis which reflected the
best currently available estimates and judgment of the management of MITI as to
the financial performance and expected future operating and financial
performance of MITI. GKM did not independently verify such information or
assumptions, conduct a physical inspection of the properties or facilities of
MITI or undertake an independent appraisal or evaluation of the assets or
liabilities of MITI. As instructed by MITI, GKM did not independently
investigate or value Actava, Orion, Sterling, any of the surviving corporations
of the Mergers, the consideration to be received by the MITI Stockholders in the
MITI Merger or the Common Stock, and express no opinion concerning the values
thereof. GKM was not requested to, and did not, solicit third party indications
of interest in acquiring all or any part of MITI. GKM expressed no opinion as to
what the value of Common Stock actually will be when issued to MITI Stockholders
pursuant to the MITI Merger or the price at which the Common Stock will trade at
any time in the future.
The GKM Proxy Opinion does not present a discussion of the relative merits
of the MITI Merger as compared to any other business plan or opportunity that
might be presented to MITI, or the effect of any other arrangement in which MITI
might engage.
In arriving at the GKM Opinion and making its presentation to the Board of
Directors of MITI at the meeting held on April 12, 1995, GKM considered and
discussed certain financial analyses and other factors, including, but not
limited to: (i) comparable public company analysis, (ii) selected comparable
transaction analysis, and (iii) discounted cash flow analysis. MITI's assets are
principally investments in joint ventures, consequently, MITI's pro-rata share
of the enterprise values for each joint venture, less consolidated net debt of
the ventures, was the basis upon which GKM valued MITI. For each of the
methodologies employed, upon consultation with MITI senior management, GKM
categorized MITI's ventures into three groups: (i) operating ventures, which
include those currently providing service to customers, (ii) pre-operating
ventures, which include those with required licenses and joint venture partners,
which ventures expect to provide service to customers in the next twelve months,
and (iii) prospective ventures, which include those in the early stages of
development which still need to obtain required licenses and/or reach agreement
with a joint venture partner.
In connection with its presentation, GKM performed a variety of financial
and comparative analyses, the material portions of which are summarized below.
Comparable Public Company Analysis. GKM reviewed and compared certain actual
and estimated financial and operating information of selected companies in the
five different industry segments in which MITI operates or plans to operate:
wireless cable, radio paging, radio broadcasting, international long distance
telephony, and fixed wireless telephony.
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In calculating a range of values of MITI's wireless cable ventures, GKM
compared certain publicly available information of: ACS Enterprises, Inc.,
American Telecasting Inc., CAI Wireless Systems, Inc., Cablemaxx Inc., Heartland
Wireless Communications Inc., People's Choice TV Corp. and Preferred
Entertainment Inc. (the "Wireless Cable Comparables"). Given that the industry
is still in its early development stage, GKM applied the median ratio of the
Wireless Cable Comparables' enterprise value (defined to be the market value of
common stock plus the liquidation value of preferred stock plus total debt and
minority interests less cash, cash equivalents and marketable securities) to
last twelve months ("LTM") revenues and projected 1995 revenues to LTM revenues
and projected 1995 revenues (or the present value of 1996 revenues) of MITI's
wireless cable ventures. For the Wireless Cable Comparables, the median
enterprise value to LTM revenues multiple was 23.2x and the median enterprise
value to projected 1995 revenues multiple was 9.9x.
GKM also compared the per POP value of the Wireless Cable Comparables with
that of MITI. "Per POP value" is defined as a quotient where the dividend (X) is
(A) the "adjusted enterprise value" (defined to be equity market capitalization
plus net debt adjusted for unbuilt headends and non-utilized wireless cable
channel rights for non-operating markets) minus (B) the value of existing
subscribers ("Existing Subscriber Value," defined as (a) the number of existing
subscribers at the time of the acquisition multiplied by (b) the theoretical
purchase price of $1,500 per subscriber), and the divisor (Y) is the number of
Net Line-of-Sight Households purchased (which term shall be defined as (i) the
gross number of households purchased minus (ii) the number of subscribers at the
time of the acquisition divided by 20% (to account for a maximum penetration
rate of 20% for wireless cable services)). The median per POP value for the
Wireless Cable Comparables was $25.92.
In calculating a range of values for MITI's radio paging ventures, GKM
compared certain publicly available information of: A+ Communications Inc.,
American Paging Inc., Arch Communications Group, Metrocall Inc., Mobile
Telecommunications Technologies, Page America Group, Paging Partners Corp.,
Paging Network Inc., ProNet Inc., and USA Communications Holdings (the "Paging
Comparables"). GKM applied the median ratio of the Paging Comparables'
enterprise value to LTM revenues, projected 1995 revenues, projected 1995
EBITDA, and the Paging Comparables' enterprise value per subscriber to LTM
revenues, projected 1995 revenues (or present value of 1996 revenues), projected
1995 EBITDA, and current and projected subscriber levels, respectively, of
MITI's radio paging ventures. For the Paging Comparables, the median enterprise
value to LTM revenues multiple was 3.8x, the median enterprise value to
projected 1995 revenues multiple was 2.3x, the median enterprise value to
projected 1995 EBITDA multiple was 9.6x, and the median enterprise value per
subscriber was approximately $359.
In calculating a range of values for MITI's radio broadcasting ventures, GKM
compared publicly available information of: Broadcasting Partners, Clear Channel
Communications, Emmis Broadcasting Corp., Evergreen Media Corp., EZ
Communications Inc., Heftel Broadcasting, Infinity Broadcasting, Jacor
Communications, Paxon Communications Corp., Saga Communications, and SFX
Broadcasting Inc. (the "Radio Comparables"). GKM applied the median ratio of the
Radio Comparables' enterprise value to LTM revenues, projected 1995 revenues,
LTM EBITDA and projected 1995 EBITDA to LTM revenues, projected 1995 revenues
(or present value of 1996 revenues), LTM EBITDA and projected 1995 EBITDA,
respectively, of MITI's radio broadcasting ventures. For the Radio Comparables,
the median enterprise value to LTM revenues multiple was 4.6x, the median
enterprise value to projected 1995 revenues multiple was 3.7x, the median
enterprise value to LTM EBITDA multiple was 16.0x and the median enterprise
value to projected 1995 EBITDA multiple was 13.5x.
In calculating a range of values for MITI's international long distance
telephony venture, GKM compared publicly available information of Petersburg
Long Distance Inc. ("Petersburg"). GKM applied Petersburg's enterprise value to
LTM revenues, projected 1995 revenues, LTM EBITDA and projected 1995 EBITDA to
LTM revenues, projected 1995 revenues (or present value of 1996 revenues), LTM
EBITDA and projected 1995 EBITDA of MITI's international long distance telephony
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venture. Petersburg's enterprise value to LTM revenues multiple was 18.2x,
enterprise value to projected 1995 revenues multiple was 5.2x, and all other
ratios examined were negative and therefore not meaningful.
In calculating a range of values for MITI's fixed-wireless telephony
ventures, GKM compared publicly available information of: Alltel Corp., C-Tec
Corp., Century Telephone Enterprises, Cincinnati Bell Inc., Frontier Corp.,
Lincoln Telecommunications, Pacific Telecom Inc., Southern New England
Telecommunications, and Telephone Data Systems (the "Telephony Comparables").
GKM applied the median ratio of the Telephony Comparables' enterprise value to
LTM revenues, projected 1995 revenues, LTM EBITDA and projected 1995 EBITDA to
LTM revenues, projected 1995 revenues (or present value of 1996 revenues), LTM
EBITDA and projected 1995 EBITDA of MITI's fixed-wireless telephony ventures.
For the Telephony Comparables, the median enterprise value to LTM revenues
multiple was 2.3x, the median enterprise value to projected 1995 revenues
multiple was 2.1x, the median enterprise value to LTM EBITDA multiple was 9.4x
and the median enterprise value to projected 1995 EBITDA multiple was 8.1x.
The comparable public company analysis implied an equity valuation reference
range for MITI of approximately $36 million to $150 million.
Selected Comparable Transaction Analysis. GKM reviewed certain publicly
available information from a series of transactions in the wireless cable, radio
broadcasting, radio paging, international long distance telephony and
fixed-wireless telephony sectors. In reviewing these transactions GKM considered
the prices paid for the target companies and the implied multiples of historical
sales, operating income and net income, except in the wireless cable sector
where GKM considered the price paid per POP for the targeted properties.
Additionally, in the radio paging sector, GKM examined the values paid per
subscriber in the various transactions.
GKM compared the "per POP value" of comparable precedent transactions in the
wireless cable industry, where per POP value is defined as a quotient where the
dividend (X) is (A) the "adjusted aggregate purchase price" (defined to be the
total acquisition consideration in the form of cash, securities and the
assumption of existing debt adjusted for unbuilt headends and non-utilized
wireless cable channel rights for non-operating markets) minus (B) the Existing
Subscriber Value, and the divisor (Y) is the number of Net Line-of-Sight
Households purchased.
In determining the appropriate per POP values for the wireless cable
industry, GKM considered 20 transactions, some of which are currently pending,
but which are expected to close. These transactions include: CAI Wireless
Systems, Inc./ACS Enterprises, Inc., CAI Wireless Systems, Inc./Microband
Companies Inc., American Telecasting Inc./Multimedia Cablevision, CC Rural
Acquisition/Rural Vision South and Rural Vision Central Inc., People's Choice TV
Corp./Preferred Entertainment Inc., American Telecasting Inc./Central Vision
Inc., ACS Enterprises, Inc./Valley Wireless Cable and Wireless Holdings
Inc./Gulf American Cable Group (the "Wireless Cable Transactions"). The median
per POP value for the Wireless Cable Transactions was $22.70.
In determining the appropriate valuation multiples for the radio
broadcasting industry, GKM considered 20 transactions, some of which are
currently pending, but which are expected to close. These transactions included:
WIBC-AM, WKLR-FM (Horizon)/Emmis Broadcasting, Chiltern Radio P.L.C./G.W.R.
Group P.L.C., Wesgo/Sunshine Broadcasting, Heftel Broadcasting/Grupo Radio
Centro SA, Austero/Associated Newspapers Ltd., Broadcasting Partners/Evergreen
Media Corp., Telemundo Group/Nugget Partners, and SFX Broadcasting/Chancellor
Holdings Corp. (the "Radio Transactions"). For the Radio Transactions, the
median "transaction value" (defined to be the offer price per share multiplied
by the sum of the number of shares outstanding and the number of exercisable
options outstanding plus the liquidation value of preferred stock plus total
debt and minority interests less cash, cash equivalents and proceeds received
upon exercise of options) to LTM revenues
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<PAGE>
multiple was 2.4x, the median transaction value to LTM operating income multiple
was 11.8x and the median transaction value to LTM net income multiple was 33.3x.
In determining the appropriate valuation multiples for the radio paging
industry, GKM considered 23 transactions, some of which are currently pending,
but which are expected to close. These transactions included: Page
America/Paging Network, Dial-A-Page/Teletouch Communications, Dial-
Page/MobileMedia, International Paging Corp./Paging Network, Beta Telepage/Arch
Communications, Data Transmission Inc./Arch Communications, Professional Paging
and Radio Inc./Arch Communications, PCI/USA Mobile Communications, and SNET
Paging/Paging Network (the "Paging Transactions"). For the Paging Transactions,
the median transaction value to LTM revenues multiple was 2.2x, the median
transaction value per subscriber was approximately $380 and the median
transaction value to LTM operating income multiple and LTM net income multiple
were not available.
In determining the appropriate valuation multiples for the fixed wireless
telephony industry, GKM considered 3 transactions, some of which are currently
pending, but which are expected to close. These transactions are: Avante-Garde
Telecommunications/WinStar Communications, FiberNet of Cincinnati/Intermedia
Communications, and Mtel Digital Services/Intelcom Group (the "Telephony
Transactions"). For the Telephony Transactions, the transaction value to LTM
revenues, LTM operating income and LTM net income multiples were not available.
In determining the appropriate valuation of multiples for the long distance
telephony industry, GKM considered 8 transactions, some of which are currently
pending, but which are expected to close. These transactions include: Long
Distance Network/SA Holdings, People's Telephone/IDB Communications, IDB
Communications/LDDS Communications, WCT Communications/Rochester Telephone,
Empresas Nacional de Telecom/Samsung Electronics and Telefonos de Mexico
S.A./Grupo Carso SA (the "Long Distance Telephony Transactions"). For the Long
Distance Telephony Transactions, the median transaction value to LTM revenues
multiple was 1.6x, the median transaction value to LTM operating income multiple
was 7.0x and the median transaction value to LTM net income multiple was 16.7x.
The selected comparable transaction analysis implied an equity valuation
reference range for MITI of approximately $46 million to $64 million.
Discounted Cash Flow Analysis. GKM performed a discounted cash flow analysis
of each of MITI's ventures for the projected years 1995 through 1999 based upon
certain operating and financial assumptions, financial projections and other
information provided by management. Utilizing these projections, GKM calculated
a range of implied values based upon the discounted net present value of the sum
of (i) the projected stream of unlevered free cash flows to the year 1999, and
(ii) the projected terminal value of MITI at such year based upon (a) a range of
multiples of projected EBITDA in 1999, and (b) perpetual growth rates applied to
1999 unlevered free cash flow, less (iii) net debt (debt less cash & cash
equivalents). In addition, GKM's experience in accessing capital for private and
publicly held wireless cable companies, combined with the economic and political
risks inherent in investing in countries that were formerly part of, or
dominated by, the Soviet Union, resulted in relatively high cost of capital
assumptions (ranging from 30% to 45%) in the discounted cash flow analysis.
Furthermore, GKM applied several multiples of EBITDA (ranging from 5.0x to 6.0x)
and perpetual growth rates (ranging from 5% to 9%).
This methodology implied an equity valuation reference range for MITI of
approximately $64 million to $200 million.
Summary. In arriving at its opinion, GKM performed a variety of financial
analyses, the material portions of which are summarized above. The foregoing,
however, does not purport to be a complete description of the analyses performed
by GKM. Although the comparable public company, selected comparable transaction
and discounted cash flow analyses imply equity valuation reference ranges of
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<PAGE>
approximately $36 million to $200 million for MITI, GKM believes that its
analyses must be considered as a whole and that selecting portions of its
analyses, or portions of the factors considered by it, without considering all
such factors and analyses, could create a misleading view of the process
underlying the analyses set forth in its opinion.
The matters considered by GKM in arriving at its opinion that, as of the
date of such opinion, the consideration to be received by the MITI Stockholders
in the MITI Merger is fair to the holders of MITI Common Stock from a financial
point of view, are based on numerous macroeconomic, operating and financial
assumptions, with respect to industry performance, general business and economic
conditions and other matters, many of which are beyond MITI's control. In
particular, the volatility of the valuation ranges derived from the
methodologies discussed herein result from the economic, regulatory and
political risks and uncertainties inherent in both the business sectors and
countries in which MITI operates. GKM considered that these risks and
uncertainties could have a negative impact on the value of the MITI Common
Stock. GKM did not, however, quantify such negative impact. GKM also considered
that the MITI Common Stock is privately held, that MITI has a majority
stockholder and that such facts could have a further negative impact on the
value of the remaining outstanding shares of MITI Common Stock.
Any estimates incorporated in the analyses performed by GKM are not
necessarily indicative of actual past or future results or values, which may be
significantly more or less favorable than such estimates. Estimated values do
not purport to be appraisals and do not necessarily reflect the prices at which
businesses or companies may be sold in the future, and such estimates are
inherently subject to uncertainty. Arriving at a fairness opinion is a complex
process not necessarily susceptible to partial or summary description. No public
company utilized as a comparison is identical to MITI or the business segments
for which a comparison is being made and none of the acquisition comparables or
other business combinations utilized as comparison is identical to the MITI
Merger. Accordingly, an analysis of publicly traded comparable companies and
comparable business combinations is not mathematical; rather it involves complex
considerations and judgments concerning differences in financial and operating
characteristics of the comparable companies and other factors that could affect
the public trading value of the comparable company or companies to which they
are being compared.
The Board of Directors of MITI selected GKM to render a fairness opinion
because of GKM's substantial experience in wireless communications transactions
and because GKM has had prior discussions with MITI about financing
opportunities and was familiar with MITI's business. GKM provided investment
banking services to the bondholders of Orion in 1990 and 1991, for which it
received customary compensation. An executive officer of GKM was employed by an
affiliate of MITI for two years ending in 1990. As part of its investment
banking business, GKM is continually engaged in the valuation of businesses and
their securities in connection with: (i) mergers and acquisitions, (ii)
negotiated underwritings, (iii) secondary distributions of listed and
over-the-counter securities, (iv) private placements and (v) valuations for
corporate and other purposes.
Miscellaneous. MITI has agreed to pay GKM a retainer fee of $25,000,
$150,000 for delivery of the GKM Opinion and an additional fee of $25,000 for
the GKM Proxy Opinion and any additional or updated opinion (whether oral and/or
written, as requested by MITI). MITI has also agreed to reimburse GKM for its
reasonable out-of-pocket expenses, including the reasonable fees and expenses of
its legal counsel, and to indemnify GKM and certain related persons against
certain liabilities in connection with its engagement, including certain
liabilities under the federal securities laws.
In the ordinary course of its business, GKM may actively trade the
securities of the Orion, Actava, Sterling or MITI for its own account and for
the accounts of customers and, accordingly, may at any time hold a long or short
position in such securities.
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Sterling
General. On April 11, 1995 Houlihan Lokey delivered its oral opinion to the
Board of Directors of Sterling to the effect that, as of such date, and based
upon the investigations, premises, provisos and analyses set forth in such
opinion, the value of the consideration to be paid to the Sterling Stockholders
in the Sterling Merger is fair, on an absolute basis, from a financial point of
view to the Sterling Stockholders.
The full text of Houlihan Lokey's opinion, dated the date of this Joint
Proxy Statement/Prospectus is attached as Appendix E to this Joint Proxy
Statement/Prospectus. Sterling Stockholders are urged to read the opinion in its
entirety for the assumptions made, matters considered and limits of the review
undertaken by Houlihan Lokey. Houlihan Lokey's opinion is directed only to the
fairness from a financial point of view and does not constitute a recommendation
to any stockholder of Sterling as to how such stockholder should vote such
stockholders' shares of Sterling Common Stock. The summary of the opinion set
forth in this Joint Proxy Statement/Prospectus is qualified in its entirety by
reference to the full text of such opinion.
In arriving at its opinion, Houlihan Lokey (i) had discussions with certain
members of the senior management of Sterling regarding the operations, financial
condition, future prospects and projected operations and performance of
Sterling; (ii) reviewed forecasts and projections prepared by Orion, Actava,
MITI and Sterling management; (iii) reviewed the historical market prices and
trading volume for Orion's and Actava's publicly traded securities; (iv)
reviewed certain other publicly available financial data for certain companies
that it deemed comparable to Orion, Actava, MITI and Sterling; (v) reviewed
copies of the Merger Agreement and a draft dated April 6, 1994 of this Joint
Proxy Statement/Prospectus; and (vi) conducted such other studies, analyses and
inquiries as it deemed appropriate.
Houlihan Lokey relied upon and assumed, without independent verification,
that the financial forecasts and projections provided to it have been reasonably
prepared and reflect the best currently available estimates of the future
financial results and condition of Orion, Actava, MITI and Sterling. In
addition, Houlihan Lokey did not independently verify the accuracy and
completeness of the information supplied to it with respect to Orion, Actava,
MITI and Sterling and did not assume any responsibility with respect to it. In
connection with its review, Houlihan Lokey did not make any physical inspection
or independent appraisal of any of the properties or assets of Orion, Actava,
MITI and Sterling.
In arriving at its opinion, Houlihan Lokey also made the following key
assumptions:
1) It assumed that the market price of Orion of $191,380,000 (based upon
its 20-day average closing price as of September 20, 1995) is a
reasonable estimate for its fair market value as of that date;
2) It assumed that the market price of Actava of $287,454,000 (based upon
its 20-day average closing price as of September 20, 1995) is a
reasonable estimate for its fair market value as of that date;
3) It assumed that the fair market value of MITI is reasonably stated by
the amount implied by its share exchange ratio of $100,000,000;
4) It assumed that the minimum stated value of Sterling for purposes of
calculating the Sterling Exchange Ratio with respect to the Mergers is
$6,000,000; and
5) It assumed that the refinancing of the Orion debt will not have a
negative impact on the public stockholders of Sterling.
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In arriving at its opinion that the consideration to be paid to the Sterling
Stockholders in the Sterling Merger is fair from a financial point of view to
the Sterling Stockholders, Houlihan Lokey conducted various analyses supporting
a valuation of Sterling and then compared that valuation to the consideration
being received by the Sterling Stockholders in the Sterling Merger. In arriving
at its opinion, Houlihan Lokey determined the relative values on a marketable
minority interest basis, that is the value to a minority stockholder (a
stockholder owning less than 50 percent of all of the issued and outstanding
shares of the entity being valued) without applying a discount for illiquidity.
In the analysis of Sterling, Houlihan Lokey took into account the income-
and cash-generating capability of Sterling. Typically, an investor
contemplating an investment in companies with income-and cash-generating
capability similar to Sterling would evaluate the risks and returns of his
investment on a going-concern basis. Accordingly, the value of Sterling was
analyzed primarily on the basis of a market multiple analysis and a discounted
cash flow analysis. Both the market multiple analysis and the discounted cash
flow analysis yield indications of value for the total invested capital
("TIC") of the business. The value of interest-bearing debt (which for
Sterling is $495,000) must be subtracted from TIC to yield the value of the
equity.
Market Multiple Analysis. The fundamental concept underlying the market
multiple analysis is that an investor should earn a fair and reasonable return
on the investment at the concluded value. Market multiples applied to various
earnings or revenues levels should reflect all risks of ownership and the
associated risks of realizing income generated by the company. To assist in the
selection of market multiples to apply to Sterling's earnings and revenues,
similar investment opportunities were analyzed in terms of market price and the
current levels of earnings before interest and taxes ("EBIT") and revenues, and
were compared with Sterling on the basis of investment risk. In the case of
businesses such as Sterling, similar investment opportunities can usually be
found in the national securities markets or the over-the-counter market. Firms
engaged in the same or similar businesses, whose securities are actively traded,
were selected for comparative purposes, and their price/EBIT and price/revenue
ratios, or market multiples, were used as a guide in selecting the appropriate
market multiples for Sterling.
A risk analysis compared the companies in terms of size, diversity of
operations, products and services, financial strength, profitability, growth and
other factors recognized as key indicators of risk. It is advantageous to obtain
a representative list of publicly traded companies that are similar to Sterling
in those respects carrying the greatest weight with the investing public.
However, from an investment standpoint, companies may be quite similar, even
though engaged in a rather broad variety of operations. Primarily, they should
offer financial and economic similarity in the areas of major importance to the
investing public and offer relatively the same degree of investment risk.
Houlihan Lokey's search for such companies included a review of various
research information published by Standard & Poor's Corporation, which contain
pertinent financial and operating information on actively traded public
companies. Four basic criteria were used in selecting comparable companies.
1. The company had to be engaged in the film distribution business;
2. The common stock had to be outstanding in the hands of the public;
3. The trading market of the company had to be relatively active in
order to obtain true investor sentiment; and
4. The company had to make its financial information public.
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Houlihan Lokey selected the following 8 companies for comparison purposes:
Cinergi Pictures Entertainment Goldwyn (Samuel) Co.
Kings Road Entertainment Savoy Pictures Entertainment Inc.
Prism Entertainment Corp. Trimark Holdings Inc.
Producers Entertainment Group Ltd. Unapix Entertainment Inc.
Market multiples for the comparative companies were computed by dividing the
mean stock price for a 20 day period most recent to the valuation date added to
the interest-bearing debt by the companies' EBIT and revenues for the latest
twelve months ending prior to the valuation date.
Based on Houlihan Lokey's analysis of Sterling relative to the group of
comparable public companies, it is Houlihan Lokey's opinion that the appropriate
market multiples to be applied to Sterling's representative EBIT and revenues
are 10.0 times and .65 times, respectively. In deriving Sterling's
representative EBIT, Houlihan Lokey used the 3-year average EBIT of Sterling
consisting of fiscal 1994, the latest twelve-month period ended June 30, 1995
and projected fiscal 1996. Latest twelve-month revenues were considered to be
representative. The calculations deriving the valuation indications from the
market multiple analysis are presented below (000's omitted):
<TABLE><CAPTION>
REPRESENTATIVE TOTAL INVESTED
APPROACH LEVEL MULTIPLE CAPITAL DEBT EQUITY
- ------------------------------- -------------- -------- -------------- ----- ------
<S> <C> <C> <C> <C> <C>
EBIT 600 x 10.0 = 6,000 495 = 5,505
Revenue 8,800 x .65 = 5,720 495 = 5,225
</TABLE>
Based upon the market multiple analysis and giving approximately equal
weight to the two approaches, the fair market value of a 100 percent ownership
position in Sterling, on a marketable minority interest basis, as of September
20, 1995, is $5,400,000 or $.48 per share based on 11,215,000 shares of common
stock issued and outstanding.
Discounted Cash Flow Analysis. The discounted cash flow analysis estimated
the value of Sterling on the present worth of the projected net debt-free cash
flows generated by the business and available (although not necessarily paid) to
debt and equity holders. Net debt-free cash flow is defined as cash flow before
interest expense less capital expenditures and working capital requirements. The
sum of all discounted debt-free cash flows yielded an indication of total
invested capital. Forecasts were provided by management with respect to Sterling
for the fiscal years ended March 31, 1996 through 1999.
The present values of the projected net debt-free cash flows provided by
management were determined using risk-adjusted discount rates ranging from 12.5
percent to 14.5 percent based on the weighted average cost of capital ("WACC").
The WACC, in turn, was developed based on a weighted average of the estimated
costs of borrowing for Sterling and the required rate of return on equity
investments similar to Sterling (i.e., those of the selected comparable public
companies).
In valuing Sterling using the discounted cash flow analysis, a provision was
made for the value of the business at the end of the forecast period, or
terminal value, by the use of a Gordon Growth model. A Gordon Growth analysis
values future cash flow streams through a mathematical expression for the
present value of a cash flow stream growing at a constant rate and discounted at
a constant rate. The discount rate employed in determining the terminal value
was the same as that employed in present valuing the interim projected net
debt-free cash flows. An annual growth rate of 4 percent to 6 percent was
considered appropriate based on discussions with management and consideration of
industry factors. The midpoint of the range of terminal value indications is
approximately $7,100,000.
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The calculations used by Houlihan Lokey in deriving the marketable minority
equity conclusion are presented below (000's omitted):
Terminal Value..................................................... 7,100
Present Value of Projected Net Debt-Free Cash Flows................ (1,200)
------
Total Invested Capital............................................. 5,900
Less Interest-Bearing Debt......................................... 495
------
Equity (rounded)................................................... 5,400
Based upon the discounted cash flow analysis, the fair market value of a 100
percent ownership position in Sterling, on a marketable minority interest basis,
as of September 20, 1995 is $5,400,000 or $.48 per share based on 11,215,000
common shares issued and outstanding.
Houlihan Lokey is a nationally recognized specialty investment banking firm
engaged in the valuation of businesses and their assets in connection with
mergers and acquisitions and for other purposes. Houlihan Lokey was selected by
the Board of Directors of Sterling who were seeking to select an investment
banking firm with the requisite expertise to evaluate Sterling. After
considering other investment banking firms, the Board of Directors of Sterling
selected Houlihan Lokey because they felt that Houlihan Lokey was well qualified
to provide an independent evaluation. Houlihan Lokey was paid a fee of $70,000
for its rendering of the fairness opinion.
INTERESTS OF AND BENEFITS TO THE METROMEDIA HOLDERS AND SENIOR EXECUTIVES OF
ACTAVA AS A RESULT OF THE MERGERS
In considering the recommendations of Orion's, Actava's, MITI's and
Sterling's Board of Directors with respect to the transactions contemplated by
the Merger Agreement, Orion Stockholders, Actava Stockholders, MITI Stockholders
and Sterling Stockholders should be aware that certain members of Orion's
management and its Board of Directors, Actava's management and its Board of
Directors, MITI's management and its Board of Directors and Sterling's
management and its Board of Directors have interests in the Mergers and the
transactions contemplated thereby that are in addition to the interests of Orion
Stockholders, Actava Stockholders, MITI Stockholders and Sterling Stockholders
generally. Each of the members of Orion's, Actava's, MITI's and Sterling's Board
of Directors, as the case may be, was aware of these interests and considered
them, among other matters, in approving the Merger Agreement and the
transactions contemplated thereby.
Control of Surviving Corporation by the Metromedia Holders
As a result of the consummation of the Mergers, the Metromedia Holders,
which currently control a majority of the outstanding common stock of each of
Orion and MITI, will be the largest single stockholder of the Surviving
Corporation.
The following table illustrates the pre-Mergers and post-Mergers record
equity ownership of the Metromedia Holders in Orion, MITI and the Surviving
Corporation based on 20,000,000 shares of Orion Common Stock and 1,716,198
shares of MITI Common Stock outstanding as of September 20, 1995. Although the
separate record ownership of shares of stock of each of the Metromedia Holders
is set forth below, all such shares are benefically owned by John W. Kluge and
Stuart Subotnick, the general partners of Metromedia. The table assumes that (i)
the Determination Date occurred on September 20, 1995, (ii) all outstanding
options to acquire shares of Common Stock are exercised, (iii) certain amounts
owed by Orion and its affiliate to MetProductions and certain amounts owed by
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MII to Met International as of September 20, 1995 are converted into Common
Stock and (iv) there will be 43,600,000 shares of Common Stock outstanding
following the consummation of the Mergers:
<TABLE><CAPTION>
SHARES OF COMMON
SHARES OF ORION SHARES OF MITI STOCK OF SURVIVING
METROMEDIA HOLDER COMMON STOCK COMMON STOCK CORPORATION
- ---------------------------------- ------------------ --------------- ------------------
<S> <C> <C> <C>
Metromedia........................ 7,195,325 (36.0%) -- 4,111,152 (9.4%)
John W. Kluge..................... 4,020,000 (20.1%) 55,556 (3.2%) 2,605,450 (6.0%)
Stuart Subotnick.................. -- 41,667 (2.4%) 231,226 (.5%)
Met International................. -- 62,578 (3.6%) 2,257,453 (5.2%)
Met Telcell....................... -- 797,613 (46.6%) 4,426,050 (10.2%)
MetProductions.................... -- -- 866,669 (2.0%)
------------------ --------------- ------------------
Total........................... 11,215,325 (56.1%) 957,414 (55.8%) 14,498,000 (33.3%)
------------------ --------------- ------------------
------------------ --------------- ------------------
</TABLE>
In addition, Metromedia, as the majority stockholder of Orion and whose
designees, together with a member of Orion's management, constitute a majority
of the members of the Board of Directors of Orion, will, pursuant to the Merger
Agreement, be entitled to designate, at the Effective Time, six of the ten
members of the Surviving Corporation's Board of Directors. The size of the
Surviving Corporation's Board of Directors is subject to downward adjustment
under certain circumstances. See "PROPOSAL NO. 1--THE PROPOSED
MERGERS--Management and Operations After the Mergers." Certain officers of
Metromedia currently also serve as officers and directors of Orion and MITI,
including John W. Kluge and Stuart Subotnick, the general partners of Metromedia
will serve as Chairman of the Board of Directors and Vice Chairman of the Board
of Directors, respectively, of the Surviving Corporation.
Metromedia Loans and Advances to Orion, MITI and Sterling
Orion, MITI and Sterling and certain of their respective affiliates are
currently party to a number of material contracts and other arrangements with
Metromedia and certain affiliates of Metromedia pursuant to which Metromedia and
certain of its affiliates have, among other things, made loans to, or paid
obligations on behalf of, each of Orion, MITI and Sterling, some of which
Metromedia financed through the use of the Actava-Metromedia Credit Agreement.
See "PROPOSAL NO. 1--THE PROPOSED MERGERS--Background of the Mergers."
Certain of the amounts owed by Orion ($20,400,000), MITI ($34,076,000) and
Sterling ($524,000) to Metromedia were financed by Metromedia through borrowings
under the $55 million Actava-Metromedia Credit Agreement. At the Effective Time,
Orion, MITI and Sterling will repay such amounts owed to Metromedia and
Metromedia will immediately utilize such funds to repay Actava the amounts owed
by Metromedia to Actava under the Actava-Metromedia Credit Agreement. Because at
the Effective Time, Orion, Sterling and MITI will be part of the Surviving
Corporation, there will be no net addition to the assets of the Surviving
Corporation as a result of these transactions.
In addition, Metromedia and Mr. Kluge have guaranteed certain amounts which
Orion owes to the Banks and to Sony (the maximum exposure under the Bank
Guarantee as of September 20, 1995 was $54.4 million, subject to reduction for
payments made by Orion from September 20, 1995 until October 20, 1995). The Bank
Guarantee requires that Metromedia and Mr. Kluge make payments to the Banks and
Sony during October 1995 if Orion has not reduced to zero the amount of its
outstanding debt to such parties. Because Orion has not satisfied its payment
obligations to Sony and it anticipates that it will not satisfy its payment
obligations to the Banks, Metromedia will be obligated to pay the remaining
unpaid portion of the $54.4 million owed to the Banks and Sony during October
1995. Orion is required to reimburse Metromedia in full for all such payments
made by Metromedia on Orion's
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behalf. Accordingly, at the Effective Time, the Surviving Corporation would be
obligated to repay Metromedia the amount of such guarantee payment paid by
Metromedia to the Banks and Sony.
Certain indebtedness owed by MII to an affiliate of Metromedia in the
principal amount of approximately $19.6 million (as of September 20, 1995) will
be refinanced or repaid in full or converted into Common Stock of the Surviving
Corporation as provided in the Contribution Agreement. In addition, certain
non-recourse financing provided by an affiliate of Metromedia to Orion and its
affiliates (approximately $9.1 million at September 20, 1995) will either be
refinanced or repaid in full or converted into Common Stock of the Surviving
Corporation as provided in the Contribution Agreement. Pursuant to the
Contribution Agreement, the amount of Common Stock into which such financing
will be converted at the Effective Time is based on, in the case of the
financing provided to Orion and its affiliates, the stock prices utilized in
formulating the Orion Exchange Ratio, and in the case of the financing provided
to MII, the stock prices utilized in formulating the MITI Exchange Ratio. If the
entire amount of such financing ($29.4 including accrued interest million as of
September 20, 1995) is converted into shares of Common Stock pursuant to such
formulas, such conversion would have resulted in the issuance of an aggregate of
2,776,854 shares of Common Stock (with an aggregate market value of $52.1
million as of September 20, 1995). See "INFORMATION REGARDING
ORION--Relationship with Metromedia;" "INFORMATION REGARDING MITI--Relationship
with Metromedia;" "INFORMATION REGARDING STERLING-Metromedia Loan Agreement;"
"PROPOSAL NO. 1--THE PROPOSED MERGERS--Background of the Mergers" and "PROPOSAL
NO. 1--THE PROPOSED MERGERS--Terms and Conditions of the Contribution
Agreement."
Approval by Orion Stockholders is Assured Due to Vote of Metromedia Holders
The Metromedia Holders have indicated that they will vote all of their
shares of Orion Common Stock and MITI Common Stock, as applicable, in favor of
the Merger Agreement (if the Merger Agreement is approved by the requisite vote
of each of the Actava Stockholders and Sterling Stockholders). Accordingly, if
all such shares held by the Metromedia Holders are voted as anticipated, the
vote will be sufficient to assure approval of the Merger Agreement by the Orion
Stockholders.
Employment Agreement with John D. Phillips
Mr. Phillips and Actava are parties to an Employment Agreement dated as of
April 19, 1994 (the "Phillips Employment Agreement") under which Actava agreed
to employ Mr. Phillips as its President and Chief Executive Officer until
December 31, 1996. Mr. Phillips will continue to serve as the President and
Chief Executive Officer of the Surviving Corporation following the consummation
of the Mergers pursuant to the terms of the Phillips Employment Agreement. The
Phillips Employment Agreement provides that Mr. Phillips will be entitled to
receive a base salary at an annual rate of $625,000 per year and will be
entitled to participate in Actava's Senior Officer Bonus Plan and to receive
other benefits provided by Actava to its senior corporate officers. Both Actava
and Mr. Phillips have the right to terminate the Phillips Employment Agreement
at any time. If Actava terminates the Phillips Employment Agreement without
cause (as defined in the Phillips Employment Agreement), then Actava will be
required to continue to pay Mr. Phillips' base salary and other benefits through
December 31, 1996. If Actava terminates the Phillips Employment Agreement with
cause or if Mr. Phillips terminates the Phillips Employment Agreement, then Mr.
Phillips will be entitled to receive his base salary and other benefits only
through the date of termination.
Post-Employment Agreements with Walter M. Grant and Frederick B. Beilstein
Actava has entered into Post-Employment Agreements with two of its senior
executive officers, Frederick B. Beilstein, Senior Vice President and Chief
Financial Officer, and Walter M. Grant, Senior Vice President and General
Counsel. The Post-Employment Agreements provide that if an executive's
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employment with Actava is terminated by Actava (other than a termination for
cause) or if the executive's employment is terminated by the executive for "good
reason," then Actava will retain the executive as a consultant for a period of
two years following the date of termination of his employment. An executive may
terminate his employment for "good reason" in the event of (i) a reduction in
his base salary or benefits other than an across-the-board reduction involving
similarly situated employees, (ii) the relocation of his full-time office to a
location greater than 50 miles from Actava's current corporate office, or (iii)
a reduction in his corporate title. The Post-Employment Agreements provide that
Actava, in exchange for the executive's post-employment consulting services,
will pay a monthly consulting fee to the executive in an amount equal to the
executive's monthly base salary at the time of the termination of his
employment. The Post-Employment Agreements also provide for the continuation of
certain medical and other employee benefits during the two-year consulting
period. In connection with its approval of the Mergers, the Board of Directors
of Actava agreed that each of the two executive officers of Actava who has a
Post-Employment Agreement will be permitted to terminate his employment with
Actava and receive the payments and other benefits due under his Post-Employment
Agreement if he does not desire to remain with the Surviving Corporation
following the consummation of the Mergers. The maximum amounts payable under the
Post-Employment Agreements (including Actava's share of the medical and other
benefits to which each executive will be entitled) will be $559,973 for Mr.
Beilstein and $485,851 for Mr. Grant. These amounts, however, will be reduced in
the event that a terminated executive has "earned income" (as defined in the
Post-Employment Agreements) during his two-year consulting period. The minimum
amounts payable under the Post-Employment Agreements will be $275,000 for Mr.
Beilstein and $237,500 for Mr. Grant.
MANAGEMENT AND OPERATIONS AFTER THE MERGERS
Management
Following consummation of the Mergers, the Surviving Corporation, renamed
"Metromedia International Group, Inc.," will be operated by a three person
Office of the Chairman consisting of the following management team: John W.
Kluge, the current Chairman of the Board of Orion and MITI, as Chairman of the
Board of the Surviving Corporation, Stuart Subotnick, the current Vice Chairman
of the Board of Orion and MITI, as Vice Chairman of the Board of the Surviving
Corporation, and John D. Phillips, the current President and Chief Executive
Officer of Actava, as President and Chief Executive Officer. In addition, the
Merger Agreement provides that as of the Effective Time the number of members of
the Board of Directors of the Surviving Corporation will be fixed at ten persons
to be designated prior to or at the Effective Time. Six of the ten directors are
to be designated by Orion and the remaining four directors are to be designated
by Actava. It is currently anticipated that Messrs. Kluge, Subotnick, Richard J.
Sherwin, Arnold L. Wadler and Leonard White and Ms. Silvia Kessel will be
designated by Orion to the Surviving Corporation's Board of Directors and that
John D. Phillips, Carl E. Sanders, John P. Imlay, Jr. and Clark A. Johnson will
be designated by Actava to the Surviving Corporation's Board of Directors.
In addition, the Triton Stockholders Agreement generally provides that
Triton is entitled to nominate two members of Actava's Board of Directors if it
owns in excess of 20% of the outstanding Common Stock and to nominate one member
of the Actava Board of Directors if it owns in excess of 10% but less than 20%
of the outstanding Common Stock. Because Triton would own in excess of 10% of
the Common Stock following consummation of the Mergers, the Board of Directors
of the Surviving Corporation, in accordance with the terms of the Triton
Stockholders Agreement, would be required to nominate one director designated by
Triton to the Surviving Corporation's Board of Directors. Unless Triton waives
compliance with that provision, it is currently anticipated that Triton will
designate Richard Nevins, who is currently a member of the Board of Directors of
Actava, to serve on the Board of Directors of the Surviving Corporation. In this
event, the Board of Directors of the Surviving Corporation will consist of nine
persons rather than ten persons as contemplated by the Merger
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Agreement. The nine persons who will serve as directors under these
circumstances will be (i) the six persons designated by Orion and named above,
(ii) Mr. Nevins, (iii) Mr. Phillips and (iv) either Mr. Sanders, Mr. Imlay or
Mr. Johnson. If the nine persons referred to above are elected to the Board of
Directors of the Surviving Corporation and if Triton, at any time prior to the
time when the Surviving Corporation nominates directors for election at the
Surviving Corporation's first annual meeting of stockholders after the Effective
Time, loses or waives its right to nominate one director to the Surviving
Corporation's Board of Directors, it is anticipated that the two directors
designated by Actava who were not able to serve on the Surviving Corporation's
Board of Directors at the Effective Time will then be appointed to the Surviving
Corporation's Board of Directors.
The Board of Directors of the Surviving Corporation will be divided into
three classes. One class of directors will be initially elected for a term
expiring at the annual meeting of stockholders of the Surviving Corporation to
be held in 1996, a second class will be initially elected for a term expiring at
the annual meeting of stockholders of the Surviving Corporation to be held in
1997, and a third class will be initially elected for a term expiring at the
annual meeting of stockholders of the Surviving Corporation to be held in 1998.
Members of each class will hold office until their successors are elected and
qualified. At each succeeding annual meeting of the stockholders of the
Surviving Corporation, the successors of the class of directors whose term
expires at that meeting shall be elected by a plurality vote of all votes cast
at such meeting and will hold office for a three-year term.
Certain biographical, share ownership and other pertinent information
regarding the persons who will serve as a director or an executive officer of
the Surviving Corporation is incorporated by reference herein from documents
filed by Actava and Orion with the Commission pursuant to the Exchange Act and
is included elsewhere in this Joint Proxy Statement/Prospectus. Such information
regarding Messrs. Kluge, Subotnick, Wadler and White and Ms. Kessel can be found
in Orion's Form 10-K/A Amendment No. 1 filed on June 28, 1995 amending Orion's
Annual Report on Form 10-K for the fiscal year ended February 28, 1995 (File No.
1-5979). Such information regarding Messrs. Phillips, Sanders, Imlay, Johnson
and Nevins can be found in Actava's Form 10-K/A Amendment No. 1 filed on April
28, 1995 amending Actava's Annual Report on Form 10-K for the year ended
December 31, 1994 (File No. 1-5706). See "AVAILABLE INFORMATION" and
"INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE." For information regarding Mr.
Sherwin, See "INFORMATION REGARDING MITI--Nominee to Surviving Corporation's
Board of Directors."
Operations--General
The Surviving Corporation will combine the valuable entertainment and
communications assets of Orion, MITI and Sterling with the financial resources
of Actava to create a global entertainment, media and communications company.
The Surviving Corporation will be better positioned to capitalize on the assets
of Actava, Orion, MITI and Sterling than any of the individual companies on a
stand-alone basis. For example, the Surviving Corporation will have the
financial and operational resources to develop more fully MITI's wireless cable
and communications businesses in the former Soviet Republics and Eastern Europe
and other emerging markets and thereby capitalize on MITI's position as a
leading provider of such services in these markets. MITI will also benefit from
increased access to high quality programming from the combined Orion/Sterling
film and television library. The Mergers will also enable New Orion to initiate
the production and acquisition of new motion pictures financed by New Orion's
revolving credit facility (under which a maximum of $50 million will be
available for such purposes and for general working capital purposes) and other
sources, which management of each of the companies believes will enhance the
marketability and value of the combined Orion/Sterling film library and will
enable the Surviving Corporation to utilize more effectively Orion's existing
distribution infrastructure. The Surviving Corporation also should have greater
access to capital markets and an enhanced ability to make strategic acquisitions
of other companies whose businesses and/or assets complement those of the
Surviving Corporation than any of the companies have individually. The
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respective Boards of Directors of Orion, Actava, MITI and Sterling also believe
that the Surviving Corporation will benefit from potential operating cost
savings, including reductions in corporate overhead and distribution expenses
and other cost savings resulting from the combination of the Orion and Sterling
film and television libraries, and that the Mergers will create greater
liquidity for the stockholders of the combined organizations. The amount of such
costs savings has not been quantified by the respective companies but they do
not anticipate that the amount of such cost savings will be material. Estimated
fees and expenses of the Mergers are $6.5 million. For a description of the
operations of Orion, see "INFORMATION REGARDING ORION--Business of Orion;" for a
description of the operations of MITI, see "INFORMATION REGARDING MITI--Business
of MITI;" and for a description of the operations of Sterling, see "INFORMATION
REGARDING STERLING--Business of Sterling."
Orion Refinancing
Upon consummation of the Mergers, it is anticipated that the Surviving
Corporation and its subsidiaries will enter into the financing arrangements in
the amounts summarized below and described below under the heading "Financing
Arrangements--Use of Proceeds by the Surviving Corporation to Refinance Existing
Orion Indebtedness" to refinance the Orion Senior Indebtedness and Orion
Subordinated Indebtedness.
SOURCE OF FUNDS
- -----------------------------------------------------------
New Orion, as borrower from Chemical Bank, as agent........ $135.0 million
Surviving Corporation, as borrower from Chemical Bank...... $ 34.5 million
Actava's and Orion's cash on hand at Effective Time........ $41.4 million
Total...................................................... $210.9 million
USE OF FUNDS
- -----------------------------------------------------------
Refinance existing Orion Senior Indebtedness and Orion
Subordinated Indebtedness, including debt issuance costs... $210.9 million(1)
- ------------
(1) Assumes that the Effective Time occurred at September 20, 1995 and that all
existing Orion indebtedness was repaid at 100% of the outstanding principal
amount thereof, plus accrued and unpaid interest at such date, except for
Orion's 10% Subordinated Debentures due 2001 which were assumed to have been
redeemed at 95% of their outstanding principal amount thereof. Orion
anticipates that it will make certain net cash flow payments to the holders
of Orion Senior Indebtedness and the Orion Subordinated Indebtedness prior
to the Effective Time and accordingly, the aggregate amount of Orion's
indebtedness at the Effective Time will change.
In addition, it is anticipated that each of New Orion, New MITI and New
Snapper will have available lines of credit which will be used as specified
below, but will not be used to finance the operations of any other businesses of
the Surviving Corporation or to refinance any existing indebtedness. New Orion
will have a $50 million revolving line of credit available to fund its
production, acquisition and distribution of motion pictures and for general
working capital purposes. New MITI may have up to $29.9 million available to it,
subject to certain conditions, to finance the construction, operation and
management, through joint ventures, of wireless cable television operations in
Eastern Europe and the former Soviet Republics. New Snapper will also have a
revolving credit facility available to finance its operations and working
capital needs.
Operations--Strategic Plans for Surviving Corporation
Actava is actively seeking to identify synergistic business combinations for
Snapper and would ultimately like for Snapper to operate as, or as part of, a
publicly held company in which Actava has an interest. Although Actava would
prefer to own an interest in a publicly held Snapper, Actava is exploring other
alternatives for Snapper, including a possible sale or joint venture or the
continued
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operation of Snapper as a division or subsidiary. Actava currently is not a
party to any agreements with respect to any acquisitions or business
combinations regarding Snapper nor does it have any immediate plans or
agreements that would cause Snapper to become publicly owned. No assurances can
be given that Actava in the future will engage in such a transaction or effect
such a plan. See "INFORMATION REGARDING ACTAVA--Narrative Description of
Business of Actava--Snapper Power Equipment Company."
Management of Orion, Actava, Sterling and MITI believe that the Surviving
Corporation will report significant operating losses for the fiscal years ended
December 31, 1995 and December 31, 1996. The future profitability of the
Surviving Corporation will depend upon the success of the Surviving
Corporation's operations in the communications industry in Eastern Europe and
other emerging markets and the motion picture industry, both of which are
speculative and involve a high degree of risk. There can be no assurance that
the businesses conducted by Orion, Actava, MITI and Sterling will be integrated
successfully with each other.
Following the refinancing of the existing Orion indebtedness described in
detail below, the Surviving Corporation will be a highly leveraged company. As a
result of the consummation of the Mergers and the refinancing described below,
the Surviving Corporation would have a debt to equity ratio of 1.07 on a pro
forma basis. It is anticipated that the Surviving Corporation's 1995 pro forma
debt will require debt service payments of $20.4 million during the remainder of
the fiscal year ending December 31, 1995 and that the Surviving Corporation will
generate sufficient cash flow from operations or will otherwise have sufficient
cash on hand to service the debt of the consolidated companies during the
remainder of fiscal year 1995. Debt service payments required after December 31,
1995 by the Surviving Corporation will be substantial. For example, it is
anticipated that the Surviving Corporation's 1996 pro forma debt will require
debt service payments of approximately $98.9 million during the year ending
December 31, 1996, excluding certain amounts payable in respect of New Snapper's
revolving credit facility, which are subject to change.
The Surviving Corporation anticipates that it will not generate sufficient
cash flow from operations or have sufficient cash on hand to service its
scheduled principal and interest payments during the fiscal year ended December
31, 1996, although it cannot at this point, quantify the amount of the
shortfall. In order to meet this shortfall, the Surviving Corporation will
attempt to extend the maturity of the $35.0 million MIG Credit Facility (as
defined below) which is scheduled to mature on the first anniversary of the
Effective Time, curtail certain of its operations and reduce its commitments,
dispose certain non-strategic assets (as described below) and/or otherwise raise
additional capital or refinance its indebtedness through the sale of its debt or
equity in a private or public offering. The Surviving Corporation has no
definitive plans as to the form, terms or conditions of any such debt or equity
offering and there can be no assurance that any such refinancing will be
successful or will be accomplished on reasonably acceptable terms. The Surviving
Corporation may be forced to curtail significantly the implementation of its
short and long term business objectives, including the commitments to be entered
into by New MITI. The Surviving Corporation has not determined what its funding
priorities will be if it is forced to curtail the implementation of its
objectives. Finally, in order to service its debt and fund its commitments, the
Surviving Corporation expects that it will have to dispose of certain
nonstrategic assets (i.e., New Snapper and its investment in Roadmaster common
stock, neither of which is related to the entertainment or communications
businesses of the Surviving Corporation). No assurance can be given that such
refinancing or restructuring can be completed on acceptable terms, if at all, or
that will be able to realize a fair price for its nonstrategic assets if it
chooses to dispose of any of them. On September 20, 1995 the closing sale price
for the Roadmaster common stock on the NYSE was $3.00 and the aggregate market
value of Actava's 19,169,000 shares of Roadmaster common stock was $57,507,000.
All of such Roadmaster common stock will be pledged to support the $35 million
MIG Credit Facility. The cash flow required to service the indebtedness of the
Surviving Corporation may reduce its liquidity, which in turn could reduce its
ability to fund the production or acquisition of
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entertainment product for distribution by New Orion, the capital expenditures
required by New MITI, the internal growth of the Surviving Corporation and other
capital improvements required by the Surviving Corporation. The Surviving
Corporation's degree of financial leverage following the consummation of the
Mergers also could inhibit its ability to obtain outside financing or to obtain
outside financing on reasonably acceptable terms.
In addition to servicing its indebtedness, the Surviving Corporation will
require substantial funds to achieve its short term and long term business
objectives. Each of Orion, MITI and Sterling is engaged in an industry which
requires significant cash and capital expenditures prior to the recognition of
revenue. Generally, producers of motion picture product are required to spend
significant capital in order to fund the development, production and
distribution costs associated with such motion picture product prior to its
theatrical release or other distribution and the receipt of any revenues. The
Surviving Corporation intends to reduce the risks associated with substantial
upfront production costs by obtaining financing from acceptable third party
production partners and by "pre-selling" certain rights in films prior to
production. There can be no assurance, however, that the Surviving Corporation
will be successful in either pre-selling rights or obtaining acceptable
production partners on commercially reasonable terms. MITI's businesses are
similarly capital intensive and require the investment of significant amounts of
capital in order to construct and develop operational systems and to attract a
significant number of subscribers to a network. The Surviving Corporation
intends to finance New MITI's operating and capital expenses through New MITI's
operating cash flow, the Surviving Corporation's cash on hand at the Effective
Time and through the proceeds of New MITI's anticipated $29.9 million credit
facility (subject to the satisfaction of certain conditions) described below.
See "PROPOSAL NO. 1--THE PROPOSED MERGERS--Financing Arrnagements." For a
discussion of MITI's anticipated commitments, see "INFORMATION REGARDING
MITI--Management's Discussion and Analysis of Financial Condition and Results of
Operations." No assurance can be given that additional financing will be
available to the Surviving Corporation on acceptable terms, if at all. If the
Surviving Corporation raises additional funds by issuing additional equity
securities, further dilution to existing equityholders will result. If adequate
additional funds are not available, the Surviving Corporation may be required to
curtail significantly its short term and long term business objectives and the
Surviving Corporation's results from operations may be materially and adversely
affected.
TERMS AND CONDITIONS OF THE MERGER AGREEMENT
Set forth below is a description of the principal terms and conditions of
the Merger Agreement. The description is qualified in its entirety by reference
to the Merger Agreement, a copy of which is attached hereto as Appendix A.
Conditions to the Mergers
Mutual Conditions. Set forth below is a description of the principal
conditions to the obligations of each of Orion, Actava, MITI and Sterling to
consummate the Merger or Mergers to which it is a party. The respective
obligations of each of Orion, Actava, MITI and Sterling to consummate the Merger
or Mergers to which it is a party are subject to the satisfaction or waiver of
certain mutual conditions including the following. All of the following
conditions, except for stockholder approval, may be waived by the parties:
1. All waiting periods under the Hart Scott Act shall have expired or
been terminated (which condition was satisfied on June 12, 1995);
2. No injunction, order, decree or stay is in effect which prevents the
consummation of any of the Mergers;
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3. The Merger Agreement shall have been approved by the requisite vote
of each of the Orion Stockholders, the Actava Stockholders, the MITI
Stockholders and the Sterling Stockholders;
4. The Registration Statement shall have been declared effective by the
Commission;
5. All material consents or approvals of any person to the Mergers shall
have been obtained;
6. Each of the Mergers shall have been concurrently consummated; and
7. Less than 25% of MITI Stockholders and less than 25% of the Sterling
Stockholders shall have perfected their dissenters' rights of appraisal.
Orion Conditions. Orion's obligation to consummate the Orion Merger is
subject to the satisfaction or waiver of certain other conditions, including the
following:
1. Certain representations and warranties of Actava, OPC Mergerco, MITI
Mergerco, MITI and Sterling made in the Merger Agreement must be true and
correct as of the Effective Time, certain other representations and
warranties of Actava, OPC Mergerco, MITI Mergerco, MITI and Sterling made in
the Merger Agreement must be true and correct in all material respects as of
the Effective Time, all covenants and agreements required to be performed by
Actava, OPC Mergerco, MITI Mergerco, MITI and Sterling prior to the
Effective Time shall have been performed and Actava, MITI and Sterling shall
each have delivered an officer's certificate stating the foregoing;
2. Orion shall have received customary legal opinions of counsel to
Actava, MITI and Sterling, in each case, reasonably satisfactory to Orion,
regarding certain legal matters relating to Actava, MITI and Sterling, as
the case may be, and an opinion from its counsel stating that the Orion
Merger will be treated for federal income tax purposes as a reorganization
within the meaning of Section 368(a) of the Code;
3. No material adverse change in the business, assets, prospects,
condition or results of operations of Actava, Roadmaster, MITI or Sterling
shall have occurred since the date of the Initial Merger Agreement;
4. Orion shall have received a fairness opinion regarding the
consideration to be paid in the Orion Merger and such opinion shall not have
been withdrawn, amended or modified prior to the date of the Orion Special
Meeting;
5. The Orion Senior Indebtedness shall have been refinanced on terms
reasonably acceptable to Orion;
6. The Orion Subordinated Indebtedness shall have been refinanced on
terms reasonably acceptable to Orion;
7. All amounts payable by MITI and its subsidiaries, Sterling and its
subsidiaries and certain amounts payable by Orion to Metromedia and its
affiliates shall have been refinanced, repaid in full or, with respect to
certain of the indebtedness, converted into Common Stock of the Surviving
Corporation; and
8. The Shelf Registration shall have been declared effective by the
Commission.
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Actava Conditions. Actava's obligation to consummate the Mergers is subject
to the satisfaction or waiver of certain other conditions, including the
following:
1. Certain representations and warranties of Orion, MITI and Sterling
made in the Merger Agreement must be true and correct as of the Effective
Time, certain other representations and warranties of Orion, MITI and
Sterling made in the Merger Agreement must be true and correct in all
material respects as of the Effective Time, all covenants and agreements
required to be performed by Orion, MITI and Sterling prior to the Effective
Time shall have been performed and Actava shall have received an officer's
certificate from each of Orion, MITI and Sterling stating the foregoing;
2. There shall not have occurred any material adverse change in the
business, assets, prospects, condition or the results of operation of Orion,
MITI or Sterling since the date of the Initial Merger Agreement;
3. Actava shall have received customary legal opinions of counsel to
Orion, counsel to MITI and counsel to Sterling, in each case, reasonably
satisfactory to Actava, regarding certain legal matters relating to Orion,
MITI and Sterling and an opinion of its counsel, reasonably satisfactory to
Actava, stating that holders of Common Stock and Actava Options to acquire
shares of Common Stock will recognize neither gain nor loss for federal
income tax purposes as a result of the consummation of the Mergers;
4. Actava shall have received a fairness opinion regarding the Exchange
Ratio and such opinion shall not have been withdrawn, amended or modified on
or prior to the date of the Actava Special Meeting;
5. The Orion Senior Indebtedness shall have been refinanced on terms
reasonably acceptable to Actava;
6. The Orion Subordinated Indebtedness shall have been refinanced on
terms reasonably acceptable to Actava;
7. The Actava Average Closing Price shall not be less than $8.25
(subject to upward or downward adjustment in the event of a stock split,
recapitalization or other similar corporate transaction);
8. The shares of Common Stock shall have been accepted for listing on
the NYSE or the AMEX or accepted for quotation on the NASDAQ/NMS; and
9. Actava shall have received a certificate of an executive officer of
each of Orion, Sterling and MITI, sworn to under penalty of perjury, setting
forth the name, address and Federal Tax Identification Number of Orion,
Sterling or MITI, as the case may be, and stating that no interest in Orion,
Sterling or MITI, as the case may be, constitutes a "United States real
property interest" within the meaning of Section 897(c)(1) of the Code. If,
on or before the Effective Time, Actava shall not have received any such
certificate, Actava may withhold from the Common Stock payable at the
Effective Time to the stockholders of the company with respect to which such
certificate was not received such amounts as may be required to be withheld
therefrom under Section 1445 of the Code.
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MITI Conditions. MITI's obligation to consummate the MITI Merger is subject
to the satisfaction or waiver of certain other conditions, including the
following:
1. Certain representations and warranties of Orion, Actava, OPC
Mergerco, MITI Mergerco and Sterling made in the Merger Agreement must be
true and correct as of the Effective Time, certain other representations and
warranties of Orion, Actava, OPC Mergerco, MITI Mergerco and Sterling made
in the Merger Agreement must be true and correct in all material respects as
of the Effective Time, all covenants and agreements required to be performed
by Orion, Actava, OPC Mergerco, MITI Mergerco and Sterling prior to the
Effective Time shall have been performed and Orion, Actava and Sterling
shall each have delivered an officer's certificate stating the foregoing;
2. There shall not have occurred any material adverse change in the
business, assets, prospects, condition or results of operations of Orion,
Actava, Roadmaster and Sterling since the date of the Initial Merger
Agreement;
3. MITI shall have received customary legal opinions of counsel to
Orion, counsel to Actava and counsel to Sterling, in each case, reasonably
satisfactory to MITI, regarding certain legal matters relating to Orion,
Actava and Sterling and an opinion from its counsel stating that the MITI
Merger will be treated for federal income tax purposes as a reorganization
within the meaning of Section 368(a) of the Code;
4. The shares of Common Stock shall have been accepted by listing on the
NYSE or AMEX or accepted for quotation on the NASDAQ/NMS; and
5. MITI shall have received a fairness opinion regarding the
consideration to be paid in the MITI Merger and such opinion shall not have
been withdrawn, amended or modified on or prior to the date of the MITI
Special Meeting.
Sterling Conditions. Sterling's obligation to consummate the Sterling Merger
is subject to the satisfaction or waiver of certain other conditions, including
the following:
1. Certain representations and warranties of Orion, Actava, OPC
Mergerco, MITI Mergerco and MITI made in the Merger Agreement must be true
and correct as of the Effective Time, certain other representations and
warranties of Orion, Actava, OPC Mergerco, MITI Mergerco and MITI made in
the Merger Agreement must be true and correct in all material respects as of
the Effective Time, all covenants and agreements required to be performed by
Orion, Actava, OPC Mergerco, MITI Mergerco and MITI prior to the Effective
Time shall have been performed and Sterling shall have received an officer's
certificate from each of Orion, Actava and MITI stating the foregoing;
2. There shall not have occurred any material adverse change in the
business, assets, prospects, condition or the results of operation of Orion,
Actava, Roadmaster or MITI since the date of the Initial Merger Agreement;
3. Sterling shall have received customary legal opinions of counsel to
Orion, counsel to Actava and counsel to MITI, in each case, reasonably
satisfactory to Sterling, regarding certain legal matters relating to Orion,
Actava and MITI and an opinion from its counsel stating that the Sterling
Merger will be treated for federal income tax purposes as a reorganization
within the meaning of Section 368(a) of the Code; and
4. Sterling shall have received a fairness opinion regarding the
consideration to be paid in the Sterling Merger and such opinion shall not
have been withdrawn, amended or modified on or prior to the date of the
Sterling Special Meeting.
Termination and Amendment of the Merger Agreement
The Merger Agreement may be terminated at any time prior to the Effective
Time by a majority of the members of each of the Boards of Directors of Orion,
Actava, MITI and Sterling. In addition, either Orion, Actava, MITI or Sterling
may terminate the Merger Agreement (i) in the event of material inaccuracies,
misrepresentations or breaches of any other representation or warranty by such
party, or (ii) in the event of a breach of any material covenant or other
agreement contained in the Merger Agreement after a thirty day cure period. The
Merger Agreement may be terminated by any of Orion,
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Actava, MITI or Sterling if the Mergers shall have not been consummated on or
before December 31, 1995 unless the party wishing to terminate on such date, due
to such party's material breach of the Merger Agreement, was the cause of the
parties' failure to consummate the Mergers. Any of Orion, Actava, MITI or
Sterling may terminate the Merger Agreement if a court of competent jurisdiction
or other governmental body shall have issued an order preventing the
consummation of any of the Mergers and such order shall have become final and
non-appealable.
Upon termination of the Merger Agreement in accordance with its terms, the
Merger Agreement shall become void and there shall be no continuing liability
thereunder on the part of any of Orion, Actava, MITI or Sterling, except for
certain expense and confidentiality obligations. The Merger Agreement, including
all the provisions set forth above, may be amended or modified in writing prior
to the Effective Time by each of the Boards of Directors of Orion, Actava, MITI
and Sterling.
Agreement Not to Solicit Other Offers
Pursuant to the Merger Agreement, subject to applicable law and the
fiduciary duties of loyalty and care, each of Orion, Actava, MITI or Sterling
has agreed that it will not, and that it will direct its officers, directors and
other representatives not to, directly or indirectly solicit, encourage or
participate in any way in discussions or negotiations with, or provide any
information or assistance to any third party regarding the acquisition or
purchase of any of the shares of capital stock of Orion, Actava, MITI and
Sterling or any significant portion of the assets of Orion, Actava, MITI and
Sterling or a subsidiary or division of Orion, Actava, MITI and Sterling. Each
of Orion, Actava, MITI and Sterling has agreed that it will promptly communicate
to the other parties the terms of any proposal or contact it may receive in
respect of any such transaction. In addition, subject to applicable law and the
fiduciary duties of loyalty and care, the Board of Directors of Orion, Actava,
MITI and Sterling have agreed that they will not alter their recommendation to
Orion Stockholders, Actava Stockholders, MITI Stockholders, or Sterling
Stockholders, respectively, regarding the approval of the Merger Agreement,
subject to the compliance by Orion, Actava, MITI and Sterling with the material
terms and conditions of the Merger Agreement.
Listing of Common Stock
Each of Orion, Actava, MITI and Sterling has agreed that it will use its
best efforts to take all action reasonably necessary to cause the additional
shares of Common Stock to be authorized for listing on the NYSE or the AMEX or
to be quoted on the NASDAQ/NMS.
Covenant Regarding Refinancing of Indebtedness
Each of Orion, Actava, MITI and Sterling has agreed to use its best efforts
to facilitate the contemplated refinancing of the Orion Senior Indebtedness and
the Orion Subordinated Indebtedness.
Conduct of Business by Orion, Actava, MITI and Sterling Prior to the Mergers
Except as otherwise provided in the Merger Agreement, each of Orion, Actava,
MITI and Sterling has agreed, pending consummation of the Mergers, to conduct
their operations in the ordinary course of business, consistent with their
respective past practice.
Stockholder Rights Plan
Each of Orion, Actava, MITI and Sterling has agreed to use its best efforts
to have the Board of Directors of the Surviving Corporation adopt a stockholder
rights plan within 30 days following the Effective Time. Although the specific
terms of such rights plan have not been determined, it is expected that such
rights plan will cause substantial dilution to a person or group that attempts
to acquire the Surviving Corporation on terms not approved by the Surviving
Corporation's Board of Directors. Such rights plan may have an anti-takeover
effect.
Expenses
The Merger Agreement provides that in the event that the Mergers are not
consummated, Orion, Actava, MITI and Sterling will bear their own expenses in
connection with the preparation, negotiation, execution and delivery of the
Merger Agreement.
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REGISTRATION RIGHTS AGREEMENT
Pursuant to the Registration Rights Agreement, the Surviving Corporation, on
or prior to the Effective Time, will register under the Securities Act the
Metromedia Holders' shares of Common Stock (the "Registrable Stock") pursuant to
the Shelf Registration. The Shelf Registration will be kept continuously
effective by the Surviving Corporation until all of the shares covered by such
Shelf Registration are sold. The Surviving Corporation is required to pay all
expenses incurred in connection with such registration.
TERMS AND CONDITIONS OF THE CONTRIBUTION AGREEMENT
It is a condition to Orion's obligation to consummate the Orion Merger that
the amount of nonrecourse financing provided by an affiliate of Metromedia to
Orion and its affiliates and the amount of financing provided by an affiliate of
Metromedia to MII be either refinanced or repaid in full or converted into
shares of Common Stock, at Orion's option, in the manner specified in the
Contribution Agreement. Pursuant to the Contribution Agreement, the amount of
Common Stock into which such financing will be converted at the Effective Time
is based on, in the case of the financing provided to Orion and its affiliates,
the stock prices utilized in formulating the Orion Exchange Ratio, and in the
case of the financing provided to MII, the stock prices utilized in formulating
the MITI Exchange Ratio. If the entire amount of such financing ($29.4 million
including accrued interest as of September 20, 1995) is converted into shares of
Common Stock pursuant to such formulas, such conversion would have resulted in
the issuance of an aggregate of 2,776,854 shares of Common Stock (with an
aggregate market value of $52.1 million as of September 20, 1995).
REGULATORY FILINGS AND APPROVALS
The requisite applications under the Hart Scott Act have been made and the
waiting period expired on June 12, 1995.
FINANCING ARRANGEMENTS
Background of Orion's Business; Bankruptcy Filing
Historically, Orion was engaged primarily in the financing, production and
distribution of motion pictures for the worldwide theatrical market, including
distribution of motion pictures financed and produced by others. Typically,
Orion's operating plan had been to release approximately 12 to 15 theatrical
motion pictures each year. In addition, Orion distributed motion pictures to the
worldwide home video, free television, cable and pay television markets. Orion
also developed, financed, produced and distributed newly created
made-for-television product, which has included, in the past, series and related
pilots, motion pictures and mini-series produced for exhibition on the major
networks in the United States as well as first-run programming produced for
syndication in the domestic television marketplace. Such television production
operations were discontinued effective May 31, 1991. See "INFORMATION REGARDING
ORION--Business of Orion."
Due generally to poor results in the domestic theatrical and video market
place, the costs of an expanding television production division, increased
theatrical production and marketing costs and increasing overhead and debt
service costs, Orion faced a severe liquidity crisis and, as a result, on
December 11 and 12, 1991 (the "Filing Date"), Orion and certain of its
subsidiaries filed for protection under chapter 11 ("chapter 11") of Title 11 of
the United States Code (the "Bankruptcy Code") with the United States Bankruptcy
Court for the Southern District of New York (the "Court"). See "INFORMATION
REGARDING ORION--Business of Orion." During the period from the Filing Date to
November 5, 1992 (the "Bankruptcy Period"), Orion 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, Orion filed the Plan and
the related "Disclosure Statement for Debtors' Joint Consolidated Plan of
Reorganization" (the "Disclosure Statement") with the Court on July 21, 1992 (as
amended on July 24, August 7 and September 3, 1992). The Court confirmed the
Plan on October 20, 1992 (the "Plan Confirmation Date") and the Plan became
effective on November 5, 1992 (the "Plan Effective Date"). See "INFORMATION
REGARDING ORION--Management's Discussion and Analysis of Financial Condition and
Results of Operations."
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Terms of Principal Plan Documents
The Plan was the result of compromises reached among Orion's principal
creditors and its majority stockholder, Metromedia. The Plan essentially
provided that Orion was to release the 10 substantially completed but unreleased
films owned by Orion on the Filing Date (the "Unreleased Films") and exploit its
existing film library in all media, but that Orion was not to engage in new
production or obtain new product through its own cash flow or recourse
financing. In order to effectuate the Plan, Orion entered into a number of new
arrangements with its existing creditors. Pursuant to such arrangements and the
Plan, to the extent Orion generates "Net Cash Flow" (generally Orion's operating
cash flow less permissible operating expenses), Orion is obligated to distribute
such Net Cash Flow to its creditors in the manner specified in such agreements.
Orion's senior secured creditors (i.e., the Banks party to the Third Restated
Credit Agreement and Sony, which had made significant advances to Orion prior to
the Filing Date against the delivery of future films for distribution in certain
foreign markets), share 85% of Orion's Net Cash Flow. Orion's remaining
unsecured creditors (principally Orion's prepetition guild and talent claim
holders, trade creditors and holders of its old subordinated debentures) were
issued new securities of Orion based on the class in which such creditors'
claims were classified and such creditors (the holders of the Talent Notes, the
Creditor Notes and the 10% Debentures) are entitled to receive, on a pari passu
basis with the Banks and Sony, the remaining 15% of Net Cash Flow. The Third
Restated Credit Agreement and the three indentures (the "Indentures") pursuant
to which the Talent Notes, the Creditor Notes and the 10% Debentures were issued
as well as certain corollary collateral and security agreements all restrict
Orion's activities and in particular restrict new production of filmed product
or the acquisition of such product from third parties, other than on a
non-recourse basis. Such restrictions, Orion's management believes, have made it
extremely difficult for Orion to obtain additional product, and thereby have
prevented Orion from more effectively exploiting its library assets and existing
distribution apparatus. See "INFORMATION REGARDING ORION--Business of Orion" and
"--Management's Discussion and Analysis of Financial Condition and Results of
Operations." In addition, as described below, Orion, during the fiscal year
ended February 28, 1995 could not satisfy the debt repayment schedule set forth
in the Third Restated Credit Agreement and Orion's agreement with Sony entered
into in connection with the Plan. Orion expects it will have further difficulty
in satisfying the debt service payments required by such agreements during its
current fiscal year, which began on March 1, 1995. Upon consummation of the
refinancing described below, Orion will no longer be subject to such
restrictions on its production and investing activities and will no longer be
required to pay substantially all of its Net Cash Flow to its creditors.
Required Debt Service Under Existing Plan Agreements
Pursuant to the terms of the Third Restated Credit Agreement and certain
other agreements entered into in connection with the Plan, Orion was required to
make certain payments to the Banks and to Sony in October and November 1994,
respectively, which it was not able to satisfy because it did not generate
sufficient Net Cash Flow. The amount payable to the Banks was subject to the
Bank Guarantee made by Metromedia and John W. Kluge. Accordingly, on October 20,
1994, Metromedia paid $14,041,000 in favor of the Banks on behalf of Orion and
on November 5, 1994, Metromedia made a payment of $5,159,000 to Sony in order to
satisfy Orion's payment obligation to Sony. In addition, Orion has not (with
respect to Sony) and anticipates that it will not (with respect to the Banks)
generate the sufficient Net Cash Flow to satisfy its payment obligations to the
Banks and Sony during October 1995. As a result, Metromedia will be obligated,
pursuant to the Bank Guarantee, to pay to the Bank's and to Sony the amount of
Orion's payment shortfall. Pursuant to a reimbursement agreement among Orion,
Metromedia and Mr. Kluge, Orion is obligated to reimburse Metromedia for the
payments made by Metromedia to the Banks and Sony. This reimbursement agreement
provides, among other things, that any payments made by Metromedia and/or Mr.
Kluge under the Bank Guarantee on behalf of Orion to the Banks and/or Sony would
result in such guarantors becoming subrogated to the Bank's and Sony's portion
of Orion's Net Cash Flow following payment in full of Orion's obligations to the
Banks and Sony. As a result, in the event Metromedia makes the payment under the
Bank Guarantee in October 1995, at the Effective Time, the Surviving Corporation
would be obligated to repay such amounts to Metromedia. Such reimbursement
agreement also contains certain covenants, similar to
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those contained in the Third Restated Credit Agreement and the Indentures, which
limit Orion's ability to engage in development, production and theatrical
distribution activities unless they are financed on a 100% nonrecourse basis to
Orion. See "INFORMATION REGARDING ORION--Relationship With Metromedia."
The Indentures pursuant to which the Talent Notes and Creditor Notes were
issued provide that an event of default ("Event of Default") will occur under
such Indentures if the aggregate amount of Net Cash Flow paid by Orion to the
holders of Talent Notes, Creditor Notes and 10% Debentures does not exceed the
mandatory minimum amounts specified in such Indentures. An Event of Default
under the Indentures pursuant to which the Talent Notes and Creditor Notes were
issued occurred as of August 31, 1995. Such an Event of Default enables the
trustee under such Indentures to accelerate payments thereunder. Should such an
acceleration under such Indentures occur, Orion, absent the refinancing
contemplated to occur in connection with the Mergers or other financing
arrangements, may be forced to seek protection under chapter 11 of the
Bankruptcy Code. See "INFORMATION REGARDING ORION--Management's Discussion and
Analysis of Financial Condition and Results of Operations."
The inability of Orion to meet its obligations under the Third Restated
Credit Agreement and the Indentures along with the restrictions contained
therein on Orion's ability to develop, produce and distribute motion picture
product have made it necessary for Orion to refinance the Orion Senior
Indebtedness and the Orion Subordinated Indebtedness. Such a refinancing would
give the Surviving Corporation increased flexibility to pursue opportunities in
the motion picture industry, such as the development, production and acquisition
for distribution of motion picture product. Moreover, the Surviving
Corporation's ability to acquire new product will enable it more effectively to
exploit Orion and Sterling's existing library assets and to utilize Orion's
existing distribution apparatus and thereby enhance stockholder value in the
Surviving Corporation.
As a condition to the consummation of the Mergers, the outstanding
indebtedness of Orion will be refinanced in the manner described below.
Existing Orion Indebtedness
It is a condition to the consummation of the Mergers that the Orion Senior
Indebtedness as well as the Orion Subordinated Indebtedness be refinanced in
full. As of September 20, 1995, Orion had $54.0 million of Orion Senior
Indebtedness outstanding, consisting of $42.1 million owed to the Banks under
the Third Restated Credit Agreement and $11.9 million owed to Sony, and $150.2
million of Orion Subordinated Indebtedness outstanding consisting of $36.6
million of Talent Notes, $62.8 million of Creditor Notes and $50.8 million of
10% Debentures. If, pursuant to the Bank Guarantee, Metromedia makes a payment
during October 1995 to the Banks and to Sony, the amount of any such payment by
Metromedia (which could be up to an aggregate of $54.4 million, reduced by
payments of Net Cash Flow made by Orion to the Banks and to Sony prior to the
date Metromedia makes a guarantee payment) would constitute Orion Senior
Indebtedness, which would be payable in full by the Surviving Corporation at the
Effective Time. In addition, to the extent Orion settles certain currently
outstanding disputed claims with its Plan creditors, such creditors would be
issued additional Talent Notes or Creditor Notes prior to the Effective Time in
the amount of such settled amount. Orion does not anticipate that the amount of
any such settled claims will be material.
Upon consummation of the Mergers, the Surviving Corporation and its
subsidiaries will enter into the financing arrangements described below in order
to repay the existing Orion Senior Indebtedness and Orion Subordinated
Indebtedness in full in the manner described below.
Capital Structure Following Effective Time
At the Effective Time, (i) Orion will merge with and into New Orion, a newly
formed, wholly-owned subsidiary of Actava, and New Orion, as the surviving
corporation of the Orion Merger, will change its name to "Orion Pictures
Corporation," and will continue the business and operations of Orion and
Sterling (see below), (ii) MITI will merge with and into New MITI, a newly
formed, wholly-owned subsidiary of Actava and New MITI, as the surviving
corporation of the MITI Merger, will change its name to "Metromedia
International Telecommunications, Inc." and will continue the business and
operations of MITI and (iii) Sterling will merge with and into Actava and
Actava, as the
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surviving corporation of the Sterling Merger, will change its name to
"Metromedia International Group, Inc." Immediately following consummation of the
Mergers, the Surviving Corporation will transfer (i) all of its assets that were
owned by Sterling immediately prior to the Effective Time to New Orion, which
will continue the business and operations of Orion and Sterling and (ii) all of
the assets of its Snapper Power Equipment Company division to a newly formed
subsidiary, New Snapper, which will continue the business and operations of the
Snapper division. Transferring the assets of Actava's Snapper division to New
Snapper will require the consent of the Snapper division's existing lender. New
MITI will continue the business and operations of MITI. Accordingly, immediately
following the Effective Time, the Surviving Corporation will be a holding
company whose assets will consist of Actava's cash and cash equivalents owned as
of the Effective Time, the stock of New Orion, New MITI and New Snapper and
Actava's current stock investment in Roadmaster. In addition, Actava's existing
subordinated indebtedness (approximately $159.2 million as of September 20,
1995) will remain outstanding as subordinated indebtedness of the Surviving
Corporation.
New Orion Credit Facility
Orion has entered into a commitment letter with Chemical which provides that
Chemical is committed, subject to the satisfaction of certain conditions, to
provide certain financing to New Orion as described below. Chemical has
committed to fund the entire amount of the facility and a portion of the
commitment may be syndicated to other financial institutions either before or
after the Effective Time. Pursuant to the commitment letter with Chemical, at
the Effective Time, New Orion, Chemical and the other bank parties thereto will
enter into a credit facility (the "New Orion Credit Facility") which will
provide for an aggregate of $185 million of financing consisting of a secured
term loan of up to $135 milllion (the "Term Loan") and a revolving credit
facility of $50 million, including a $10 million letter of credit facility (the
"Revolving Credit Facility"). The Term Loan will be used solely to refinance the
Orion Senior Indebtedness and Orion Subordinated Indebtedness and the Revolving
Credit Facility will be used to finance New Orion's production, acquisition and
distribution of motion pictures and for general working capital purposes, as
described below.
The Term Loan will bear interest at New Orion's option at a rate of LIBOR
plus 3% or Chemical's alternative base rate plus 2%. The Revolving Credit
Facility will bear interest at New Orion's option at a rate of LIBOR plus 1 1/2%
or Chemical's alternative base rate plus 1/2%. The Term Loan will have a final
maturity date of December 31, 2000 and will amortize in 20 equal quarterly
installments commencing on March 31, 1996. The amount of borrowing capacity
available under the Term Loan will be up to $135 million based upon a borrowing
base for New Orion calculated using a percentage of its eligible outstanding
accounts receivable and a credit for New Orion's film library (such borrowing
base would currently provide for $135 million of availability under the Term
Loan). As a result, in addition to the amortization schedule to be set forth in
the New Orion Credit Facility, the New Orion Credit Facility will provide that
in the event that the ratio of the value of the eligible accounts receivable in
New Orion's borrowing base to the amount outstanding under the Term Loan (the
"Borrowing Base Ratio") does not exceed a designated threshold, all cash
received by New Orion must be used to prepay principal and interest on the Term
Loan until such Borrowing Base Ratio exceeds such designated threshold. To the
extent the Borrowing Base Ratio exceeds the threshold set forth in the New Orion
Credit Facility, and is not needed to amortize the Term Loan, New Orion may use
excess cash to pay its operating expenses, including the costs of acquiring new
film product or new production. The Term Loan and the Revolving Credit Facility
will be secured by a first priority lien in all of the stock of New Orion and in
substantially all of New Orion's assets, including its accounts receivable and
film library. In addition, New Orion will establish a system of lockbox accounts
and collection accounts to maintain Chemical's security interest in the cash
proceeds of New Orion's accounts receivable. Amounts outstanding under the
Revolving Credit Facility will also be guaranteed jointly and severally by
Metromedia and by John D. Phillips. In addition, Metromedia has agreed to
guarantee the payment by Orion to Chemical of certain fees payable in connection
with the execution of the commitment letter with Chemical for the New Orion
Credit Facility.
The New Orion Credit Facility will contain customary covenants including
maintenance of corporate existence, compliance with ERISA, maintenance of
properties, delivery of certain monthly, quarterly and annual financial
information, delivery of budgets and other information regarding new
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motion picture productions, limitations on the issuance of additional
indebtedness and guarantees, limitations on the creation of new liens,
limitations on the number of films New Orion may produce simultaneously and the
development costs and budgets for such films, limitations on the aggregate
amount of unrecouped print and advertising costs New Orion may incur,
limitations on the amount of New Orion's leases, capital and overhead expenses,
prohibitions on the declaration of dividends or distributions by New Orion,
limitations on the merger or consolidation of New Orion or the sale by New Orion
of any substantial portion of its assets or stock and restrictions on New
Orion's line of business, other than activities relating to the production and
distribution of entertainment product. The New Orion Credit Facility will also
contain several financial covenants, including requiring maintainence by New
Orion of the ratio of New Orion's Free Cash Flow (as defined in the New Orion
Credit Facility) to New Orion's cumulative investment in film product above
certain specified levels at the end of each fiscal quarter, and requiring that
New Orion's cumulative investment in film product not exceed Free Cash Flow by
more than $50,000,000. In addition, the New Orion Credit Facility will contain a
limitation on the amount of New Orion's net losses above certain levels for each
fiscal year beginning with the fiscal year ended December 31, 1996.
The Revolving Credit Facility will contain the following events of default:
nonpayment of principal or interest on the facility, the occurence of a "change
of control" (as defined below) of New Orion and an assertion by the guarantors
of such facility that the guarantee of such facility is unenforceable. The Term
Loan portion of the New Orion Credit Facility will also contain a number of
customary events of default including non-payment of principal and interest, the
occurrence of a "change of control" of the Surviving Corporation (defined to
mean if the Metromedia Holders do not control at least 25% of the outstanding
Common Stock or if a third party controls more Common Stock than the Metromedia
Holders or is entitled to designate a majority of the members of the Surviving
Corporation's Board of Directors), a termination of employment of New Orion's
chief executive officer, head of production, general counsel or chief financial
officer and the objection to such person's replacement by the required lenders
within a designated period, violation of covenants, falsity of representations
and warranties in any material respect, certain cross-default and
cross-acceleration provisions, and bankruptcy or insolvency of New Orion or the
Surviving Corporation.
The commitment letter with Chemical for the New Orion Credit Facility will
provide for a number of customary conditions precedent to the making of loans to
New Orion, including the receipt of certain legal opinions and certificates,
absence of any material adverse change in New Orion's business, satisfaction
with New Orion's business plan and capital structure, receipt of commitments
from other banks and financial institutions to provide financing to New Snapper
and New MITI, satisfaction with the results of Chemical's due diligence
investigation of New Orion and the Surviving Corporation, satisfaction with New
Orion's management and the investment in New Orion by the Surviving Corporation
of certain amounts in the form of equity or subordinated debt, which together
with the proceeds of the Term Loan, is required to refinance in full all the
outstanding Orion Senior Indebtedness and Orion Subordinated Indebtedness.
Surviving Corporation Revolving Credit Facility. It is anticipated that at
the Effective Time, the Surviving Corporation will enter into a credit facility
(the "MIG Credit Facility") with Chemical for up to $35 million based upon a
percentage of the value of the Surviving Corporation's investment in Roadmaster
common stock (which, if the Effective Time had occurred on September 20, 1995
would have entitled the Surviving Corporation to borrow $34.5 million). The
proceeds from the MIG Credit Facility will be used to refinance Orion's
indebtedness as described below. The MIG Credit Facility will have a maturity of
one year and will bear interest at MIG's option at a rate of LIBOR plus 2% or
Chemical's alternative base rate plus 1%. The MIG Credit Facility will be
secured by a first lien on all of the shares of Roadmaster common stock owned by
the Surviving Corporation, a second lien on New Snapper's assets and a guarantee
by New MITI. In the event the amount outstanding under the MIG Credit Facility
exceeds 65% of the value of the Roadmaster common stock pledged to secure such
facility, the Surviving Corporation will be obligated either to prepay an amount
of the loan to reduce the amount outstanding to 60% of the value of the
Roadmaster common stock or pledge additional collateral to secure the loan.
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Use of Proceeds by the Surviving Corporation to Refinance Existing Orion
Indebtedness. The Surviving Corporation intends to use the entire amount of the
proceeds of the Term Loan ($135 million) and the MIG Credit Facility (currently
$34.5 million) and the cash on hand of Actava and Orion at the Effective Time
(the amount of cash on hand to be used for such purpose is currently estimated
to be approximately $41.4 million assuming the Effective Time occurred on
September 20, 1995) to refinance the existing Orion Senior Indebtedness and
Orion Subordinated Indebtedness in full, including certain financing costs. The
Orion Senior Indebtedness ($54.0 million at September 20, 1995) will be repaid
at the Effective Time in full, at the face amount of such indebtedness, plus
accrued and unpaid interest to such date.
With regard to the Orion Subordinated Indebtedness, the Surviving
Corporation intends to redeem in full the aggregate amount of the Talent Notes
($36.6 million at September 20, 1995) and Creditor Notes ($62.8 million at
September 20, 1995) at 100% of their face amount plus accrued and unpaid
interest through the redemption date in accordance with the indentures for such
Notes and to redeem in full the aggregate amount of the 10% Subordinated
Debentures ($50.8 million at September 20, 1995) at 95% of their face amount
plus accrued and unpaid interest through the redemption date in accordance with
the indenture for such debentures. Following the refinancing in full of the
existing Orion indebtedness, the current restrictions on Orion's ability to
produce and acquire new motion picture product imposed by Orion's existing
indebtedness will be removed. The New Orion Credit Facility will, however,
contain certain limitations on New Orion's ability to produce and acquire new
product. Subject to these limitations, following the Effective Time, New Orion
may use the entire amount of the Revolving Credit Facility ($50 million) to
finance the production and acquisition of new entertainment product and for New
Orion's working capital requirements subject to the limitations set forth in the
New Orion Credit Facility.
New MITI and New Snapper Credit Facilities. MITI, its wholly-owned
subsidiary, International Telcell, Inc. ("ITI"), and International Telcell SPS,
Inc. ("ITISPS"), a recently formed wholly-owned subsidiary of ITI, have entered
into a commitment letter with the Overseas Private Investment Corporation
("OPIC"), a United States government agency, whereby OPIC agreed to provide loan
guarantees enabling ITI and a special-purpose subsidiary ("ITISPS") to obtain
loans in an amount of up to $29.9 million (the "Loans"), subject to the
satisfaction of certain conditions, for the construction, operation and
management of MITI'S wireless cable television systems in markets such as
Moscow, Russia, Riga, Latvia, Tbilisi, Georgia and Tashkent, Uzbekistan. It is
anticipated that the Loans will be provided to ITI and ITISPS directly by OPIC
and that interests in 100% of the Loans will be sold by the Placement Agent on a
best efforts basis to one or more institutional investors. The interests in the
Loans will be evidenced by certificates of participation ("COPs") issued by OPIC
to such institutional investors and OPIC will guarantee the repayment in full of
the COPs by affixing a guaranty endorsement to each COP. OPIC will have no
obligation to provide any Loans to ITI and ITISPS, unless Chemical, as the
placement agent, is able to sell all of the COPs to eligible institutional
investors. The COPs may be put back, at the option of the purchaser thereof, to
ITI and ITISPS, under certain circumstances. The interest rate on the COPs will
be tied to the rate of the 91-day U.S. Treasury Bill.
New Snapper will continue to utilize its existing revolving credit facility
to finance its operations.
CHANGE IN CONTROL
The consummation of the Mergers will result in a "change in control" of
Actava and Sterling (within the meaning of Item 403(c) of the Commission's
Regulation S-K). Assuming that the Determination Date had occurred on September
1, 1995 (and assuming the exercise of all outstanding options to acquire shares
of Common Stock and assuming the conversion to Common Stock of certain financing
arrangements provided by certain of the Metromedia Holders to Orion and
affiliates of Orion and MITI), the Surviving Corporation would have issued to
the Metromedia Holders 14,498,000 shares of Common Stock, which will represent
in the aggregate approximately 33.3% of the common equity and voting power of
the Surviving Corporation and will initially be entitled to elect six of the ten
members of the Surviving Corporation's Board of Directors. The size of the
Surviving Corporation's Board of Directors is subject to downward adjustment
under certain circumstances. See "PROPOSAL
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NO. 1--THE PROPOSED MERGERS--Management and Operations After the Mergers."
Assuming that the Determination Date occurred on September 20, 1995 (and
assuming the exercise of all outstanding options to acquire shares of Common
Stock and assuming the conversion to Common Stock of certain financing
arrangements provided by certain of the Metromedia Holders to Orion and
affiliates of Orion and MITI), Actava Stockholders will collectively own
approximately 41.5% of the outstanding shares of Common Stock and Sterling
Stockholders will collectively own approximately 1.2% of the outstanding shares
of Common Stock.
ACCOUNTING TREATMENT
At the Effective Time, the Metromedia Holders will (through their majority
ownership of the Orion Common Stock and through their control, with a member of
Orion's management, of the Board of Directors of Orion) control the direction
and operations of the Surviving Corporation as a result of their ability to
appoint a majority of the members of the Board of Directors of the Surviving
Corporation at the Effective Time and will be the Surviving Corporation's single
largest stockholder. Due to the existence of common control of Orion and MITI,
their combination pursuant to the Mergers will be accounted for as a combination
of entities under common control. As a result, the combination of Orion and MITI
will be effected utilizing historical costs for the ownership interests of the
Metromedia Holders. The remaining ownership interests of MITI other than those
of the Metromedia Holders will be accounted for based on fair value of such
ownership interests, as determined by the value of shares received by such
holders at the Effective Time, in accordance with the purchase method of
accounting. For accounting purposes only, Orion and MITI have been deemed to be
the joint acquiror of Actava and Sterling. The acquisition of Actava and
Sterling will be accounted for as a purchase. As a result of the reverse
acquisition, the historical financial statements of the Surviving Corporation
for periods prior to the Mergers will be those of Orion rather than Actava.
PUBLIC TRADING MARKET
It is a condition to the consummation of the Mergers that the outstanding
shares of Common Stock and the shares of Common Stock to be issued in connection
with the Mergers be accepted for listing on the NYSE or the AMEX or accepted for
quotation on the NASDAQ/NMS. An application to list the Surviving Corporation's
Common Stock on the AMEX will be filed shortly.
DISSENTERS' RIGHTS
Orion and Actava
Orion Stockholders and Actava Stockholders are not entitled to dissenters'
rights of appraisal or other dissenters' rights under Delaware law with respect
to the Mergers or any transactions contemplated by the Merger Agreement.
MITI and Sterling
Holders of shares of MITI Common Stock and Sterling Common Stock who make
the demand described below with respect to such shares, who continuously are the
record holders of such shares through the Effective Time, who otherwise comply
with the statutory requirements of Section 262 (a copy of which is attached
hereto as Appendix F) and who neither vote in favor of the Merger Agreement nor
consent thereto in writing will be entitled to an appraisal by the Delaware
Court of the fair value of their shares of MITI Common Stock or Sterling Common
Stock, as the case may be. All references in this summary of appraisal rights to
a "stockholder," "holders of shares of MITI Common Stock" or "holders of shares
of Sterling Common Stock" are to the record holder or holders of shares of MITI
Common Stock or Sterling Common Stock, as the case may be. Except as set forth
herein, stockholders of MITI and Sterling will not be entitled to appraisal
rights in connection with the MITI Merger or the Sterling Merger, as the case
may be.
In addition to the requirements set forth above, a holder of shares of MITI
Common Stock wishing to exercise dissenters' rights of appraisal must, within 20
days after the date of mailing of the notice regarding appraisal rights required
by Section 262, deliver to New MITI a written demand for appraisal of his
shares. A holder of shares of Sterling Common Stock wishing to exercise
dissenters' rights of appraisal must, before the taking of the vote on the
Sterling Merger at the Sterling Special
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Meeting, deliver to Sterling a written demand for appraisal of such shares. A
demand for appraisal will be sufficient if it reasonably informs New MITI or
Sterling, as the case may be, of the identity of the stockholder and that the
stockholder intends thereby to demand the appraisal of his shares.
Within 120 days after the Effective Time, either the surviving corporation
of a merger or any stockholder who has complied with the required conditions of
Section 262 may file a petition in the Delaware Court, with a copy served on the
surviving corporation of a merger in the case of a petition filed by a
stockholder, demanding a determination of the fair value of the shares of all
dissenting stockholders. There is no present intent on the part of New MITI or
the Surviving Corporation to file an appraisal petition and stockholders seeking
to exercise appraisal rights should not assume that New MITI or the Surviving
Corporation will file such a petition or that New MITI or the Surviving
Corporation will initiate any negotiations with respect to the fair value of
such shares. Accordingly, MITI Stockholders and Sterling Stockholders who desire
to have their shares appraised should initiate any petitions necessary for the
perfection of their appraisal rights within the time periods and in the manner
prescribed in Section 262. Within 120 days after the Effective Time, any
stockholder who has theretofore complied with the applicable provisions of
Section 262 will be entitled, upon written request, to receive from New MITI or
the Surviving Corporation, as the case may be, a statement setting forth the
aggregate number of shares of MITI Common Stock or Sterling Common Stock, as the
case may be, not voting in favor of the Merger Agreement and with respect to
which demands for appraisal were received by MITI and/or Sterling and the number
of holders of such shares. Such statement must be mailed within 10 days after
the written request therefor has been received by New MITI or the Surviving
Corporation, as the case may be.
If a petition for an appraisal is timely filed, at the hearing on such
petition, the Delaware Court will determine which stockholders are entitled to
appraisal rights. The Delaware Court may require the stockholders who have
demanded an appraisal for their shares and who hold stock represented by
certificates to submit their certificates of stock to the Register in Chancery
for notation thereon of the pendency of the appraisal proceedings; and if any
stockholder fails to comply with such direction, the Delaware Court may dismiss
the proceedings as to such stockholder. Where proceedings are not dismissed, the
Delaware Court will appraise the shares of MITI Common Stock or Sterling Common
Stock, as the case may be, owned by such stockholders, determining the fair
value of such shares exclusive of any element of value arising from the
accomplishment or expectation of the MITI Merger, or the Sterling Merger, as the
case may be, together with a fair rate of interest, if any, to be paid upon the
amount determined to be the fair value. In determining fair value, the Delaware
Court is to take into account all relevant factors. In Weinberger v. UOP Inc.,
the Delaware Supreme Court discussed the factors that could be considered in
determining fair value in an appraisal proceeding, stating that "proof of value
by any techniques or methods which are generally considered acceptable in the
financial community and otherwise admissible in court" should be considered, and
that "fair price obviously requires consideration of all relevant factors
involving the value of a company." The Delaware Supreme Court stated that in
making this determination of fair value the court must consider market value,
asset value, dividends, earnings prospects, the nature of the enterprise and any
other factors which could be ascertained as of the date of the merger which
throw light on future prospects of the merged corporation. In Weinberger, the
Delaware Supreme Court stated that "elements of future value, including the
nature of the enterprise, which are known or susceptible of proof as of the date
of the merger and not the product of speculation, may be considered." Section
262, however, provides that fair value is to be "exclusive of any element of
value arising from the accomplishment or expectation of the merger."
Holders of shares of MITI Common Stock and/or Sterling Common Stock
considering seeking appraisal should recognize that the fair value of their
shares determined under Section 262 could be more than, the same as or less than
the consideration they are entitled to receive pursuant to the Merger Agreement
if they do not seek appraisal of their shares. The cost of the appraisal
proceeding may be determined by the Delaware Court and taxed against the parties
as the Delaware Court deems equitable in the circumstances. Upon application of
a dissenting stockholder of MITI and/or Sterling, the Delaware Court may order
that all or a portion of the expenses incurred by any dissenting stockholder in
connection with the appraisal proceeding, including without limitation,
reasonable
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attorney's fees and the fees and expenses of experts, be charged pro rata
against the value of all shares of stock entitled to appraisal.
At any time within 60 days after the Effective Time, any stockholder will
have the right to withdraw such demand for appraisal and to accept the terms
offered in the MITI Merger or Sterling Merger, as the case may be; after this
period, the stockholder may withdraw such demand for appraisal only with the
consent of New MITI or the Surviving Corporation, as the case may be. If no
petition for appraisal is filed with the Delaware Court within 120 days after
the Effective Time, stockholders' rights to appraisal shall cease, and all
holders of shares of MITI Common Stock or Sterling Common Stock, as the case may
be, will be entitled to receive the consideration offered pursuant to the Merger
Agreement. Inasmuch as each of New MITI and the Surviving Corporation has no
obligation to file such a petition, and each of New MITI and the Surviving
Corporation has no present intention to do so, any holder of shares of MITI
Common Stock and/or Sterling Common Stock who desires such a petition to be
filed is advised to file it on a timely basis. Any stockholder may withdraw such
stockholder's demand for appraisal by delivering to New MITI or the Surviving
Corporation, as the case may be, a written withdrawal of his or her demand for
appraisal and acceptance of the MITI Merger or Sterling Merger, as the case may
be, except (i) that any such attempt to withdraw made more than 60 days after
the Effective Time will require written approval of New MITI or the Surviving
Corporation, as the case may be, and (ii) that no appraisal proceeding in the
Delaware Court shall be dismissed as to any stockholder without the approval of
the Delaware Court, and such approval may be conditioned upon such terms as the
Delaware Court deems just.
SURRENDER OF STOCK CERTIFICATES AND RECEIPT OF MERGER CONSIDERATION
At the Effective Time, (i) each holder of Orion Common Stock will be
entitled to receive the number of whole shares of Common Stock equal to the
number of shares of Orion Common Stock owned immediately prior to the Effective
Time multiplied by the Orion Exchange Ratio, plus cash in lieu of any fractional
shares, (ii) each holder of MITI Common Stock will be entitled to receive the
number of whole shares of Common Stock equal to the number of shares of MITI
Common Stock owned immediately prior to the Effective Time multiplied by the
MITI Exchange Ratio, plus cash in lieu of any fractional shares, and (iii) each
holder of Sterling Common Stock will be entitled to receive the number of whole
shares of Common Stock equal to the number of shares of Sterling Common Stock
owned immediately prior to the Effective Time multiplied by the Sterling
Exchange Ratio, plus cash in lieu of any fractional shares. Each holder of Orion
Common Stock, MITI Common Stock and Sterling Common Stock, upon surrender of a
stock certificate or certificates, will be entitled to receive a stock
certificate or certificates representing the number of whole shares of Common
Stock (together with cash in lieu of fractional shares) to which such
stockholder is entitled. As soon as practicable after the Effective Time,
Chemical Mellon Shareholder Services, the Exchange Agent, will mail to each
former holder of Orion Common Stock, MITI Common Stock and Sterling Common
Stock, notification of the consummation of the Orion Merger, the MITI Merger and
the Sterling Merger, as the case may be, and instructions as to the procedure
for the surrender of the stock certificates. The Exchange Agent will accept
documentation acceptable to it in lieu of lost or destroyed certificates and may
also require the holder of a lost or destroyed certificate to post an insurance
bond acceptable to the Exchange Agent. Actava Stockholders will not be required
to surrender or exchange their shares of Common Stock.
No dividends or other distributions will be paid to a former stockholder of
Orion, MITI or Sterling with respect to shares of Common Stock until such
stockholder's stock certificate(s) representing Orion Common Stock, MITI Common
Stock or Sterling Common Stock, as the case may be, are delivered to the
Exchange Agent (or documentation in lieu of a lost or destroyed certificate is
delivered). Any dividends declared between the Effective Time and the date of
the surrender of the stock certificate(s) will be held by the Exchange Agent for
the benefit of such stockholder and will be paid to such stockholder, without
interest thereon, upon the surrender of such stock certificate(s) (or
documentation in lieu thereof).
FRACTIONAL SHARES
No fractional shares of Common Stock will be issued to the stockholders of
Orion, MITI or Sterling in connection with any of the Mergers. In lieu of the
issuance of any fractional shares, cash equal to such fractional interest
multiplied by the market value of a full share of Common Stock will be paid to
the holder of such interest. For this purpose, the market value of a share of
Common Stock will be equal to the Actava Average Closing Price.
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CERTAIN FEDERAL INCOME TAX CONSEQUENCES OF THE MERGERS
The Mergers
The Mergers are intended to qualify as tax-free reorganizations within the
meaning of Section 368(a) of the Code. Assuming that the Mergers so qualify, the
principal federal income tax consequences of the Mergers will be as follows:
(i) Except as otherwise described herein, no gain or loss will be
recognized by Actava, Orion, MITI or Sterling as a result of the Mergers.
(ii) No gain or loss will be recognized by the stockholders of Orion,
MITI or Sterling upon their receipt of shares of Common Stock in exchange
for their shares of Orion Common Stock, MITI Common Stock or Sterling Common
Stock, as the case may be, except as described in (v) below.
(iii) The tax basis of the shares of Common Stock (including fractional
share interests for which cash is ultimately received) received by the
stockholders of Orion, MITI and Sterling will be the same as the tax basis
of their shares of Orion Common Stock, MITI Common Stock or Sterling Common
Stock, respectively, exchanged therefor, plus any gain recognized on the
applicable Merger (including any portion that is treated as a dividend as
described in (v) below).
(iv) The holding period of the Common Stock in the hands of the Orion,
MITI and Sterling stockholders will include the holding period of their
shares of Orion Common Stock, MITI Common Stock or Sterling Common Stock,
respectively, exchanged therefore, provided that such shares were held as a
capital asset at the Effective Time of the Mergers.
(v) Each stockholder of Orion, MITI and Sterling who receives cash
proceeds from the sale of fractional interests in shares of Common Stock
will recognize gain or loss equal to the difference between such proceeds
and the tax basis allocated to such stockholder's fractional share
interests. Any stockholder of MITI or Sterling who perfects dissenter's
appraisal rights and receives solely cash will recognize gain equal to the
excess of the cash received over such stockholder's tax basis in the shares
of MITI Common Stock or Sterling Common Stock exchanged. Any such gain or
loss recognized as described in this paragraph will constitute capital gain
or loss if the stockholder's shares of Orion Common Stock, MITI Common Stock
or Sterling Common Stock, as the case may be, were held as a capital asset
at the Effective Time of the Mergers, unless the receipt of such cash by
such stockholder has the effect of a distribution of a dividend, in which
case such gain will be taxed as ordinary income, to the extent of the
earnings and profits of the Surviving Corporation.
Although the issue is not entirely free from doubt, the refinancing,
repayment or conversion to Common Stock of certain financing arrangements
provided by Metromedia and its affiliates to Orion, MITI and Sterling and their
affiliates should not give rise to any gain or loss to Orion, MITI or Sterling,
respectively, or to Metromedia or its affiliates.
Consummation of the Mergers is conditioned upon receipt by Orion, Actava,
MITI and Sterling of opinions from their respective counsel that the Mergers
will be treated for federal income tax purposes as reorganizations within the
meaning of Section 368(a) of the Code. Such opinions will be issued with the
understanding that the relevant facts are as described in this Joint Proxy
Statement/Prospectus and exhibits and appendices hereto, and in rendering such
opinions such counsel will rely upon the accuracy of the factual statements and
representations in the foregoing documents and upon certain representations made
in writing to such counsel by Orion, Actava, MITI, Sterling and certain of their
stockholders. An opinion of counsel, however, is not binding on the Internal
Revenue Service or the courts. No ruling on the Mergers will be sought from the
Internal Revenue Service.
Limitations on Net Operating Loss Carry-Forwards
As of the end of their most recent taxable years, Orion, Actava, MITI and
Sterling and the subsidiaries included in their respective affiliated groups of
corporations which file consolidated Federal
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income tax returns with Orion, Actava, MITI and Sterling as the parent
corporations (such Orion, Actava, MITI and Sterling affiliated groups
hereinafter being referred to as the "Orion Group," the "Actava Group," the
"MITI Group" and the "Sterling Group," respectively, and individually as a
"Former Group" and collectively as the "Former Groups") reported or will report
net operating loss carryforwards. As a result of the Mergers, certain
limitations will apply to the use of such net operating losses by the Surviving
Corporation and its subsidiaries included in the affiliated group of
corporations which will file a consolidated Federal income tax return with the
Surviving Corporation as the parent corporation (the "Surviving Group").
Under Section 382 of the Code, annual limitations will generally apply to
the use of such losses by the Surviving Group. The amount of the annual
limitation with respect to a Former Group will depend upon the application of
certain principles contained in Section 382 relating to the valuation of such
Former Group immediately prior to the Mergers and an interest factor published
by the Internal Revenue Service on a monthly basis. Orion, Actava, MITI and
Sterling, respectively, anticipate that based on the valuations of the Orion
Group, the Actava Group, the MITI Group and the Sterling Group and using the
most recently published interest factor of 5.75 percent (applicable for
transactions occurring during September 1995), the annual limitations on the use
of the losses of the Orion Group, the Actava Group, the MITI Group and the
Sterling Group, respectively, by the Surviving Group will be approximately $6.9
million, $10.2 million, $5.8 million and $.35 million per year, respectively.
The amount of any such limitation with respect to a Former Group would generally
be increased by the amount of any recognized "built-in" gains of former members
of such Former Group. In addition, to the extent losses equal to the annual
limitation with respect to any of the Former Groups are not used in any year,
the unused amount would generally be available to be carried forward and used to
increase the limitation with respect to such Former Group in the succeeding
year.
The use of losses of the Orion Group, the MITI Group and the Sterling Group
will also be separately limited by the income and gains recognized by the
corporations that were members of each of the Orion Group, the MITI Group and
the Sterling Group, respectively, including corporations such as the Surviving
Corporation (in the case of Sterling), OPC Mergerco (in the case of Orion) and
MITI Mergerco (in the case or MITI) that are successors by merger to any of such
members. Under proposed Treasury regulations, such losses of any such former
members of any such Former Group, or successors thereof, would be usable on an
aggregate basis to the extent of the income and gains of such former members of
such Former Group, or successors thereof on an aggregate basis.
THE DISCUSSION SET FORTH ABOVE IS INCLUDED FOR GENERAL INFORMATION ONLY. IT
DOES NOT ADDRESS THE STATE, LOCAL OR FOREIGN TAX ASPECTS OF THE MERGERS. IN
ADDITION, THE DISCUSSION DOES NOT ADDRESS THE TAX CONSEQUENCES THAT MAY BE
RELEVANT TO PARTICULAR CATEGORIES OF STOCKHOLDERS SUBJECT TO SPECIAL TREATMENT
UNDER CERTAIN FEDERAL INCOME TAX LAWS, SUCH AS DEALERS IN SECURITIES, BANKS,
INSURANCE COMPANIES, FOREIGN INDIVIDUALS AND ENTITIES AND REGULATED INVESTMENT
COMPANIES. THE DISCUSSION IS BASED ON CURRENTLY EXISTING PROVISIONS OF THE CODE,
EXISTING AND PROPOSED TREASURY REGULATIONS THEREUNDER AND CURRENT ADMINISTRATIVE
RULINGS AND COURT DECISIONS. ALL OF THE FOREGOING ARE SUBJECT TO CHANGE,
POSSIBLY WITH RETROACTIVE EFFECT, AND ANY SUCH CHANGE COULD AFFECT THE
CONTINUING VALIDITY OF THIS DISCUSSION. EACH STOCKHOLDER SHOULD CONSULT HIS OR
HER OWN TAX ADVISOR AS TO THE SPECIFIC TAX CONSEQUENCES OF THE MERGERS TO HIM OR
HER, INCLUDING THE APPLICATION AND EFFECT OF FEDERAL, STATE, LOCAL AND FOREIGN
TAX LAWS.
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LITIGATION
Three stockholder suits have been filed in the Delaware Court relating to
the proposed Mergers.
Jerry Krim v. John W. Kluge, Silvia Kessel, Joel R. Packer, Michael I.
Sovern, Raymond L. Steele, Stuart Subotnick, Arnold L. Wadler, Stephen
Wertheimer, Leonard White and Orion Pictures Corporation, (Delaware Chancery
Court, C.A. No. 13721); complaint filed September 2, 1994. Orion and each of its
directors have been named as defendants in a purported class action lawsuit
which alleges that Orion's Board of Directors failed to use the required care
and diligence in considering the Mergers, and seeks to enjoin the Mergers. The
lawsuit further alleges that as a result of the actions of Orion's directors,
Orion's stockholders will not receive the fair value of Orion's assets and
business in exchange for their Orion Common Stock, in the Mergers. Orion and its
directors have obtained an indefinite extension of time to answer the complaint.
Harry Lewis v. John W. Kluge, Leonard White, Stuart Subotnick, Silvia
Kessel, Joel R. Packer, Michael I. Sovern, Raymond L. Steele, Arnold L. Wadler,
Stephen Wertheimer, Actava Group, Inc. and Orion Pictures Corp. (Delaware
Chancery Court, C.A. No. 14234); complaint filed April 17, 1995. Orion, each of
its directors and Actava have been named in this purported class action lawsuit,
which was filed after the execution of the Merger Agreement. The complaint
contains similar allegations and seeks similar relief to the Krim case described
above. Orion and its directors have obtained an indefinite extension of time to
answer the complaint.
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. Imlay, 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); complaint filed September 23, 1994. This class
action lawsuit was filed by stockholders of Actava against Actava and its
directors as well as each of Orion, MITI and Sterling. The complaint alleges
that the terms of the Mergers constitute an overpayment by Actava for the assets
of Orion and it seeks to enjoin the Mergers. The complaint further alleges that
each of Orion, MITI and Sterling knowingly aided, abetted and materially
assisted Actava's directors in breach of their fiduciary duties to Actava's
stockholders. Actava has filed a motion to dismiss. The plaintiff has not
responded. Orion and Sterling have received indefinite extensions of the time to
answer the complaint.
Each of the Krim action, the Lewis action and the Sweeney action are at a
preliminary stage. In the case of Krim and Lewis, each of the defendants has not
responded to the complaint; in the case of Sweeney, only Actava has responded to
the complaint. No discovery has been taken and plaintiffs have not yet moved for
class certification in any of the actions. Certain of the defendants have
engaged in settlement talks with plaintiffs' counsel in each of the Krim, Lewis
and Sweeney actions. Such talks have not resulted in an agreement to settle any
of the actions.
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SURVIVING CORPORATION
PRO FORMA COMBINING FINANCIAL STATEMENTS
The following unaudited Pro Forma Combining Balance Sheet of the accounting
acquiror Orion as of May 31, 1995 and unaudited Pro Forma Combining Statement of
Operations of the accounting acquiror Orion for the three months ended May 31,
1995 and the year ended February 28, 1995, illustrate the effect of the Mergers
(see "Accounting Treatment" below), the associated refinancing of the Orion
Senior Indebtedness and the Orion Subordinated Indebtedness, the contribution
for equity of inventory by MetProductions, the conversion to equity of certain
amounts owed to Met International, the settlement of certain Orion liabilities
and accounting for the results of Actava's sporting goods subsidiaries for the
period from January 1, 1994 through December 6, 1994 on the equity method as a
result of the exchange of such subsidiaries for approximately 39% of
Roadmaster's outstanding common stock on December 6, 1994. The unaudited Pro
Forma Combining Balance Sheet assumes that the Mergers and other aforementioned
transactions occurred on May 31, 1995 and the unaudited Pro Forma Combining
Statements of Operations assumes that the Mergers and other aforementioned
transactions occurred at the beginning of the periods presented.
Pursuant to the terms of the Merger Agreement, each holder of Orion Common
Stock, MITI Common Stock and Sterling Common Stock will be entitled to receive
the number of whole shares of Common Stock equal to the number of shares of
Orion Common Stock, MITI Common Stock and Sterling Common Stock, as the case may
be, owned immediately prior to the Effective Time multiplied by the Orion
Exchange Ratio, the MITI Exchange Ratio and the Sterling Exchange Ratio,
respectively, plus cash in lieu of fractional shares and cash issued in respect
of dissenters rights of appraisal, if any, (which is expected to be immaterial).
The Orion Exchange Ratio will be based upon the Actava Average Closing Price and
the number of shares of Orion Common Stock outstanding immediately prior to the
Determination Date. The MITI Exchange Ratio will be based upon the Actava
Average Closing Price and the number of shares of MITI Common Stock outstanding
immediately prior to the Determination Date. The Sterling Exchange Ratio will be
based upon the Actava Average Closing Price and the number of shares of Sterling
Common Stock outstanding immediately prior to the Determination Date. These pro
forma combining financial statements have been prepared assuming: an Actava
Average Closing Price of $16.38125, 20.0 million shares of Orion Common Stock
outstanding and an Orion Exchange Ratio of .57143; 1.7 million shares of MITI
Common Stock outstanding and a MITI Exchange Ratio of 5.54937; and 11.2 million
shares of Sterling Common Stock outstanding and a Sterling Exchange Ratio of
.04627. The actual Orion Exchange Ratio, MITI Exchange Ratio and Sterling
Exchange Ratio will be determined on the Determination Date in accordance with
the formulas set forth in the Merger Agreement. See "PROPOSAL NO. 1--THE
PROPOSED MERGERS." The Actava Options will remain outstanding after the
Effective Time with the same terms and subject to the same conditions as in
effect prior to the Effective Time. The MITI Options will be converted into
options to purchase shares of Common Stock, with a proportional adjustment being
made to the exercise price of and the number of shares into which to each such
option to reflect the MITI Exchange Ratio in the Mergers.
ACCOUNTING TREATMENT
At the Effective Time, the Metromedia Holders will (through their majority
ownership of the Orion Common Stock and through their control, with a member of
Orion's management, of the Board of Directors of Orion) control the direction
and operations of the Surviving Corporation as a result of their ability to
appoint a majority of the members of the Board of Directors of the Surviving
Corporation at the Effective Time and will be the Surviving Corporation's single
largest stockholder. Due to the existence of common control of Orion and MITI,
their combination pursuant to the Mergers will be accounted for as a combination
of entities under common control. As a result, the combination of Orion and MITI
will be effected utilizing historical costs for the ownership interests of the
Metromedia Holders. The remaining ownership interests of MITI other than those
of the Metromedia Holders will
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be accounted for based on fair value, as determined by the value of shares
received by such holders at the Effective Time, in accordance with the purchase
method of accounting. For accounting purposes only, Orion and MITI have been
deemed to be the joint acquiror of Actava and Sterling. The acquisition of
Actava and Sterling will be accounted for as a purchase. As a result of the
reverse acquisition of Actava by Orion, the historical financial statements of
the Surviving Corporation for periods prior to the Mergers will be those of
Orion rather than Actava.
The pro forma adjustments are based upon currently available information and
upon certain assumptions that management of each of Actava, Orion, MITI and
Sterling (collectively "Management") believes are reasonable. The mergers of
Actava and Sterling will be recorded based upon the estimated fair market value
of the net tangible assets acquired at the date of acquisition. The adjustments
included in the unaudited pro forma combining financial statements represent
Management's preliminary determination of these adjustments based upon available
information. There can be no assurance that the actual adjustments will not
differ significantly from the pro forma adjustments reflected in the pro forma
financial information.
The unaudited pro forma combining financial statements are not necessarily
indicative of either future results of operations or results that might have
been achieved if the foregoing transactions had been consummated as of the
indicated dates. The unaudited pro forma combining financial statements should
be read in conjunction with the historical financial statements of Actava
(incorporated by reference), Orion, MITI and Sterling, together with the related
notes thereto, included elsewhere in this Joint Proxy Statement/Prospectus.
139
<PAGE>
SURVIVING CORPORATION
UNAUDITED PRO FORMA COMBINING BALANCE SHEET
(IN THOUSANDS)
<TABLE><CAPTION>
MAY 31, 1995
-----------------------------------
MAY 31, JUNE 30 SURVIVING
1995 MARCH 31, 1995 1995 CORPORATION
----------- ----------------------- ---------- PRO FORMA PRO FORMA PRO FORMA
ORION MITI ACTAVA STERLING MERGER FOR MERGER REFINANCING
HISTORICAL HISTORICAL HISTORICAL HISTORICAL ADJUSTMENTS COMBINED ADJUSTMENTS
----------- ---------- ---------- ---------- ----------- ------------- --------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Cash and marketable
securities......... $ 14,188 $ 2,430 $ 44,274 $ 613 $ -- $ 61,505 $(41,586)(13)
(7,882)(24)
Accounts
receivable......... 40,776 713 139,791 3,140 -- 184,420
Notes receivable..... -- -- 98,063 -- -- 98,063 (44,895)(14)
Other current
assets............. 67,140 264 44,475 -- 15,024(1) 136,003 --
9,100(2)
----------- ---------- ---------- ----- ----------- ---------- -------
Current assets....... 122,104 3,407 326,603 3,753 24,124 479,991 (94,363)
Film inventories..... 159,901 -- -- 2,891 558(3) 163,350 --
Property and
equipment, net..... 2,334 2,379 33,517 -- -- 38,230 --
Intangibles.......... -- 9,460 633 -- 301,695(4) 306,972 --
(633)(5)
(4,183)(6)
Other assets......... 38,945 29,406 98,704 430 (10,382)(7) 156,103 6,745(13)
(1,000)(8) (4,469)(13)
----------- ---------- ---------- ----- ----------- ---------- -------
Total assets..... $ 323,284 $ 44,652 $ 459,457 $7,074 $ 310,179 $1,144,646 $(92,087)
----------- ---------- ---------- ----- ----------- ---------- -------
Accrued expenses..... $ 30,788 $ 3,189 $ 80,235 $ 398 $ 6,500(9) $ 144,573 $ (4,882)
7,944(10)
15,982(11)
(463)(12)
Short-term debt...... 79,573 36,584 86,379 495 (10,994)(12) 192,037 (77,899)(13)
(25,380)(14)
61,504(13)
Other current
liabilities........ 54,777 4,801 8,941 2,183 -- 70,702 --
----------- ---------- ---------- ----- ----------- ---------- -------
Current
liabilities........ 165,138 44,574 175,555 3,076 18,969 407,312 (46,657)
Deferred income
taxes.............. -- -- 6,911 -- -- 6,911 --
Deferred revenues.... 30,580 -- -- 232 -- 30,812 (3,000)(24)
Long-term debt....... 118,577 584 156,826 -- (19,658)(8) 256,329 (92,143)(13)
108,000(13)
(19,515)(14)
Other liabilities.... 27,217 165 -- -- -- 27,382 --
Stockholders' equity:
Common stock........ 5,000 2 22,768 11 (4,913)(4) 40,776 --
15,950(4)
867(2)
1,091(12)
Additional paid-in
capital........... 265,811 35,794 34,903 1,989 347,542(4) 684,504 --
(15,950)(4)
8,233(2)
10,366(12)
(4,183)(6)
Retained earnings
(accumulated
deficit).......... (289,039) (36,467) 168,749 1,766 (1,766)(4) (309,380) (38,773)(13)
(168,749)(4)
16,126(4)
Treasury Stock....... -- -- (106,255) -- 106,255(4) -- --
----------- ---------- ---------- ----- ----------- ---------- -------
Total
stockholders'
equity
(deficiency)... (18,228) (671) 120,165 3,766 310,868 415,900 (38,773)
----------- ---------- ---------- ----- ----------- ---------- -------
Total liabilities
and
stockholders'
equity
(deficiency)......... $ 323,284 $ 44,652 $ 459,457 $7,074 $ 310,179 $1,144,646 $(92,087)
----------- ---------- ---------- ----- ----------- ---------- -------
----------- ---------- ---------- ----- ----------- ---------- -------
<CAPTION>
<S> <C>
SURVIVING
CORPORATION
PRO FORMA
COMBINED
-------------
Cash and marketable
securities......... $ 12,037
Accounts
receivable......... 184,420
Notes receivable..... 53,168
Other current
assets............. 136,003
-------------
Current assets....... 385,628
Film inventories..... 163,350
Property and
equipment, net..... 38,230
Intangibles.......... 306,972
Other assets......... 158,379
-------------
Total assets..... $ 1,052,558
-------------
Accrued expenses..... $ 139,691
Short-term debt...... 150,262
Other current
liabilities........ 70,702
-------------
Current
liabilities........ 360,655
Deferred income
taxes.............. 6,911
Deferred revenues.... 27,812
Long-term debt....... 252,671
Other liabilities.... 27,382
Stockholders' equity:
Common stock....... 40,776
Additional paid-in
capital........... 684,504
Retained earnings
(accumulated
deficit).......... (348,153)
Treasury Stock....... --
-------------
Total
stockholders'
equity
(deficiency)... 377,127
-------------
Total liabilities
and
stockholders'
equity
(deficiency)... $ 1,052,558
-------------
-------------
</TABLE>
140
<PAGE>
SURVIVING CORPORATION
PRO FORMA COMBINING STATEMENT OF OPERATIONS
(IN THOUSANDS EXCEPT PER SHARE DATA)
<TABLE><CAPTION>
THREE MONTHS ENDED THREE MONTHS ENDED THREE MONTHS ENDED
MAY 31, 1995 MARCH 31, 1995 JUNE 30, 1995 PRO FORMA
------------------ ------------------------- ------------------ MERGER AND
ORION MITI ACTAVA STERLING REFINANCING
HISTORICAL HISTORICAL HISTORICAL HISTORICAL ADJUSTMENTS
------------------ ---------- ---------- ------------------ -----------
<S> <C> <C> <C> <C> <C>
Revenues............. $ 42,232 $ 1,111 $ 57,062 $1,705 $--
Cost of revenues..... 38,901 -- 44,304 922 11(15)
Operating expenses... 5,823 5,738 13,405 732 (99)(16)
Deprecation and
amortization....... 142 386 2,333 22 2,969(17)
------ ---------- ---------- ----- -----------
Operating income
(loss)............. (2,634) (5,013) (2,980) 29 (2,881)
Other income
(expense):
Interest expense,
net............... (6,927) (439) (5,556) -- 6,603(18)
1,131(19)
(2,974)(20)
(674)(21)
(662)(22)
Other, net.......... -- (534) 1,501 -- --
------ ---------- ---------- ----- -----------
Income (loss) before
tax................ (9,561) (5,986) (7,035) 29 543
Provision for income
taxes.............. 200 -- -- 13 --
------ ---------- ---------- ----- -----------
Net income (loss)
from continuing
operations......... $ (9,761) $ (5,986) $ (7,035) $ 16 $ 543
------ ---------- ---------- ----- -----------
------ ---------- ---------- ----- -----------
Number of shares
issued and
outstanding........
Loss per share.......
<CAPTION>
THREE MONTHS ENDED
MAY 31, 1995
------------------
SURVIVING
CORPORATION PRO
FORMA COMBINED
------------------
<S> <C>
Revenues............. $102,110
Cost of revenues..... 84,138
Operating expenses... 25,599
Deprecation and
amortization....... 5,852
-------
Operating income
(loss)............. (13,479)
Other income
(expense):
Interest expense,
net.............. (9,498)
Other, net.......... 967
-------
Income (loss) before
tax................ (22,010)
Provision for income
taxes.............. 213
-------
Net income (loss)
from continuing
operations......... $(22,223)
-------
-------
Number of shares
issued and
outstanding........ 40,776
Loss per share....... $ (0.55)
-------
-------
</TABLE>
141
<PAGE>
SURVIVING CORPORATION
PRO FORMA COMBINING STATEMENT OF OPERATIONS
(IN THOUSANDS EXCEPT PER SHARE DATA)
<TABLE><CAPTION>
YEAR ENDED DECEMBER 31, 1994
YEAR ENDED ------------------------------------------ YEAR ENDED
FEBRUARY 28, 1995 ACTAVA MARCH 31, 1995 PRO FORMA
----------------- SPORTING ----------------- MERGER AND
ORION MITI ACTAVA GOODS STERLING REFINANCING
HISTORICAL HISTORICAL HISTORICAL SUBSIDIARIES(23) HISTORICAL ADJUSTMENTS
----------------- ---------- ---------- ---------------- ----------------- -----------
<S> <C> <C> <C> <C> <C> <C>
Revenues....... $ 191,244 $ 3,545 $ 551,828 $ (302,326) $ 8,443 $ --
Cost of
revenues..... 187,477 -- 461,175 (265,707) 4,656 43(15)
Operating
expenses..... 21,278 19,312 77,638 (36,565) 3,240 (204)(16)
Depreciation
and
amortization. 767 1,149 13,336 (4,900) 90 11,875(17)
-------- ---------- ---------- -------- ------ -----------
Operating
income
(loss)....... (18,278) (16,916) (321) 4,846 457 (11,714)
Other income
(expense):
Interest
expense, net (29,082) (213) (28,434) 5,299 -- 29,884(18)
2,867(19)
(11,897)(20)
(2,696)(21)
(2,649)(22)
Other......... (1,610) (2,012) 5,299 82 -- --
-------- ---------- ---------- -------- ------ -----------
Income (loss)
before tax... (48,970) (19,141) (23,456) 10,227 457 3,795
Provision for
income taxes. 1,300 -- -- (417) 198 --
-------- ---------- ---------- -------- ------ -----------
(50,270) (19,141) (23,456) 10,644 259 3,795
Equity in loss
of Actava
Sporting Goods
Subsidiaries. -- -- -- (10,644) -- --
-------- ---------- ---------- -------- ------ -----------
Net income
(loss) from
continuing
operations... $ (50,270) $ (19,141) $ (23,456) $ -- $ 259 $ 3,795
-------- ---------- ---------- -------- ------ -----------
-------- ---------- ---------- -------- ------ -----------
Number of
shares issued
and
outstanding.. 20,000
--------
--------
Loss per
share........ $ (2.51)
--------
--------
<CAPTION>
YEAR ENDED FEBRUARY
28,
1995
-------------------
SURVIVING
CORPORATION
PRO FORMA
COMBINED
-------------------
<S> <C>
Revenues....... $ 452,734
Cost of
revenues..... 387,644
Operating
expenses..... 84,699
Depreciation
and
amortization. 22,317
--------
Operating
income
(loss)....... (41,926)
Other income
(expense):
Interest
expense, net (36,921)
Other......... 1,759
--------
Income (loss)
before tax... (77,088)
Provision for
income taxes. 1,081
--------
(78,169)
Equity in loss
of Actava
Sporting Goods
Subsidiaries. (10,644)
--------
Net income
(loss) from
continuing
operations... $ (88,813)
--------
--------
Number of
shares issued
and
outstanding.. 40,776
--------
--------
Loss per
share........ $ (2.18)
--------
--------
</TABLE>
- ------------
(1) Reflects Actava's inventory at estimated fair market value.
(2) Reflects contribution of film inventory and the conversion of indebtedness
by certain affiliates of Metromedia in exchange for 866,669 shares of
Common Stock.
(3) Reflects Sterling's film inventory at estimated fair market value.
(Footnotes continued on following page)
142
<PAGE>
(Footnotes continued from preceding page)
(4) Reflects the excess of cost over the estimated fair value of net tangible
assets acquired in the Mergers, the elimination of Actava's and Sterling's
historical additional paid-in capital and retained earnings (accumulated
deficit) the elimination of MITI's accumulated deficit attributable to the
minority stockholders, the retirement of Actava's treasury stock and the
value of the Common Stock issued to the Actava and Sterling stockholders
and MITI minority stockholders in the Mergers.
<TABLE><CAPTION>
(IN THOUSANDS
EXCEPT SHARE
AND PER
SHARE DATA)
<S> <C>
Actava shares outstanding at May 31, 1995................................. 17,346,726
Common Stock to be owned by MITI minority stockholders.................... 4,211,432
Common Stock to be owned by Sterling stockholders......................... 518,918
---------------
Number of shares issued to acquire Actava, MITI Minority and Sterling..... 22,077,076
Per share price at closing (assumed at September 20, 1995 for illustrative
purposes)................................................................. $ 18.75
---------------
Value of stock............................................................ $ 413,945
Value of Actava options................................................... 7,944
Value of MITI options..................................................... 19,548
Transaction costs......................................................... 6,500
---------------
Purchase price of Actava, MITI minority and Sterling...................... 447,937
Less--Estimated fair value of net tangible assets acquired................ 146,242
---------------
Excess of cost over fair value of the net tangible assets acquired........ $ 301,695
---------------
---------------
</TABLE>
These adjustments reflect the conversion of each outstanding share of Orion
Common Stock and MITI Common Stock into .57143 and 5.54937 shares of Common
Stock, respectively. Based on the number of shares of Orion Common Stock
and MITI Common Stock outstanding at September 20, 1995 and assuming an
Actava Average Closing Price of $16.38125, the MITI Common Stock owned by
the Metromedia Holders and all of the Orion Common Stock will be converted
into an aggregate of 16,740,986 shares of Common Stock, excluding shares
issued in connection with the conversion of certain amounts owed to
MetProductions and Met International as described in footnotes (2) and
(12) to the Pro Forma Financial Statements, respectively. Excess of cost
over fair value of the net tangible assets acquired is presented in the
pro forma balance sheet utilizing estimated amounts at September 20, 1995
and will be determined at the Effective Time. Such amount will also be
allocated according to the estimated fair values of assets at the
Effective Time.
(5) Reflects elimination of historical goodwill of Actava.
(6) Reflects elimination of historical goodwill of MITI attributable to MITI
minority stockholders.
(7) Reflects Actava's equity investment in Roadmaster at fair market value at
September 20, 1995.
(8) Reflects fair market value of Actava's debentures based on trading quotes
as of September 20, 1995 and the elimination of $1.0 million of historical
debt issuance cost.
(9) Reflects transaction costs incurred in connection with the Mergers.
(10) Reflects estimated fair market value of Actava's stock options at September
20, 1995.
(11) Reflects excess of estimated fair market value at September 20, 1995 of
MITI's stock options over amounts accrued at March 31, 1995.
(12) Reflects conversion of $6.0 million of indebtedness owed to certain
affiliates of Metromedia and $5.5 million of indebtedness as of March 31,
1995 to be refinanced by certain affiliates of Metromedia into 1,091,137
shares of Common Stock. In addition, $8.6 million borrowed from certain
affiliates of Metromedia subsequent to March 31, 1995 and outstanding as of
September 20, 1995 will be converted into 819,048 shares of Common Stock at
the Effective Time.
(13) Reflects the refinancing of the Orion Senior Indebtedness (including
unamortized discount) and the Orion Subordinated Indebtedness with the Term
Loan and the MIG Credit Facility (as described elsewhere herein). Debt
issuance costs are assumed to be paid in cash. A loss of $38.8 million on
the retirement of this debt will be reflected as an extraordinary loss in
the fiscal period following the consummation of the Mergers and this
financing.
<TABLE><CAPTION>
IN THOUSANDS
DR. (CR.)
------------
<S> <C>
Elimination of the current portion of Orion Existing Indebtedness
(comprised of the Orion Senior Indebtedness and the current portion of the
Orion Subordinated Indebtedness)......................................... $ 77,899
Elimination of the non-current portion of the Orion Subordinated
Indebtedness............................................................... 92,143
Capitalization of financing fees........................................... 6,745
Loss on refinancing of debt................................................ 38,773
Refinancing with current portion of Term Loan ($27,000) and the MIG Credit
Facility ($34,504)....................................................... (61,504)
Refinancing with non-current portion of Term Loan.......................... (108,000)
Reduction of Surviving Corporation's cash needed to effect refinancing..... (41,586)
Reduction of Other Assets due to write off of deferred financing fees
related to the Existing Orion Indebtedness............................... (4,469)
------------
Net................................................................... $ 0
------------
------------
</TABLE>
(14) Reflects the settlement of amounts due to and from the participants in the
Mergers and Metromedia.
(15) Reflects additional amortization expense associated with the purchase price
allocation to film inventories.
(16) Reflects elimination of Plan distribution costs as a result of Mergers and
refinancing.
(17) Reflects amortization of the excess of cost over the fair value of net
tangible assets acquired in the Mergers by use of the straight-line method
over 25 years.
(18) Reflects elimination of interest expense attributable to Orion Senior
Indebtedness and Orion Subordinated Indebtedness as a result of
refinancing.
(19) Reflects reduction in interest expense due to the repayment of Actava's
Swiss Franc Senior Subordinated Debentures, net of reduction in interest
income (assumed interest rate of 4.5%) related to cash equivalents utilized
to retire redeemable common stock on February 17, 1995.
(20) Reflects interest expense on the Term Loan (assumed interest rate of 9.0%).
(21) Reflects interest expense on the MIG Credit Facility (assumed interest rate
of 9.0%).
(22) Reflects amortization of debt issuance costs related to the Term Loan and
the MIG Credit Facility.
(23) Reflects the results of Actava's Sporting Goods subsidiaries on the equity
method for the period from January 1, 1994 through December 6, 1994. The
Actava Sporting Goods subsidiaries were combined with Roadmaster in
exchange for approximately 19.2 million shares of Roadmaster Common Stock.
Actava consolidated the results of operations of the Sporting Goods
subsidiaries with the results of Actava for periods ending prior to
December 6, 1994. Actava's investment in Roadmaster is accounted for by the
equity method.
(24) Reflects the settlement of certain Orion liabilities at the Effective Time.
143
<PAGE>
INFORMATION REGARDING ORION
BUSINESS OF ORION
Orion, which was incorporated in Delaware in 1968 and is the successor to a
New York corporation incorporated in 1952, changed its name from Filmways, Inc.
to Orion Pictures Corporation in 1982. Orion is engaged in the worldwide
distribution of filmed entertainment product for theatrical, cable, pay and free
television markets, to the video cassette and video disc markets and through
other emerging technologies. Orion has a library of approximately 750 motion
pictures and television titles which it distributes in all media. Orion also
distributes product produced by third parties and acquired by Orion through
non-recourse financing and provides distribution services for third parties.
Upon consummation of the Mergers, Orion intends to initiate the production and
acquisition of new motion pictures, which management believes will enhance the
marketability and value of the existing library.
On the Filing Date, Orion filed for protection under chapter 11 of the
Bankruptcy Code with the Court. The Court confirmed the Plan on October 20, 1992
and the Plan became effective on November 5, 1992. For a brief summary of the
Plan, see "INFORMATION REGARDING ORION-- Management's Discussion and Analysis of
Financial Condition and Results of Operations."
Historical Business
Before the Filing Date, Orion was engaged primarily in the financing,
production and distribution of motion pictures for the worldwide theatrical
market, including distribution of motion pictures financed and produced by
others. In addition, Orion distributed motion pictures to the worldwide home
video, free television, cable and pay television markets. Orion also developed,
financed, produced and distributed newly created made-for-television product,
which has included, in the past, series and related pilots, motion pictures and
mini-series produced for exhibition on the major networks in the United States
as well as first-run programming produced for syndication in the domestic
television marketplace. Before the Filing Date, Orion's operating plan had been
to release approximately 12 to 15 theatrical motion pictures each year.
Events Leading to Bankruptcy Case
During fiscal 1990, 1991 and 1992, many of Orion's films failed to meet
preliminary expectations in the domestic theatrical marketplace and failed to
reach hoped-for levels of domestic video sales. The result of such performances
was that Orion's domestic theatrical film revenues failed to recover the print
and advertising costs it expended which, when combined with disappointing home
video results, placed significant pressure on Orion's cash reserves. In
addition, beginning with the first half of fiscal 1991, Orion released or
planned to release a large number of films having well-known stars, with costs
above Orion's average cost of films over the previous two-year period.
Generally, Orion paid for these films as they were delivered during this period,
which required significant amounts of cash. Furthermore, the print and
advertising expenditures to support the domestic theatrical release of these
pictures were significantly higher than on Orion's previous films. Those
expenditures put further strains on Orion's liquidity. As a result, despite the
success of "DANCES WITH WOLVES" and "THE SILENCE OF THE LAMBS" in late fiscal
1991 and the first half of fiscal 1992 and the solid performances of "ROBOCOP
2," "MERMAIDS" and "BILL & TED'S BOGUS JOURNEY," Orion was placed under enormous
financial pressure by the economically disappointing motion picture releases
during fiscal 1990 and part of fiscal 1991. This financial pressure was
exacerbated by the costs of an expanding television production division and
increasing overhead and debt service costs. These factors exhausted Orion's
credit lines and depleted its available cash reserves.
Orion took a number of steps prior to the Filing Date to augment its
liquidity, including increasing the maximum amount available under its credit
facility, selling certain assets and commencing exchange offers for its then
outstanding senior and subordinated debentures. Despite these efforts, Orion was
in default under its credit facility and under its senior and subordinated
debentures and was
144
<PAGE>
experiencing difficulty in paying its trade creditors on a timely basis. As a
result of these and other factors, on the Filing Date, Orion and substantially
all of its subsidiaries sought relief under chapter 11 of the Bankruptcy Code.
Business and Results of Operations of Orion Following Plan Consummation
In connection with the consummation of the Plan, Orion entered into a number
of agreements with its creditors, including the Third Restated Credit Agreement
and the Indentures which severely restricted Orion's ability to engage in the
development, production or acquisition of new product. The Plan essentially
provided that Orion was to release the Unreleased Films and exploit its existing
film library in all media. The Plan further required that Orion use 100% of its
Net Cash Flow from such activities to pay principal and interest on the
indebtedness incurred by Orion in connection with the Plan. Since the Plan
Effective Date, Orion has paid an aggregate of $220.8 million to the Banks, Sony
and the holders of the Orion Subordinated Indebtedness. Despite these payments,
Orion's operating results since the Plan Effective Date have been disappointing
and generally have been less than the results projected in the Plan.
In addition to releasing the Unreleased Films, since the Plan Effective
Date, Orion has exploited its existing film library and other assets in existing
and new markets and through emerging technologies. Orion's film library includes
in excess of 750 previously released theatrical and television motion pictures,
television series and other television programs. Some of the noteworthy titles
in Orion's film library include "PLATOON," "DANCES WITH WOLVES" and "THE SILENCE
OF THE LAMBS," each of which won the Academy Award for best picture. Orion's
distribution organization distributes its library and any acquired entertainment
assets as described above, in the worldwide market. More specifically, Orion
Home Entertainment Corporation ("OHEC"), a wholly owned subsidiary of Orion,
distributes Orion's home video product in the United States and Canada. Orion
Pictures Distribution Corporation, another wholly owned subsidiary of Orion,
among other things, directly licenses Orion's motion pictures to theaters
throughout the United States. Orion's motion pictures are licensed to theaters
throughout Canada by a subdistributor.
Orion had historically distributed motion pictures to theaters in foreign
countries (other than Canada) pursuant to an agreement Orion entered into in
February 1990 (the "Sony Theatrical Agreement") with Sony and has continued to
do so following the Plan Effective Date. The Sony Theatrical Agreement
originally provided for exclusive theatrical distribution for a specified
license period by Sony in foreign countries (other than Canada) of 50 of Orion's
current and future motion pictures meeting certain qualifying criteria. The Sony
Theatrical Agreement was amended in connection with the Plan to include only 23
motion pictures, concluding with the last of the Unreleased Films owned by Orion
on the Plan Effective Date. In February 1990, Orion also entered into an
exclusive film licensing agreement (the "Sony Video Agreement") with Sony. The
Sony Video Agreement originally provided for exclusive distribution for a
specified license period by Sony to the home video marketplace throughout the
world (except for the United States and Canada) of 50 of Orion's current and
future motion pictures meeting certain qualifying criteria. This agreement was
also amended in connection with the Plan to include only 23 pictures, concluding
with the Unreleased Films.
The Unreleased Films, which Orion owned at the Plan Effective Date, have all
been subsequently released theatrically by Orion in the United States and Canada
to less than anticipated results. These results, coupled with the reduction, as
a result of Orion's settlement of certain litigations with Showtime Networks
Inc. ("Showtime"), from the contractual amounts which otherwise would have been
payable by Showtime to Orion pursuant to a pay television output agreement
between Orion and Showtime have had an adverse effect on Orion's results of
operations and liquidity. See "INFORMATION REGARDING ORION--Management's
Discussion and Analysis of Financial Condition and Results of Operations." As
Orion's ability to engage in the development and production of new product is
strictly limited by the Third Restated Credit Agreement, the Indentures and
certain other agreements entered into in
145
<PAGE>
connection with the Plan, since the Plan Effective Date, Orion has not fully or
substantially financed the production of any new film product for release in the
theatrical marketplace. Specifically, such agreements permit Orion to engage in
the development, production and acquisition of motion picture product only to
the extent that such activities are financed on a 100% nonrecourse basis to
Orion, and to otherwise purchase additional entertainment assets with
nonrecourse financing secured solely by the assets so purchased. Since the Plan
Effective Date, Orion has been able to acquire, with nonrecourse financing
provided by an affiliate of Metromedia, certain rights to distribute films from
other film producers in specified media and territories for varying periods of
time. Under such arrangements, Orion receives a distribution fee; however, such
arrangements, to date, have not contributed substantially to Orion's results of
operations.
Pursuant to the terms of the Third Restated Credit Agreement and certain
other agreements entered into in connection with the Plan, Orion was required to
make certain payments to the Banks and to Sony in October and November 1994,
respectively, which it was not able to pay in full because it did not generate
sufficient Net Cash Flow. The amount payable to the Banks was subject to the
Bank Guarantee made by Metromedia and Mr. Kluge. Accordingly, in October 1994,
Metromedia paid $14,041,000 in favor of the Banks on behalf of Orion. In
addition, Metromedia made a payment in November 1994, of $5,159,000 to Sony in
order to satisfy Orion's payment obligation to Sony. Metromedia will be
obligated to make an additional payment to Sony during October 1995 and Orion
anticipates that Metromedia will be obligated to make an additional payment to
the Banks during October 1995 pursuant to the Bank Guarantee. Any payments made
by Metromedia to the Banks and Sony on Orion's behalf during October 1995, would
be repaid in full to Metromedia by the Surviving Corporation at the Effective
Time. In addition, the Indentures pursuant to which the Talent Notes and
Creditor Notes were issued provide that an Event of Default will occur under
such Indentures if the aggregate amount of Net Cash Flow paid by Orion to the
holders of Talent Notes, Creditor Notes and 10% Subordinated Debentures does not
exceed the mandatory minimum amounts specified in such Indentures. An Event of
Default under the Indentures pursuant to which the Talent Notes and Creditor
Notes were issued occurred as of August 31, 1995. See "INFORMATION REGARDING
ORION-- Management's Discussion and Analysis of Financial Condition and Results
of Operations."
Three separate lawsuits have been filed in the Delaware Court, one against
Orion and its directors, one against Orion, its directors and Actava and one
against Actava, its directors, Orion, MITI and Sterling. Such lawsuits seek,
among other things, to enjoin consummation of the Mergers. See "LITIGATION."
Orion was organized under the laws of the State of Delaware on November 21,
1968. Orion's executive offices are located at 1888 Century Park East, Seventh
Floor, Los Angeles, California 90067. Orion's telephone number is (310)
282-0550.
Additional information concerning Orion and its subsidiaries is contained in
Orion's Annual Report on Form 10-K, as amended, for the year ended February 28,
1995, Orion's Quarterly Report on Form 10-Q for the quarter ended May 31, 1995
and Orion's other public filings. See "AVAILABLE INFORMATION" and "INCORPORATION
OF CERTAIN DOCUMENTS BY REFERENCE."
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SELECTED FINANCIAL DATA
The following table presents selected financial information for Orion for
each of the five fiscal years ended, and as of, February 28 (29), 1995, 1994,
1993, 1992, and 1991. The selected financial data for each of the five fiscal
years ended, and as of, February 28 (29), 1995, 1994, 1993, 1992, and 1991, are
derived from and qualified in their entirety by reference to the audited
consolidated financial statements, the most recent three years of which are
included elsewhere herein, and should be read in conjunction with such financial
statements and the independent auditor's report, which contains an explanatory
paragraph that states that Orion is a defendant in certain litigation which
alleges various breaches of agreements by Orion and seeks certain damages. The
independent auditor's report also includes an explanatory paragraph that states
that based upon Orion's inability to meet required debt payments that are due
within the next year under the terms of its Indebtedness (as defined in note 6
of the Notes to Consolidated Financial Statements) there exists substantial
doubt about the entity's ability to continue as a going concern. The
consolidated financial statements and the selected data do not include any
adjustment that might result from the outcome of these uncertainties. Per share
amounts for the fiscal years ended in February, 1992, and 1991, reflect the
impact of the recapitalization in fiscal 1993. The selected financial data for
Orion presented below as of and for the three months ended May 31, 1995 and 1994
have been derived from unaudited interim financial statements of Orion which, in
the opinion of management, reflect all material adjustments, consisting of only
normal recurring adjustments necessary for a fair presentation of such data. All
of the following data should be read in conjunction with "INFORMATION REGARDING
ORION--Management's Discussion and Analysis of Financial Condition and Results
of Operations" and Orion's Consolidated Financial Statements appearing elsewhere
in this Joint Proxy Statement/Prospectus.
SELECTED FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
THREE MONTHS THREE MONTHS FISCAL YEARS ENDED FEBRUARY 28 (29),
ENDED MAY ENDED MAY ----------------------------------------------------------
31, 1995 31, 1994 1995 1994 1993 1992 1991
------------ ------------ -------- --------- -------- ----------- ----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA
Revenues from continuing
operations................ $ 42,232 $ 83,757 $191,244 $ 175,662 $222,318 $ 491,117 $ 507,304
------------ ------------ -------- --------- -------- ----------- ----------
------------ ------------ -------- --------- -------- ----------- ----------
Loss from continuing
operations................ $ (9,761) $(12,104) $(50,270) $(125,196) $(72,973) $ (280,832) $ (60,648)
------------ ------------ -------- --------- -------- ----------- ----------
------------ ------------ -------- --------- -------- ----------- ----------
Loss from discontinued
television operations...... $ -- $ -- $ -- $ -- $ -- $ (31,239) $ (2,337)
------------ ------------ -------- --------- -------- ----------- ----------
------------ ------------ -------- --------- -------- ----------- ----------
Loss before extraordinary
gains..................... $ (9,761) $(12,104) $(50,270) $(125,196) $(72,973) $ (312,071) $ (62,985)
------------ ------------ -------- --------- -------- ----------- ----------
------------ ------------ -------- --------- -------- ----------- ----------
Net income (loss)........... $ (9,761) $(12,104) $(50,270) $(125,196) $250,240 $ (312,071) $ (62,985)
------------ ------------ -------- --------- -------- ----------- ----------
------------ ------------ -------- --------- -------- ----------- ----------
Loss from continuing
operations per share:
Primary.................... $ (.49) $ (.61) $ (2.51) $ (6.26) $ (11.29) $ (1,744.47) $ (409.97)
------------ ------------ -------- --------- -------- ----------- ----------
------------ ------------ -------- --------- -------- ----------- ----------
Fully diluted.............. $ (.49) $ (.61) $ (2.51) $ (6.26) $ (11.26) $ (1,755.38) $ (427.30)
------------ ------------ -------- --------- --------
------------ ------------ -------- --------- --------
Loss before extraordinary
gains per share:
Primary.................... $ (.49) $ (.61) $ (2.51) $ (6.26) $ (11.29) $ (1,938.50) $ (425.76)
------------ ------------ -------- --------- -------- ----------- ----------
------------ ------------ -------- --------- -------- ----------- ----------
Fully diluted.............. $ (.49) $ (.61) $ (2.51) $ (6.26) $ (11.26) $ (1,950.62) $ (443.75)
------------ ------------ -------- --------- -------- ----------- ----------
------------ ------------ -------- --------- -------- ----------- ----------
Net income (loss) per common
share:
Primary.................... $ (.49) $ (.61) $ (2.51) $ (6.26) $ 38.70 $ (1,938.50) $ (425.76)
------------ ------------ -------- --------- -------- ----------- ----------
------------ ------------ -------- --------- -------- ----------- ----------
Fully diluted.............. $ (.49) $ (.61) $ (2.51) $ (6.26) $ 38.62 $ (1,950.62) $ (443.75)
------------ ------------ -------- --------- -------- ----------- ----------
------------ ------------ -------- --------- -------- ----------- ----------
Common and common equivalent
shares entering into
computation of per-share
amounts:
Primary.................... 20,000 20,000 20,000 20,000 6,465 161 148
------------ ------------ -------- --------- -------- ----------- ----------
------------ ------------ -------- --------- -------- ----------- ----------
Fully diluted.............. 20,000 20,000 20,000 20,000 6,479 160 142
------------ ------------ -------- --------- -------- ----------- ----------
------------ ------------ -------- --------- -------- ----------- ----------
Cash dividends per common
share..................... $ -- $ -- $ -- $ -- $ -- $ -- $ --
BALANCE SHEET DATA
Total assets................ $323,284 $452,920 $351,588 $ 508,014 $704,356 $ 856,950 $1,058,673
Notes and subordinated
debt...................... $198,150 $253,732 $212,079 $ 274,501 $325,158 $ 521,968 $ 510,894
</TABLE>
See accompanying consolidated financial statements and notes thereto included
elsewhere in this Joint Proxy Statement/Prospectus.
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<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
Overview
On December 11 and 12, 1991 Orion and certain of its subsidiaries filed
petitions for relief under the Bankruptcy Code in the Court. During the
Bankruptcy Period, Orion 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, Orion filed the Plan with the Court on July 13,
1992 (as amended July 24, August 7, September 3 and October 20, 1992) and the
Disclosure Statement. On October 20, 1992, the Court confirmed the Plan which
became effective on November 5, 1992. The Plan and Orion's reorganization
activities are more fully described in "Liquidity and Capital Resources" below.
Results of Operations
Three Months Ended May 31, 1995 Compared to Three Months Ended May 31, 1994
During the first quarter of the fiscal year ending February 29, 1996
("fiscal 1996"), Orion recorded a net loss of $9,761,000 on revenues of
$42,232,000. During the first quarter of the preceding year ("fiscal 1995"),
Orion recorded a net loss of $12,104,000 on revenues of $83,757,000.
Certain factors should be considered when evaluating Orion results of
operations in the first quarter of both fiscal 1996 and fiscal 1995.
Approximately two-thirds of Orion'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 first quarter of both fiscal 1996 and fiscal
1995 related to such film inventories. Accordingly, gross profit from profitable
pictures (before the effect of the writedowns in the first quarter of fiscal
1995 described below) was insufficient to cover selling, general and
administrative costs and interest costs during each quarter. In addition, Orion
released three films in the domestic theatrical marketplace during the first
quarter of fiscal 1995. Orion recorded approximately $5,500,000 of writedowns to
estimated net realizable value during that quarter on two of these titles.
Year Ended February 28, 1995 Compared to Year Ended February 28, 1994;
Year Ended February 28, 1994 Compared to Year Ended February 28, 1993
For the year ended February 28, 1995 ("fiscal 1995"), Orion recorded a net
loss of $50,270,000 on revenues of $191,244,000. For the year ended February 28,
1994 ("fiscal 1994"), Orion recorded a net loss of $125,196,000 on revenues of
$175,662,000. For the year ended February 28, 1993 ("Fiscal 1993") Orion
recorded a loss before extraordinary items of $72,973,000 and extraordinary
gains of $323,213,000 resulting in net income of $250,240,000 for fiscal 1993,
on revenues of $222,318,000.
Orion's results of operations from year to year have been substantially
dependent on both the number of films released and on the acceptance of Orion's
current product by general audiences. Orion released three films in fiscal 1993,
four films in fiscal 1994, and five films in fiscal 1995. These pictures
performed poorly in the domestic theatrical marketplace and did not generate
sufficient gross profit to maintain a profitable level of operations during
those years. The success of "DANCES WITH WOLVES" and "THE SILENCE OF THE LAMBS"
during fiscal 1993 only partially mitigated these results. The following
paragraphs describe the most significant factors affecting Orion's results
during this three year period.
During fiscal 1995, Orion recorded approximately $7,500,000 of writedowns to
the estimated net realizable value related to the five theatrical titles
released domestically during that year and $9,600,000 of writedowns to
previously released product. These writedowns had a negative effect on Orion's
reported gross profit (loss) in fiscal 1995.
During fiscal 1994, Orion wrote off additional amounts on a large number of
its previously released theatrical and television library titles due to certain
events that occurred during that year. Such writedowns, which aggregated
approximately $37,400,000 included certain amounts due to: 1) the
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Showtime Settlement (defined below and which is more fully described in Note 5
of Notes to Orion's Consolidated Financial Statements included elsewhere in this
Joint Proxy Statement/Prospectus ("Note 5")) and 2) current market conditions
that affected management's estimates in the fourth quarter of fiscal 1994 of the
future revenue-generating potential of certain of Orion's theatrical and
television library product in the domestic free television market places. In
addition, including the effect of the Showtime Settlement described above, Orion
recorded approximately $30,400,000 of writedowns to the estimated net realizable
value related to the four theatrical titles released domestically during that
year, and approximately $26,800,000 of additional provisions for losses on the
five titles that remained unreleased at February 28, 1994. These fiscal 1994
losses, approximately $94,600,000 in total, had a significant effect upon
Orion's reported gross profit (loss) in fiscal 1994.
During fiscal 1993, Orion successfully emerged from its chapter 11
bankruptcy proceedings. Several significant adjustments were recorded during
that fiscal year to reflect this event in Orion's consolidated financial
statements, which resulted in the recognition of an aggregate of $323,313,000 of
extraordinary gains, before the effect of income taxes. Orion recorded these
adjustments and did not adopt fresh-start reporting in accordance with the
provisions of 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"), as is more fully described in Note 2
of Notes to Orion's Consolidated Financial Statements included elsewhere in this
Joint Proxy Statement/Prospectus ("Note 2").
In addition, Orion realized a benefit of approximately $28,477,000 upon the
contribution by Metromedia and Mr. Kluge of a guarantee of bank borrowings, the
contribution by Metromedia and Mr. Kluge of an interest in "MERMAIDS" and the
contribution by Metromedia and Mr. Kluge of $15,000,000 in cash for an aggregate
of 50.1% of the equity interest in Orion. As described in Note 2, Metromedia and
Mr. Kluge owned in excess of 50% of Orion's common stock both before and after
the effective date of the Plan and, accordingly, this benefit was credited
directly to paid-in surplus as a contribution to capital. Furthermore, Orion
incurred approximately $20,792,000 of costs directly related to the chapter 11
proceedings during the year that adversely affected results from continuing
operations.
Also during fiscal 1993, Orion wrote off additional amounts on a large
number of its previously released theatrical and television library titles due
to certain events that occurred during that year. Such writedowns, which
aggregated approximately $18,000,000, included certain amounts recorded due to:
1) the disappointing domestic video results in fiscal 1993 for "SHADOWS AND
FOG"; 2) the further recognition of the impact of the lack of future production
on the marketability of Orion's library; and 3) current market conditions, that
significantly affected management's estimates in the fourth quarter of 1993 of
the future revenue-generating potential of certain of Orion's theatrical and
television library in the foreign pay and free television marketplaces. In
addition, Orion recorded approximately $8,100,000 of writedowns to estimated net
realizable value during fiscal 1993 related to the two theatrical titles
initially released during that year, "ARTICLE 99" and "LOVE FIELD," and
approximately $9,700,000 of additional provisions for losses on the nine titles
that remained unreleased at February 28, 1993. These fiscal 1993 losses,
$35,800,000 in total, significantly impacted the amount of reported gross profit
in fiscal 1993.
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Revenues
Three Months Ended May 31, 1995 Compared to Three Months Ended May 31, 1994
The following table sets forth the sources of Orion's revenues from
operations by market during the first quarter of fiscal 1996 and 1995 (in
thousands):
<TABLE><CAPTION>
THREE MONTHS ENDED
MAY 31,
--------------------
<S> <C> <C>
1995 1994
------- -------
Theatrical distribution............................... $ 953 $ 6,347
Television and video distribution:
Home video direct distribution...................... 14,120 14,902
Home video subdistribution.......................... 405 2,616
Pay television...................................... 11,585 43,951
Free television and other........................... 15,169 15,941
------- -------
Total television and video distribution......... 41,279 77,410
------- -------
$42,232 $83,757
------- -------
------- -------
</TABLE>
Year Ended February 28, 1995 Compared to Year Ended February 28, 1994;
Year Ended February 28, 1994 Compared to Year Ended February 28, 1993
The following table sets forth the sources of Orion's revenues from
continuing operations by market for each of the last three fiscal years and
serves as a basis for the analysis of fluctuations in revenues that follows (in
thousands):
<TABLE><CAPTION>
FISCAL YEARS ENDED IN FEBRUARY, 1995 1994 1993
- ------------------------------------------------------------ -------- -------- --------
<S> <C> <C> <C>
Theatrical Distribution..................................... $ 8,969 $ 33,319 $ 43,255
Television and Video Distribution:
Home video direct distribution............................ 51,905 37,418 52,468
Home video subdistribution................................ 6,749 12,245 12,192
Pay television............................................ 60,900 12,330 41,007
Free television and other................................. 62,721 90,350 73,396
-------- -------- --------
Total television and video distribution..................... 182,275 142,343 179,063
-------- -------- --------
$191,244 $175,662 $222,318
-------- -------- --------
-------- -------- --------
</TABLE>
Theatrical Revenues
Three Months Ended May 31, 1995 Compared to Three Months Ended May 31, 1994
During the current quarter, Orion released only one title in the domestic
theatrical marketplace ("BAR GIRLS") that was acquired utilizing non-recourse
financing under the restrictions of the Plan. Such title did not contribute
significant revenues during the current quarter, and accordingly theatrical
revenues decreased 85% to $953,000 for the three months ended May 31, 1995 as
compared to $6,347,000 for the three months ended May 31, 1994. Theatrical
revenues in the first quarter of fiscal 1995 reflect the poor performance of the
three films released in the domestic theatrical marketplace in that quarter.
Together, these films generated approximately $5,000,000 in domestic theatrical
revenues.
Orion's ability to produce or acquire additional product for distribution is
limited, therefore, revenues from theatrical distribution will depend on Orion's
ability to produce or acquire additional product.
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<PAGE>
Year Ended February 28, 1995 Compared to Year Ended February 28, 1994;
Year Ended February 28, 1994 Compared to Year Ended February 28, 1993
Orion released five, four, and three theatrical feature films in the
domestic market place in fiscal 1995, 1994 and 1993, respectively. Only one of
Orion's pictures exceeded $3,000,000 in theatrical revenues during fiscal 1995.
Only two of Orion's pictures, exceeded $6,000,000 in theatrical revenues
during fiscal 1994. Only one of Orion's pictures, "THE ADDAMS FAMILY," exceeded
$9,000,000 in theatrical revenues during fiscal 1993. Revenues from "THE ADDAMS
FAMILY" were earned solely outside the United States and Canada.
Orion has released, in the domestic theatrical marketplace, all of the
pictures that were fully or substantially financed by Orion. Furthermore, as
described above, Orion's ability to produce or acquire additional product for
theatrical distribution is limited by the Plan. Accordingly, it is anticipated
that revenues from theatrical distribution in the future will depend entirely on
Orion's ability to produce or acquire additional product in accordance with the
provisions of the Plan.
Home Video Direct Distribution Revenues
Three Months Ended May 31, 1995 Compared to Three Months Ended May 31, 1994
The distribution of Orion's theatrical release, "BLUE SKY," and an acquired
film "NOSTRADAMUS" in the domestic home video rental market through Orion Home
Video ("OHV") accounted for over one-half of Orion's home video direct
distribution revenues during the current year's first quarter. The distribution
of "ROBOCOP 3" in the domestic home video rental market through OHV accounted
for the majority of Orion's home video direct distribution revenues during the
previous year's first quarter.
Orion'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 continue to have an adverse effect on
quarterly revenues in this market for the foreseeable future.
Year Ended February 28, 1995 Compared to Year Ended February 28, 1994;
Year Ended February 28, 1994 Compared to Year Ended February 28, 1993
All of Orion's home video direct distribution revenues are contributed by
OHV. OHV distributed six of Orion's theatrical releases in the domestic home
video rental market in fiscal 1995, compared to three releases in both fiscal
1994 and 1993. The distribution of certain of Orion's theatrical titles in the
domestic home video "sell-thru" (i.e., lower priced) market through OHV
accounted for a significant portion of Orion's home video direct distribution
revenues during fiscal 1993, including approximately $13,500,000 attributable to
"DANCES WITH WOLVES."
Over 60% of Orion's fiscal 1995 OHV revenues were generated by seven titles
in that year, including "ROBOCOP 3" and "CLIFFORD" which produced revenues in
excess of $8,600,000 and $6,600,000 respectively. Over 65% of Orion's fiscal
1994 OHV revenues were generated by five titles in that year, including "THE
DARK HALF" and "DANCES WITH WOLVES," which produced revenues in excess of
$8,000,000 and $6,200,000, respectively. Over 80% of Orion's fiscal 1993 OHV
revenues were generated by four titles in that year, including $16,200,000,
$10,300,000 and $9,500,000 which were generated by "DANCES WITH WOLVES," "LITTLE
MAN TATE" and "THE SILENCE OF THE LAMBS," respectively.
The revenues earned by "DANCES WITH WOLVES" and "THE SILENCE OF THE LAMBS"
since they were first released in the domestic home video rental market are
among the largest generated in this market in the history of the industry. Orion
has only one picture, which was fully or substantially produced by Orion left to
be released in the domestic home video rental market. Orion does not expect this
title to approach the success of these two titles. Furthermore, Orion's reduced
theatrical release
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<PAGE>
schedule in fiscal 1993, 1994 and 1995 and limitations of the Plan with regard
to the investment in the production of new theatrical product, as described
elsewhere in this Joint Proxy Statement/Prospectus, are likely to continue to
have an adverse effect on future home video annual revenues.
Home Video Subdistribution Revenues
Orion's home video subdistribution revenue is primarily generated in the
foreign marketplace. Beginning in fiscal 1992, Orion's foreign home video
releases began to be distributed under the subdistribution agreement with Sony.
Under the terms of such agreement, which was entered into in February 1990, and
amended on November 5, 1992, Orion received a substantial advance against the
performance of the 23 pictures (amended from 50 pictures) covered by the
agreement. Revenues recorded in fiscal 1995, 1994 and 1993 (approximately
$6,900,000, $8,000,000, and $9,100,000, respectively) 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. In addition, Orion's reduced theatrical
release schedule in fiscal 1993, 1994 and 1995 and the limitations of the Plan
as described above are likely to continue to have an adverse effect on future
home video subdistribution revenue.
Pay Television Revenues
Three Months Ended May 31, 1995 Compared to Three Months Ended May 31, 1994
Three titles became available during the first quarter of fiscal 1996 for
exclusive exhibition in the pay cable market pursuant to a settlement (the
"Showtime Settlement") reached with Showtime, and accordingly pay television
revenue decreased 74% to $11,585,000 for the first quarter of fiscal 1996 as
compared to $43,951,000 for the first quarter of fiscal 1995. During the first
quarter of fiscal 1995, nine titles became available for exclusive exhibition in
the pay cable market pursuant to the Showtime Agreement reached with Showtime
during that quarter. Pay television revenues for that quarter included
approximately $40,000,000 for the recognition of license fees on these titles.
The remainder of Orion'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, Orion'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.
Year Ended February 28, 1995 Compared to Year Ended February 28, 1994;
Year Ended February 28, 1994 Compared to Year Ended February 28, 1993
During fiscal 1995, eleven titles became available for exclusive exhibition
in the pay cable market pursuant to the Showtime Settlement reached with
Showtime during the year as described below. Pay television revenues for fiscal
1995 included approximately $46,000,000 from the recognition of license fees on
these titles. During fiscal 1994 and 1993, three and five titles, respectively,
first became available for exclusive exhibition in the pay cable market under
the Showtime Agreement. Recognition of revenues on all three fiscal 1994 titles
and four of the five fiscal 1993 titles were deferred for the reason described
below. Orion recorded approximately $5,900,000 of license fees related to the
Showtime Agreement in fiscal 1993. Revenues for the last five released titles
under such Showtime Settlement to be recognized in future periods approximates
$13,500,000.
Note 5 describes the terms of the Showtime Settlement reached on March 29,
1994 regarding, inter alia, a dispute (defined therein as the "Key Man Dispute")
that existed between Orion and Showtime regarding the licensing by Showtime of
the 16 pictures theatrically released in the domestic marketplace by Orion in
fiscal 1992, 1993, 1994, and 1995. No revenues related to the licensing to
Showtime of these disputed pictures had been recorded pending resolution of this
dispute. Such deferral
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<PAGE>
began to have an adverse effect on pay television revenues in the first quarter
of fiscal 1993. In accordance with the terms and conditions of the Showtime
Agreement, pay television revenues were recorded beginning with the first
quarter of fiscal 1995. Note 5 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 Orion. This matter was also settled under the Showtime
Settlement, as described in Note 5.
Pay television revenues in fiscal 1994 and 1993 would have included
approximately $17,600,000 and $17,400,000, respectively, of license fees due
under the Showtime Agreement, the recognition of which was deferred until the
dispute was resolved. The Showtime Settlement resulted in an approximate
$18,000,000 reduction to the license fees for the 16 pictures subject to the Key
Man Dispute. 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.
During December 1988, Orion entered into an agreement with Sky Television
plc ("Sky Movies"), an affiliate of 20th Century Fox Film Corporation which has
merged with British Satellite Broadcasting ("BSB") to form BSkyB, to license the
pay television rights in the United Kingdom to many of Orion's recent and
current theatrical titles as well as to over 150 of its library titles. During
fiscal 1995, 1994, and 1993, approximately $3,000,000, $3,600,000, and
$9,500,000 respectively, of revenues were recorded upon the initial availability
to Sky Movies and BSB of certain titles under these contracts. In addition, in
November 1992, Orion entered into an agreement with Mitsubishi Corporation
("Mitsubishi") to license the pay and free television rights in Japan to many of
Orion's recent and current theatrical titles as well as to 40 of its library
titles. Approximately $5,000,000 of pay television revenues were recorded under
this contract during fiscal 1993.
Free Television Revenues
Three Months Ended May 31, 1995 Compared to Three Months Ended May 31, 1994
Orion's free television revenues in the first quarters of both fiscal 1996
and 1995 were derived primarily from the availability, in a number of foreign
territories, of certain of Orion's theatrical titles. Free television revenues
in the first quarters of both fiscal 1996 and 1995 include fees from the
availability to Lifetime of five pictures in each quarter under Orion's two
major agreements with that basic cable network.
Year Ended February 28, 1995 Compared to Year Ended February 28, 1994;
Year Ended February 28, 1994 Compared to Year Ended February 28, 1993
A major source of Orion's revenues from syndication in the free television
market has been derived from the licensing in certain foreign territories of
free television rights to Orion's newer theatrical titles. Revenues from this
source, which generally begin to be recognized two to four years after the
initial domestic theatrical release of each picture, were approximately
$30,500,000, $37,000,000, and $34,200,000, in fiscal 1995, 1994 and 1993,
respectively. Major contracts in fiscal 1995 that contributed to revenues were
with TV De Catalunya for rights in Spain, Mitsubishi for rights in Japan and
Principal Network for rights in Italy. In fiscal 1994, the most significant
licensees were TV de Catalunya for rights in Spain, Principal Network for rights
in Italy and RTL Plus for rights in Germany. In fiscal 1993, the most
significant licensees were Mitsubishi for rights in Japan, BBC for rights in the
United Kingdom, and Cecchi Gori for rights in Italy, Germany and Spain.
Another major source of revenues in the free television market has been
derived from the licensing for a period of years in certain foreign territories
of free television rights to certain of Orion's pre-1982 library titles.
Revenues from this source were approximately $3,000,000 in fiscal 1995,
approximately $2,200,000 in fiscal 1994, and approximately $6,000,000 in fiscal
1993.
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<PAGE>
Revenues from syndication in the free television market in the United States
and Canada were approximately $18,000,000 in fiscal 1993, compared to
approximately $21,000,000 in fiscal 1994, and to approximately $20,000,000 in
fiscal 1995, including approximately $12,000,000, $15,000,000, and $12,500,000
in fiscal 1993, 1994, and 1995, respectively, of basic cable revenues.
Orion periodically licenses its more successful theatrical titles to the
major networks in the United States. Revenues from this source were
approximately $23,200,000, and $1,500,000, in fiscal 1994 and 1993,
respectively. Significant revenues were recognized during fiscal 1994 upon the
availabilities of "DANCES WITH WOLVES" and "THE SILENCE OF THE LAMBS" and, to a
lesser extent, two other pictures. No network license fees were recognized in
fiscal 1995 and it is anticipated that little or no additional network license
fees will be generated unless Orion is able to produce or acquire additional
product in accordance with the provisions of the Plan.
Gross Profit (Loss)
Three Months Ended May 31, 1995 Compared to Three Months Ended May 31, 1994
No film generated significant gross profit in the current year's first
quarter. Gross profit in the previous year's first quarter was most favorably
affected by the recognition of approximately $40,000,000 of domestic pay
television license fees on nine titles pursuant to the Showtime Settlement.
These nine titles accounted for approximately $7,000,000 in gross profit during
that quarter.
The previous year's first quarter was most adversely affected by the
recording of writedowns to the estimated net realizable value of the carrying
amounts of the three first quarter domestic theatrical releases. These
writedowns aggregated approximately $6,100,000. In addition, a writedown to
estimated net realizable value of approximately $1,000,000 was recorded due to
the less-than-previously-expected domestic home video distribution of "ROBOCOP
3."
As previously disclosed, Orion has released only 16 theatrical films that
were substantially financed by Orion 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 the 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. Furthermore, as previously
disclosed, approximately two-thirds of Orion'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.
Year Ended February 28, 1995 Compared to Year Ended February 28, 1994;
Year Ended February 28, 1994 Compared to Year Ended February 28, 1993
Orion had gross profit (revenues less cost of rentals) of $3,767,000 in
fiscal 1995 compared to a loss of ($67,368,000) in fiscal 1994 and gross profit
of $7,506,000 in fiscal 1993. The most significant contributions to Orion's
fiscal 1995 gross profit were derived from the recognition of significant
domestic pay television license fees pursuant to the Showtime Settlement as
described in Note 5, as well as the continued distribution to the worldwide home
video and foreign television marketplaces. The contributions to gross profit
described above were offset by the effects of certain adverse factors described
below.
The most significant contributions to Orion's fiscal 1994 gross profit were
derived from the continued distribution to the worldwide home video, and foreign
television marketplaces as well as the network availability of "THE SILENCE OF
THE LAMBS" and to a lesser extent, by the domestic home video sell-thru
distribution and the network availability of "DANCES WITH WOLVES." Together
these two pictures contributed approximately $15,600,000 to fiscal 1994 gross
profit. The contributions to gross profit described above were more than offset
by the effects of certain adverse factors described below.
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The most significant contributions to Orion's fiscal 1993 gross profit were
derived from the continued distribution to the foreign theatrical, worldwide
home video and the domestic pay cable marketplaces of "THE SILENCE OF THE LAMBS"
and, to a lesser extent, by the domestic home video sell-thru distribution of
"DANCES WITH WOLVES." Together, these two pictures contributed approximately
$23,100,000 to fiscal 1993 gross profit. The foreign theatrical and home video
distribution of "THE ADDAMS FAMILY," the domestic home video rental distribution
of "LITTLE MAN TATE," the domestic home video sell-thru distribution of "DIRTY
ROTTEN SCOUNDRELS" and the licensing in a number of foreign territories, as
described above, of the television rights to certain of Orion's older theatrical
titles also contributed to gross profit in fiscal 1993. The contributions to
gross profit described above were offset, almost entirely, by the effects of
certain adverse factors described below.
The fiscal 1995 results included writedowns to estimated net realizable
value of the carrying amounts of "CLIFFORD," "CHINA MOON," "THE FAVOR," "BLUE
SKY" and "THERE GOES MY BABY," all of which were released in the domestic
marketplace during that year as well as additional writedowns to previously
released product.
The fiscal 1994 results included writedowns to estimated net realizable
value of the carrying amounts of "MARRIED TO IT," "THE DARK HALF," "ROBOCOP 3,"
and "CAR 54, WHERE ARE YOU?," all of which were released in the domestic
marketplace during that year as well as increases to previous provisions for
losses on Orion's then remaining unreleased titles. In addition, the fiscal 1994
results were adversely affected by the writedowns due to the Showtime Settlement
more fully described above and in Note 5. Furthermore, as a result of Orion's
quarterly inventory reviews, described below, current market conditions in the
domestic free television market affected management's estimate of the future
revenue-generating potential of Orion's product in this market.
The fiscal 1993 results included writedowns to estimated net realizable
value of the carrying amounts of "ARTICLE 99" and "LOVE FIELD," both of which
were released during that year, as well as increases to previous provisions for
losses on certain of Orion's then unreleased titles. The fiscal 1993 results
were also adversely affected by further writedowns to estimated net realizable
value of "SHADOWS AND FOG." In addition, as a result of Orion's quarterly
inventory reviews, described below, changed market conditions, as well as the
restrictions within the Plan concerning the production of new product,
significantly affected management's estimate of the future revenue generating
potential of Orion's product in the foreign pay and free television
marketplaces. During fiscal 1993, Orion concluded negotiations with several
customers which demonstrated the reduced demand, and consequently, reduced
pricing for Orion's product in these markets.
Orion performs quarterly comprehensive reviews of its inventory of film
product. In the process of performing these reviews, Orion, where appropriate,
has written down the carrying amount of certain released titles to estimated net
realizable value and recorded provisions for losses on certain then unreleased
titles. Such writedowns, in fiscal 1995 totalled approximately $17,100,000
compared to approximately $94,600,000 in fiscal 1994, and compared to
approximately $35,800,000 in fiscal 1993. Such writedowns for fiscal 1994
included an aggregate of $76,000,000 attributed to the effect of the Showtime
Settlement described above, the disappointing release of four pictures during
that fiscal year, and additional provisions on the five then unreleased
pictures. In addition, for reasons described above and in previous
publicly-filed documents, approximately three-quarters of Orion's film
inventories are stated at estimated net realizable value and do not generate
gross profit upon the recognition of revenues.
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Selling, General and Administrative Expense
Year Ended February 28, 1995 Compared to Year Ended February 28, 1994;
Year Ended February 28, 1994 Compared to Year Ended February 28, 1993
Orion's selling, general and administrative expense decreased 29%
(approximately $8,815,000) from fiscal 1993 to fiscal 1994. Approximately
$5,800,000 of the decrease in fiscal 1994 was attributed to reduced personnel
costs, as well as from rejections and renegotiations of various operating
leases. Selling general and administrative expense remained relatively constant
from fiscal 1994 to fiscal 1995.
Interest Expense
Three Months Ended May 31, 1995 Compared to Three Months Ended May 31, 1994
Interest expense for the first quarter of fiscal 1996 decreased $228,000
(3%) from the previous year's quarter from $7,155,000 to $6,927,000. This
decrease, which primarily reflects reduced interest charges on lower outstanding
debt balances as principal payments continue to reduce Orion's debt, was
partially offset by increased interest costs as well as a non-recurring credit
in the first quarter of fiscal 1995 of approximately $526,000 representing
interest earned by Orion in connection with the Showtime Settlement.
Year Ended February 28, 1995 Compared to Year Ended February 28, 1994;
Year Ended February 28, 1994 Compared to Year Ended February 28, 1993
Interest expense decreased from approximately $32,300,000 in fiscal 1994 to
approximately $29,100,000 in fiscal 1995. Interest expense increased from
approximately $23,500,000 in fiscal 1993 to approximately $32,300,000 in fiscal
1994. The fiscal 1994 increase is largely due to the impact of applying SOP 90-7
to accounting for interest related to Orion's subordinated notes and debentures.
In accordance with the requirements of SOP 90-7, Orion did not accrue interest
on these securities during the Bankruptcy Period. Interest expense for fiscal
year 1994 includes 12 months or approximately $24,300,000 of expenses recognized
related to Orion's 10% Debentures, Talent Notes, Creditor Notes, the payment
obligation to Sony and the guarantee of bank borrowings. Whereas fiscal 1993
included only four months or approximately $8,600,000 of New Debt Structure
interest. The fiscal 1995 decrease, which primarily reflects reduced interest
charges on lower outstanding debt balances as principal payments continue to
reduce Orion's debt, was partially offset by increased interest rates.
Approximately $17,100,000, $17,300,000 and $6,100,000 of the above amounts in
fiscal 1995, 1994 and 1993, respectively, resulted from the amortization of
discounts and the carrying amount of the guarantee of bank borrowings described
in Note 2. Annual interest expense is expected to continue to decrease as Orion
makes payments with respect to amounts outstanding under its various securities.
Provision for Income Taxes
Three Months Ended May 31, 1995 Compared to Three Months Ended May 31, 1994
The provision for income taxes on operations in the first quarter of both
fiscal 1995 and fiscal 1996 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 May 31, 1995 and 1994 are attributable to foreign
remittance taxes and minimum state taxes.
Year Ended February 28, 1995 Compared to Year Ended February 28, 1994;
Year Ended February 28, 1994 Compared to Year Ended February 28, 1993
The provisions for income taxes for fiscal 1995, 1994, and 1993 are
comprised primary of provisions for foreign withholding and remittance taxes
incurred. Additional information regarding
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Orion's income tax accounts can be found in Note 8 of Notes to Orion's
Consolidated Financial Statements included elsewhere in this Joint Proxy
Statement/Prospectus.
Effective March 1, 1993, Orion adopted the Statement of Accounting Standards
No. 109 "Accounting for Income Taxes" ("SFAS 109"). Under this method, deferred
tax assets and liabilities are recognized with respect to the tax consequences
attributable to the differences between the financial statement carrying values
and tax bases of existing assets and liabilities. There was no cumulative effect
of this change in method of accounting for income taxes for periods prior to
March 1, 1993.
Liquidity and Capital Resources
On the Filing Date, as described above, Orion and certain of its
subsidiaries filed petitions for relief under the Bankruptcy Code in the Court.
Under the Plan, Orion will continue to concentrate its efforts on the licensing
and distribution of its library. Currently, the principal sources of the funds
required for Orion's motion picture distribution activities are proceeds from
the licensing of exhibition and ancillary rights to Orion's library. In
accordance with the terms of the Plan, Orion 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 Orion.
Before the filing of Orion's petitions under chapter 11, Orion had as an
operating plan to release each year approximately 12 to 15 theatrical motion
pictures which Orion fully or substantially financed. Prior to the filing, all
new production was halted leaving Orion with only 12 largely completed but
unreleased motion pictures at the Filing Date. In addition, under the Plan,
Orion's ability to produce or invest in new theatrical product is severely
limited as described above. Accordingly, Orion released five, four, and three
theatrical motion pictures in the domestic marketplace in fiscal 1995, 1994, and
1993, respectively. 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 5, approximately three-quarters of Orion's
film inventories at February 28, 1995 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, during the Bankruptcy Period, Orion 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. Orion 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, Orion's financial and other resources
continued to decline. Production operations were suspended because of Orion's
inability to finance production of new films. New product for distribution was
limited to the Unreleased Films. To conserve resources, Orion 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.
Orion 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 Plan Effective Date, Orion 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 is available by request, free of charge, by requesting
the same from Orion Pictures Corporation, 1888
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Century Park East, Seventh Floor, Los Angeles, California 90067, Attention:
Cynthia Friedman, Chief Financial Officer (telephone: (310) 282-0550)). In order
to ensure timely delivery of the Plan, any request should be made by October 13,
1995. The Plan represents a compromise and settlement reached among Orion'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, Orion'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% 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 Mr.
Kluge, 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%
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 Orion's subordinated notes and debentures
outstanding at the Filing Date received an aggregate of $50,000,000 initial
principal amount of 10% Debentures due October 31, 2001 of the reorganized
Orion, 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 Orion. The holders of Orion'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 Orion. Metromedia and Mr.
Kluge have received an aggregate of 50.1% of the common stock of the reorganized
Orion 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 Orion and an affiliate of Metromedia
(the "MetMermaids Rights").
Orion's By-laws provide that for a period of five years from the Plan
Effective Date Orion must cause certain directors not affiliated with Metromedia
to be included in Orion's slate of directors nominated for election by Orion's
stockholders. One of such nominees is to be a member of the Executive Committee
of the Board of Directors of the reorganized Orion.
Pursuant to the terms of the Plan, Orion 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 Orion's ability to produce 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, Orion is nevertheless allowed,
without any restriction, to pay related debt service out of operating cash flow.
While Orion has been able to acquire certain distribution rights to certain new
product with nonrecourse financing, no assurance can be given that Orion 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 Orion's results of
operations.
To the extent that Orion generates Net Cash Flow, Orion is required to make
principal payments with respect to the Banks and Sony and to the holders of the
Orion Subordinated Indebtedness at least
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quarterly out of Net Cash Flow. Net Cash Flow as defined in the Plan generally
provides for the payment of operating costs as incurred. As distributions are
dependent upon Orion'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 6 of Notes to Orion's
Consolidated Financial Statements included elsewhere in this Joint Proxy
Statement/Prospectus ("Note 6"), for a schedule of Orion's Net Cash Flow
payments since the Plan Effective Date.
The poor performance of Orion's pictures released after the Plan 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 Orion. As described in
Note 6, such events had an adverse effect on Orion'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 have had an
adverse effect on Orion's ability to meet certain of the other Plan obligations
discussed below in the fiscal year ended February 29, 1996 ("fiscal 1996").
As described in Note 6, Orion was obligated to make certain principal
payments to the Banks 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 September 1995, respectively. Orion did not generate sufficient Net Cash
Flow to make the scheduled payments 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, Orion did not
satisfy its payment obligations in full to Sony and Orion does not currently
believe it will generate sufficient Net Cash Flow to make the scheduled final
maturity payments to the Banks in October 1995. As a result, Metromedia will be
obligated to make a payment to the Banks and Sony in the amount of such payment
shortfall. Any amounts paid by Metromedia to the Banks and Sony on Orion's
behalf will be repaid in full to Metromedia by the Surviving Corporation at the
Effective Time. 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 Orion to the Bank and/or to Sony result in such Guarantors become
subrogated to the Banks' and Sony's portion of Orion's Net Cash Flow following
payment in full of Orion's obligations to the Banks and Sony. Absent the
consummation of the Mergers and the refinancing of the Orion Senior
Indebtedness, Orion would be obligated to reimburse the amounts paid by the
Guarantors under the Bank Guarantee on Orion's behalf, plus interest, out of the
portion of Orion's Net Cash Flow previously allocable to the Banks and Sony
until such Guarantors are reimbursed in full.
In addition, as described in Note 6, the Indentures pursuant to which the
Talent Notes and Creditor Notes were issued provide for an Event of Default
under such Indentures if the aggregate amount of Net Cash Flow paid by the
Company to the holders of Orion Subordinated Indebtedness does not exceed the
mandatory minimum amounts (the "Mandatory Minimums") specified in such
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 Orion because of the Showtime Settlement.
Although such Indentures provide that Orion must make payments to the
holders of the Orion Subordinated Indebtedness in the amounts specified in such
Indentures (less the reduction for the Showtime Settlement discussed above) for
each fiscal quarter through the fiscal year ended February 28, 1999, such
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 such Indentures would mean that by the end of
each of Orion's four fiscal quarters in each fiscal year beginning with the
fiscal quarter ended May 31, 1995, Orion would have had to pay to the holders of
the Orion Subordinated Indebtedness the same Mandatory Minimum amount. Orion
believes that the language set forth in such Indentures does not reflect the
agreement between Orion and its principal creditors who negotiated and agreed
upon the provisions based upon Orion's review of the agreement in principle
agreed to by such parties. Orion believes that the Mandatory Minimums specified
in such
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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 such Indentures for each fiscal
quarter of each fiscal year beginning with the quarter ended May 31, 1995.
Notwithstanding the literal language of such Indentures, it is Orion'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, which Orion believes reflects the agreement of the parties,
Orion did not generate sufficient Net Cash Flow to satisfy the Mandatory Minimum
threshold specified in the Indentures for the quarter ended May 31, 1995.
Accordingly, it is possible that the Trustee under the Indentures or the holders
of Talent Notes or Creditor Notes could assert that an Event of Default should
have occurred 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
the holders of at least 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. To date, Orion has not received any notification
from such Trustee or the holders of Talent Notes or Creditor Notes that an Event
of Default has occurred under either of the Indentures and no such acceleration
has occurred. Should such acceleration under the Indentures occur, Orion, absent
other financing arrangements, may be forced to seek protection under chapter 11
of the Bankruptcy Code. Notwithstanding the literal language of the Indentures,
Orion believes, however, that no such Event of Default has occurred for the
quarter ended May 31, 1995 because the language set forth in the Indentures does
not reflect the intention of Orion and the representatives of the holders of
such indebtedness who negotiated such provisions and utilizing Orion'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 the quarterly Mandatory
Minimum thresholds for each fiscal quarter, as specified in Note 4 of Notes to
the March 31, 1995 unaudited Condensed Consolidated Financial Statements, Orion
generated sufficient Net Cash Flow to satisfy the Mandatory Minimums for the
fiscal quarter ended May 31, 1995. Notwithstanding the foregoing, Orion did not
generate sufficient Net Cash Flow to satisfy such reformed quarterly Mandatory
Minimums at the quarter ended August 31, 1995. Consequently, as of August 31,
1995, an Event of Default occurred under the Indentures, creating the
possibility of an acceleration of the Talent Notes and Creditor Notes as
described above. Should such acceleration under the Indentures occur, Orion,
absent other financing arrangements, may be forced to seek protection under
chapter 11 of the Bankruptcy Code. As is more fully described in this Joint
Proxy Statement/Prospectus, Orion has entered into the Merger Agreement to
combine Orion with Actava, Sterling and MITI. A condition to consummation of the
Mergers is the refinancing of all of the Orion Subordinated Indebtedness and its
remaining obligations to the Banks and to Sony, in order to avoid a possible
acceleration of the Talent Notes and Creditor Notes pursuant to such Indentures.
As previously discussed herein, Orion anticipates net losses for financial
reporting purposes for fiscal 1996, as well as insufficient liquidity to meet
its obligations in fiscal 1996 as described above.
Orion continues to exploit its existing library of product in order to
generate Net Cash Flow. Orion 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 Plan Effective Date, Orion has been able to acquire some new
product with nonrecourse financing. In order to further exploit its existing
distribution apparatus, Orion 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 Orion
through its distribution system. In addition, Orion will pursue additional
nonrecourse financing for the production of new product, which Orion is also
permitted to engage in under the Plan on a nonrecourse basis or through certain
unrestricted subsidiaries. If Orion is successful in obtaining nonrecourse
financing as described above, the contribution to Orion's liquidity will
generally be in the form of a distribution fee. In addition to the Mergers
described above and in Note 11 of Notes to Orion's Consolidated Financial
Statements included elsewhere in this Joint Proxy Statement/Prospectus, Orion
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 Orion Subordinated Indebtedness.
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RELATIONSHIP WITH METROMEDIA
Prior to the Filing Date, Metromedia and its affiliates, through a series of
open market purchases of Orion's old common stock and through the exercise of
warrants issued to Metromedia, owned approximately 68.4% of Orion's then
outstanding old common stock. In February, 1991, the Board of Directors of Orion
was increased in size and, for the first time, Metromedia attained majority
representation on Orion's Board of Directors. Metromedia was a co-proponent of
the Plan and, pursuant to the Plan, Metromedia and its affiliates received
109,345 shares of the Orion Common Stock in return for their shares of Orion's
old common stock. In addition, Metromedia and Mr. Kluge received 10,020,000
shares of Orion Common Stock (50.1% of the issued and outstanding shares) in
return for $15 million in cash and the contribution to Orion of certain rights
of an affiliate of Metromedia under an agreement with Orion, which rights
provided for payment of approximately $29 million to Orion as of the Plan
Confirmation Date.
The Guarantee and Reimbursement Agreement
Prior to the Plan Effective Date, Metromedia and Mr. Kluge delivered the
Bank Guarantee to the Banks under the Third Restated Credit Agreement. The Bank
Guarantee provides generally that, to the extent Orion has not paid the Banks,
the guarantors under the Bank Guarantee will be obliged to pay to the Banks: (i)
$85 million (less principal payments made to the Banks prior to the Plan
Effective Date) on the first anniversary of the Plan Confirmation Date, $80
million on the second anniversary thereof, and approximately $64.2 million on
the third anniversary thereof; (ii) quarterly interest payments under the Third
Restated Credit Agreement; (iii) the following payments (subject to certain
adjustments in the timing of such payments for partial draws) with respect to
Orion's reimbursement obligations under the Third Restated Credit Agreement in
respect of a letter of credit issued in favor of an affiliate of Sony: $26
million on the first anniversary of the Plan Confirmation Date, $24 million on
the second anniversary thereof, $20 million on the third anniversary thereof,
and the amount of any draw under the letter of credit if such draw would not
have been permitted under the letter of credit outstanding prior to the Plan
Effective Date, in each case together with interest and fees relating thereto;
and (iv) legal fees and expenses incurred in connection with the enforcement of
the Bank Guarantee. The Bank Guarantee provides that the Banks may not
accelerate the obligations under the Third Restated Credit Agreement or take any
action to foreclose on any assets of Orion unless and until the guarantors under
the Bank Guarantee shall have failed to make any payment due under the Bank
Guarantee. If, in violation of that requirement, the Banks instead first proceed
against Orion or its assets, the Bank Guarantee thereupon will terminate.
In connection with the delivery by Metromedia and Mr. Kluge of the Bank
Guarantee, Orion entered into the Reimbursement Agreement (the "Reimbursement
Agreement") dated as of October 20, 1992 which provides, among other things,
that if Metromedia or Mr. Kluge has performed under the Bank Guarantee or made
cure payments to Sony under the agreement between Orion and Sony, that portion
of Orion's Net Cash Flow that would have been distributed to the Banks pursuant
to the Plan will instead be paid to Metromedia and Mr. Kluge to reimburse them
for payments made to the Banks and/or Sony until Metromedia and Mr. Kluge are
reimbursed in full; provided, however, that neither Metromedia nor Mr. Kluge may
receive reimbursement under the Reimbursement Agreement or receive the Banks'
and/or Sony's portion of Orion's Net Cash Flow payable under the Plan until the
Banks and/or Sony have been paid in full. The Reimbursement Agreement contains a
number of customary affirmative covenants, including, but not limited to,
delivery of certain financial and other information, maintenance of existence
and compliance with certain agreements. The Reimbursement Agreement also
contains various negative covenants which, among other things, generally
restrict the ability of Orion and each of its subsidiaries (i) to incur
indebtedness other than certain permitted indebtedness specified in the
Reimbursement Agreement, (ii) to incur liens, (iii) to undertake a fundamental
change in its corporate structure or business or to dispose of all or
substantially all of its assets, (iv) to sell or otherwise dispose of certain of
its assets or to exploit its assets other than in the
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ordinary course of business, (v) to pay dividends or make other distributions on
or redeem its capital stock, (vi) to modify the provisions of certain agreements
and (vii) to enter into certain transactions with affiliates. The Reimbursement
Agreement also contains customary events of default which, upon occurrence,
permit Metromedia and Mr. Kluge (after the Banks and Sony have been paid in
full) to declare all amounts owing under the Reimbursement Agreement to be
immediately due and payable. The Reimbursement Agreement also provides, however,
that as long as one or both of Metromedia and Mr. Kluge "control" (as defined in
the Reimbursement Agreement) Orion, neither may enforce any of the affirmative
or negative covenants set forth in the Reimbursement Agreement, and breach of
any of such covenants will not give rise to an event of default thereunder.
It is a condition to the consummation of the Merger Agreement and the
transactions contemplated thereby that the indebtedness of Orion to Metromedia
pursuant to the Reimbursement Agreement be refinanced or repaid in full. Orion
anticipates that Metromedia will be obligated to make an additional payment to
the Banks and to Sony during October 1995, which at the Effective Time would be
repaid in full to Metromedia by the Surviving Corporation. See "PROPOSAL NO.
1--THE PROPOSED MERGERS--Interests of Certain Persons in the Mergers."
Miscellaneous Relationships
Since the Plan Effective Date, Metromedia, through its affiliates, has
provided Orion and its affiliates with non-recourse financing to acquire certain
theatrical and home video product, as described below. All of the following
amounts constitute the obligations which will, at the option of Orion, be
refinanced or repaid in full at the Effective Time or converted into Common
Stock of the Surviving Corporation as provided in the Contribution Agreement.
See "PROPOSAL NO. 1--THE PROPOSED MERGERS--Terms and Conditions of the
Contribution Agreement."
Orion and MetProductions, an affiliate of Metromedia, entered into an
agreement pursuant to which MetProductions loaned to Orion $1,129,000 (the
"Boxing Helena Loan") to fund the print and advertising costs associated with
the domestic distribution in all media of the film "BOXING HELENA." The Boxing
Helena Loan and accrued and unpaid interest thereon (at the rate of 10% per
annum) was payable out of the gross receipts of the film (less certain
distribution expenses) and the distribution fee payable to Orion by the licensor
of the film. The Boxing Helena Loan was secured by a first priority lien granted
to MetProductions on Orion's rights in the license agreement pursuant to which
it acquired the distribution rights in the film. Orion has repaid the Boxing
Helena Loan in full.
MetProductions and Orion are also parties to an agreement pursuant to which
MetProductions made a non-recourse loan in the amount of $1,005,000 (the "Me and
the Kid Loan") to Orion to fund the print and advertising costs associated with
the domestic distribution in all media of the film "ME AND THE KID." The Me and
the Kid Loan and accrued and unpaid interest thereon (at the rate of 10% per
annum) is payable out of the gross receipts of the film (less certain
distribution expenses) and the distribution fee payable to Orion by the licensor
of the film to Orion. The Me and the Kid Loan is secured by a first priority
lien granted to MetProductions on Orion's rights in the license agreement
pursuant to which it acquired the distribution rights in the film. As of
September 20, 1995, $755,000 of the Me and the Kid Loan is outstanding.
MetProductions and Orion are parties to an agreement pursuant to which
MetProductions has agreed to lend Orion up to $750,000 (the "Nostradamus Loan")
to fund the print and advertising costs associated with the domestic
distribution in all media of the film "NOSTRADAMUS." The Nostradamus Loan and
accrued and unpaid interest thereon (at the rate of 10% per annum) is payable
out of the gross receipts of the film (less certain distribution expenses) and
the distribution fee payable to Orion by the licensor of the film to Orion. The
Nostradamus Loan was secured by a first priority lien granted to MetProductions
on Orion's rights in the license agreement pursuant to which it acquired the
distribution rights in the film. Orion has repaid the Nostradamus Loan in full.
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MetProductions and Orion are parties to an agreement pursuant to which
MetProductions has agreed to lend Orion up to $775,000 (of which $571,200 has
been lent and is outstanding as of September 20, 1995) (the "Bar Girls Loan") to
fund the print and advertising costs associated with and an advance to the
producer to acquire the domestic distribution in all media of the film "BAR
GIRLS." The Bar Girls Loan and accrued and unpaid interest thereon (at the rate
of 10% per annum) is payable out of the gross receipts of the film (less certain
distribution expenses) and the distribution fee payable to Orion by the licensor
of the film to Orion. The Bar Girls Loan is secured by a first priority lien
granted to MetProductions on Orion's rights in the license agreement pursuant to
which it acquired the distribution rights in the film.
MetProductions and Orion are parties to an agreement pursuant to which
MetProductions has agreed to lend Orion up to $250,000 (of which $227,200 has
been lent and is outstanding as of September 20, 1995) (the "Playmaker Loan") to
fund an advance to the producer in order to acquire the domestic distribution in
all media of the film "PLAYMAKER." The Playmaker Loan and accrued and unpaid
interest thereon (at the rate of 10% per annum) is payable out of the gross
receipts of the film (less certain distribution expenses) and the distribution
fee payable to Orion by the licensor of the film to Orion. The Playmaker Loan is
secured by a first priority lien granted to MetProductions on Orion's rights in
the license agreement pursuant to which it acquired the distribution rights in
the film.
Orion and MetProductions are parties to an agreement pursuant to which
MetProductions has agreed to lend Orion up to $1,500,000 (of which $981,000 has
been lent and is outstanding as of September 20, 1995) (the "Robocop Loan") to
acquire the domestic home video distribution rights in the television movie
"ROBOCOP, The Fourth Directive" (the "Picture") and the series based thereon.
The Robocop Loan and all accrued and unpaid interest thereon (at the rate of 10%
per annum) is payable out of the gross proceeds of the Picture (less certain
distribution expenses). The Robocop Loan is secured by a first priority lien
granted to MetProductions in Orion's right, title and interest in the
Distribution Agreement between Orion and Skyvision Entertainment, Inc.
MetProductions and Orion are parties to an agreement pursuant to which
MetProductions has agreed to lend Orion up to $1,050,000 (of which $950,000 has
been lent and is outstanding as of September 20, 1995) (the "Jeffrey Loan") to
fund the print and advertising costs associated with and as an advance to the
producer of such film to acquire the domestic distribution in all media of the
film "JEFFREY." The Jeffrey Loan and accrued and unpaid interest thereon (at the
rate of 10% per annum) is payable out of the gross receipts of the film (less
certain distribution expenses) and the distribution fee payable to Orion by the
licensor of the film to Orion. The Jeffrey Loan is secured by a first priority
lien granted to MetProductions on Orion's rights in the license agreement
pursuant to which it acquired the distribution rights in the film.
OHEC and MetProductions are parties to an agreement pursuant to which
MetProductions has agreed to lend OHEC certain amounts where the cumulative
amount outstanding cannot exceed $600,000 during Year 1 (November 1, 1993
through December 31, 1994); $700,000 in Year 2 (January 1, 1995 through December
31, 1995) and $800,000 during Year 3 (January 1, 1996 through December 31, 1996)
(the "Fox Lorber Loan") to provide to Fox Lorber Home Video an acquisition fund
to be used to acquire full-length theatrical motion pictures (the "Acquisition
Fund Product"). At September 20, 1995, $111,000 of MetProduction's commitment
was outstanding. The Fox Lorber Loan and all accrued interest thereon is payable
out of the gross receipts to which OHEC is entitled from the Acquisition Fund
Product (less any expenses incurred by OHEC). The Fox Lorber Loan is secured by
a first priority lien on and security interest granted to MetProductions in
OHEC's right, title and interest in the Fox Lorber Agreement.
OHEC and MetProductions are parties to an agreement pursuant to which
MetProductions has agreed to lend OHEC up to $500,000 (the "Castle Loan") to
fund the acquisition of domestic home video distribution rights by OHEC to five
animated children films from Castle Communications.
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MetProductions has loaned all of its commitment and the entire amount is
outstanding as of September 20, 1995. The Castle Loan and all accrued interest
thereon is payable out of the gross receipts to which OHEC is entitled from the
animated films (less any expenses incurred by OHEC). The Castle Loan is secured
by a first priority lien on and security interest granted to MetProductions in
OHEC's right, title and interest in the Distribution Agreement between OHEC and
Castle Communications.
In addition, an affiliate of Orion and MetProductions have formed a
partnership to fund the production or acquisition of film product.
MetProductions has contributed to the partnership approximately $2,435,000 which
the partnership utilized to fund a portion of the production budgets for two
films intended for initial distribution in the home video market ("DEAD ON" and
"ILLEGAL IN BLUE"), of which "DEAD ON" has been released. Orion has distributed
an aggregate of $135,200 to Metromedia in respect of these partnerships.
OHEC and MetProductions are parties to an agreement pursuant to which
MetProductions has agreed to lend OHEC up to $1,000,000 (the "Streamline Loan")
to fund the acquisition of domestic home video distribution rights by OHEC to
certain animated films from Streamline Entertainment. As of September 20, 1995,
$700,000 was outstanding under the Streamline Loan. The Streamline Loan and all
accrued interest thereon is payable out of the gross receipts to which OHEC is
entitled from the animated films (less any expenses incurred by OHEC). The
Streamline Loan is secured by a first priority lien on and security interest
granted to MetProductions in OHEC's right, title and interest in the
Distribution Agreement between OHEC and Streamline Communications.
MetProductions and Orion have entered into an agreement pursuant to which
MetProductions has agreed to lend Orion up to $2,487,424 (of which $1,698,686
has been lent and is outstanding as of September 20, 1995) (the "Hot City Loan")
to fund the pre-production and production financing associated with the film
"HOT CITY." The Hot City Loan and all accrued and unpaid interest thereon (at
the rate of 10% per annum) is payable out of the gross receipts to which Orion
is entitled pursuant to the production agreement relating to the film (less
certain distribution expenses). The Hot City Loan is secured by a first priority
lien granted to MetProductions on Orion's rights in the film (domestic) pursuant
to the production agreement relating to the film.
MetProductions and Orion are parties to an agreement pursuant to which
MetProductions has agreed to lend Orion up to $724,000 (of which $227,000 has
been lent and is outstanding as of September 20, 1995) (the "Theremin Loan") to
fund the printing and advertising costs and certain advances associated with the
domestic distribution in all media of the film "THEREMIN." The Theremin Loan and
all accrued and unpaid interest thereon (at the rate of 10% per annum) is
payable out of the gross receipts of the film (less certain distribution
expenses) and the distribution fee payable to Orion by the licensor of the film.
The Theremin Loan is secured by a first priority lien granted to MetProductions
on Orion's rights in the license agreement pursuant to which it acquired the
distribution rights to the film.
MetProductions and Orion have reached an agreement pursuant to which
MetProductions has agreed to lend Orion up to $550,000 (none of which has been
lent and is outstanding as of September 20, 1995) (the "Dangerous Loan") to
provide certain advances of home video sales with respect to the film "THE
DANGEROUS." The Dangerous Loan and all accrued and unpaid interest thereon (at
the rate of 10% per annum) is payable out of the gross receipts of the film
(less certain distribution expenses) and the distribution fee payable to Orion
by the licensor of the film. The Dangerous Loan is secured by a first priority
lien granted to MetProductions on Orion's rights in the film. The terms of the
Dangerous Loan have not been finalized and are subject to change.
Mr. Kluge beneficially owns more than 10% of the common stock of Image
Investors Co., a Delaware corporation. Image Investors owns approximately 40% of
the common stock of Image Entertainment, Inc. ("Image"). OHEC was a party to an
output license agreement with Image which
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terminated on December 31, 1992 pursuant to which OHEC granted to Image the
rights to manufacture, market and sell on laserdiscs for private in-home use
certain feature length programs released by Orion on videocassette for a period
of three years from the date of first release by Image on laserdisc in
consideration of a royalty payment payable with respect to each program. At the
end of the fiscal year ended February 28, 1995, Image paid to Orion
approximately $1.1 million under the agreement. Orion, OHEC and Image are
currently negotiating and finalizing the terms of a new output agreement.
Metromedia has agreed to guarantee the payment by Orion to Chemical of
certain fees payable in connection with the execution of the commitment letter
with Chemical for the New Orion Credit Facility.
Orion is a customer of WorldCom, Inc. (formerly known as LDDS Metromedia
Communications ("WorldCom")), which provides long distance telephone services to
Orion. Mr. Kluge is Chairman of the Board of WorldCom, Orion and MITI, Mr.
Subotnick, the Vice Chairman of the Board of Orion and MITI, is a Director of
WorldCom and Silvia Kessel, an Executive Vice President and Director of Orion
and a Senior Vice President of Metromedia, serves on WorldCom's Board of
Directors. For the fiscal year ended February 28, 1995 Orion paid $174,000 to
WorldCom.
During the fiscal year ended February 28, 1995, Orion received $89,000 from
Metromedia Steakhouses Company, L.P. for sales of video cassettes. Orion also
reimburses Metromedia $95,000 annually for the services of Silvia Kessel, a
Senior Vice President of Metromedia who also serves as Executive Vice President
of Orion.
ORION DESIGNEES TO THE SURVIVING CORPORATION BOARD OF DIRECTORS
Pursuant to the terms of the Merger Agreement, the Board of Directors of the
Surviving Corporation will be fixed at ten directors. Six of the ten directors
will be designated by Orion and four directors will be designated by Actava. The
size of the Surviving Corporation's Board of Directors is subject to downward
adjustment under certain circumstances. See "PROPOSAL NO. 1--THE PROPOSED
MERGERS--Management and Operations After the Mergers." Orion currently intends
to cause the designation of the following six persons to serve as directors of
the Surviving Corporation after the Effective Time: John W. Kluge, Stuart
Subotnick, Silvia Kessel, Richard J. Sherwin, Arnold L. Wadler and Leonard
White.
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INFORMATION REGARDING ACTAVA
BUSINESS OF ACTAVA
General
Since the late 1960's, Actava has owned, operated and sold dozens of
companies in many diverse industries, including photofinishing, recreation,
sporting goods, yacht and sailboat manufacturing, outdoor power equipment,
manufactured housing, petroleum distribution, movie theaters, retailing,
broadcasting, trucking, food and beverages, grain storage bins, taxicabs,
seating and banking. At the beginning of 1994, Actava owned and operated
businesses in three industries: photofinishing, lawn and garden equipment, and
sporting goods. Actava sold its photofinishing subsidiary and its four sporting
goods subsidiaries during 1994. As a result of these transactions, Actava
presently operates only one business, Snapper, which is a division of Actava and
is engaged in the manufacture and sale of lawn and garden equipment. In addition
to operating Snapper, Actava owns 19,169,000 shares of the Common Stock of
Roadmaster. These shares were issued to Actava in connection with the
Actava-Roadmaster Exchange Transaction on December 7, 1994.
Actava was organized in 1929 under Pennsylvania law and was reincorporated
in 1968 under Delaware law. On July 19, 1993, Actava changed its name from Fuqua
Industries, Inc. to The Actava Group Inc. Actava's principal executive offices
are located at 945 East Paces Ferry Road, Atlanta, Georgia 30326 and its
telephone number is (404) 261-6190.
Additional information concerning Actava and its subsidiaries is contained
in its Annual Report on Form 10-K for the year ended December 31, 1994, as
amended, its Quarterly Reports on Form 10-Q for the quarters ended March 31,
1995 and June 30, 1995, its Current Report on Form 8-K dated April 12 1995, as
amended, and its other public filings. See "AVAILABLE INFORMATION" and
"INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE".
RECENT DEVELOPMENTS
Election of John D. Phillips as Chief Executive Officer of Actava
On April 19, 1994, the Board of Directors of Actava elected John D. Phillips
as President, Chief Executive Officer and a director of Actava. Actava, on the
same date, sold 700,000 shares of Common Stock to Renaissance Partners, a
partnership for which Mr. Phillips serves as a general partner, for a cash price
of $4,462,500, and Actava issued to Mr. Phillips seven-year options for the
purchase of 300,000 additional shares of Common Stock at a price of $6.375 per
share. As a result of these transactions, Mr. Phillips, as of September 20,
1995, was the beneficial owner of approximately 5.7% of the outstanding shares
of Common Stock. From 1989 to 1993, Mr. Phillips was President and a director of
Resurgens which transmitted operator-assisted long distance telephone calls and
provided operator services and billing and collection services to other long
distance telephone companies. Resurgens Inc. merged with Metromedia
Communications Corporation, a wholly owned subsidiary of Metromedia, and LDDS in
September 1993, and the combined company now operates as a long distance
telecommunications company under the name WorldCom, Inc. Mr. Phillips has had
previous business relationships with Metromedia and Mr. Kluge. Mr. Kluge, or
entities controlled by him, including Metromedia, have previously made
investments in two companies for which Mr. Phillips was then serving as chief
executive officer or chief operating officer. See "PROPOSAL NO. 1--THE PROPOSED
MERGERS--Background of the Mergers."
Mr. Phillips was given a mandate by Actava's Board of Directors to improve
Actava's operations and earnings and to increase stockholder value. Consistent
with this mandate, Actava, acting on a proposal by Mr. Phillips which was
approved by the Board of Directors, sold its photofinishing
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subsidiary and its four sporting goods subsidiaries during 1994. These
transactions have strengthened the financial condition of Actava and have
enabled it to pursue other business opportunities.
Sale of Qualex
Actava was engaged in photofinishing business from 1967 through August 12,
1994. In 1988, Actava combined its photofinishing subsidiary, Colorcraft
Corporation, with the United States photofinishing operations of Eastman Kodak
Company ("Kodak"). The company resulting from this combination was named Qualex
Inc. ("Qualex") and was jointly owned by Actava and Kodak. Qualex is the largest
wholesale photofinishing company in the United States.
On August 12, 1994, Actava sold its 50% ownership interest in Qualex to
Kodak and, as a result, is no longer engaged in the photofinishing business.
Kodak owned the remaining 50% interest in Qualex prior to the transaction. In
exchange for Actava's ownership interest in Qualex, as well as a covenant not to
compete and related releases from Actava, Kodak paid Actava $50 million in cash
and agreed to pay Actava an additional $100 million without interest in two
equal installments on February 13, 1995 and August 11, 1995. Actava recorded a
loss of $37,858,000 on the sale of its interest in Qualex and classified
Qualex's results of operations to discontinued operations along with the loss
upon disposition. The cash received and to be received by Actava from the sale
of its interest in Qualex improved Actava's liquidity and Actava's ability to
take advantage of future business opportunities. In connection with the sale of
Qualex, Actava reclassified Qualex as a discontinued operation. During 1994,
Actava recorded a loss of $40.7 million from discontinued operations. This loss
included a loss of $37.9 million on the sale of Actava's interest in Qualex and
a loss of $2.8 million relating to the operations of Qualex in 1994.
Prior to June 30, 1994, Actava owned 51% of the voting stock of Qualex, was
entitled to and elected a majority of the members of the Board of Directors of
Qualex, and had the ability through its control of Qualex's Board of Directors
to declare dividends, remove the executive officers of Qualex and otherwise
direct the management and policies of Qualex, except for policies relating to
certain designated actions requiring the consent of at least one member of the
Board of Directors of Qualex designated by Kodak. Because of these rights,
Actava believes that, under generally accepted accounting principles, it had
effective unilateral control of Qualex which was not temporary during the period
from 1988 until the second quarter of 1994. As a result, Actava consolidated the
results of operations of Qualex with the results of operations of Actava for
periods ending prior to June 30, 1994.
Upon the formation of Qualex in 1988, Actava and Kodak entered into the
Qualex Shareholders Agreement that provided, among other things, for a reduction
in Actava's voting control of Qualex from 51% to 50% and for changes in the
composition of the Board of Directors of Qualex in the event of a "change in
control" of Actava. The Qualex Shareholders Agreement defined the term "change
in control" to include a "transaction or occurrence the effect of which is to
give a person or group of affiliated persons or entities the power to direct the
management and policies" of Actava.
In 1991, Charles R. Scott was elected President and Chief Executive Officer
of Actava. At the time of his election, Mr. Scott was also serving as Chairman
and Chief Executive Officer of a company that owned approximately 25% of
Actava's voting stock and was Actava's single largest stockholder. Because Mr.
Scott was serving at the same time as the Chief Executive Officer of both Actava
and Actava's single largest stockholder, Actava and Kodak agreed that a "change
in control" of Actava had occurred for purposes of the Qualex Shareholders
Agreement. Despite this "change in control" of Actava, Kodak agreed that Actava
would continue to own 51% of the voting control of Qualex and to elect a
majority of the directors of Qualex. The Qualex Shareholders Agreement, however,
was amended to provide that Kodak had the right to change Actava's control of
Qualex on March 1, 1992 or on any subsequent March 1. During the period from
1991 until the second quarter of 1994, Actava did not believe that Kodak would
exercise the right to change Actava's control of Qualex, and Kodak, in fact, did
not exercise this right on March 1, 1992, 1993 or 1994.
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Mr. Phillips was elected as President and Chief Executive Officer of Actava
on April 19, 1994. In late April 1994, Actava's management became aware of
Kodak's position that the election of Mr. Phillips as President and Chief
Executive Officer of Actava resulted in a "change in control" of Actava under
the Qualex Shareholders Agreement. Actava, however, did not believe that the
election of Mr. Phillips constituted a "change in control" of Actava as defined
in the Qualex Shareholders Agreement. This belief was based in part on the fact
that (i) Mr. Phillips beneficially owned less than 4% of Actava's voting stock
at the time of his election, (ii) Delaware corporate law, under which Actava is
governed, provides that the business and affairs of a corporation shall be
managed by and under the direction of the board of directors--not the president,
and (iii) eight of the nine members of the Board of Directors of Actava after
the election of Mr. Phillips were serving as directors before the election of
Mr. Phillips. Although Kodak had informed Actava of its position that a "change
in control" of Actava had occurred, Actava believed that the issue would be
resolved without a "change in control of Qualex." At a meeting held on June 8,
1994, Kodak restated its position that the election of Mr. Phillips constituted
a "change in control" of Actava under the Qualex Shareholders Agreement and
requested that changes be made in Actava's voting control of Qualex and in the
composition of the Board of Directors of Qualex. The disagreement between Actava
and Kodak as to whether or not a "change in control" had occurred was resolved
at this meeting when Actava agreed that it would not contest Kodak's
interpretation of the Qualex Shareholders Agreement. As a result, on June 30,
1994, Actava's ownership of the voting stock of Qualex was reduced to 50% and
Actava and Kodak each became entitled to elect an equal number of members of the
Board of Directors of Qualex. Because of these changes affecting Actava's
control of Qualex, Actava discontinued its practice of consolidating the
accounts of Qualex and began accounting for its ownership in Qualex under the
equity method effective as of June 30, 1994. As a result, Actava's balance
sheet, effective as of June 30, 1994, no longer includes approximately $771
million of Qualex's assets, including approximately $367 million of intangible
assets, and approximately $399 million of Qualex's liabilities, including
approximately $260 million of long-term debt and approximately $21 million of
working capital debt.
Actava-Roadmaster Exchange Transaction
Actava during 1994 transferred ownership of its four sporting goods
subsidiaries to Roadmaster in exchange for 19,169,000 shares of the $.01 par
value Common Stock of Roadmaster ("Roadmaster Common Stock"). The
Actava-Roadmaster Exchange Transaction was consummated pursuant to the terms of
an Agreement and Plan of Reorganization dated as of July 20, 1994 (the
"Reorganization Agreement") by and among Actava, the Actava's four sporting
goods subsidiaries, and Roadmaster. The Reorganization Agreement and the
Actava-Roadmaster Exchange Transaction were approved by the Actava's
Stockholders at a Special Meeting of the Actava Stockholders held on December 6,
1994, and the Actava-Roadmaster Exchange Transaction was closed effective as of
the same date (the "Actava-Roadmaster Closing Date").
As a result of the Actava-Roadmaster Exchange Transaction, Actava now owns
approximately 39% of the issued and outstanding shares of Roadmaster Common
Stock based on 49,289,529 shares of Roadmaster Common Stock outstanding as of
June 30, 1995. Shares of Roadmaster Common Stock are listed on the NYSE. For a
description of the business of Roadmaster, see "INFORMATION REGARDING
ACTAVA--Business of Actava--Narrative Description of Business--Investment in
Roadmaster Industries, Inc." below.
The four subsidiaries of Actava transferred to Roadmaster were Diversified
Products Corporation ("Diversified Products"), Hutch Sports USA Inc. ("Hutch"),
Nelson/Weather-Rite, Inc. ("Nelson/Weather-Rite"), and Willow Hosiery Company,
Inc. ("Willow") (collectively referred to as the "Sports Subsidiaries"). On the
Actava-Roadmaster Closing Date, the aggregate book value of the Sports
Subsidiaries was approximately $68.3 million. The market value of the shares of
Roadmaster Common Stock received by Actava in exchange for the Sports
Subsidiaries was approximately $76.7 million as of the Actava-Roadmaster Closing
Date, approximately $55.1 million as of March 15, 1995
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and approximately $57.5 million as of June 30, 1995. Due to the nature of the
Actava-Roadmaster Exchange Transaction, Actava recorded its investment in
Roadmaster on its books at an amount equal to the aggregate book value of the
Sports Subsidiaries as of the Actava-Roadmaster Closing Date rather than
recognizing a gain on the transaction.
In connection with the consummation of the Actava-Roadmaster Exchange
Transaction, Roadmaster adopted certain amendments to its Certificate of
Incorporation. Among other things, these amendments (i) increased the number of
authorized shares of Roadmaster Common Stock to 100,000,000 shares, (ii) fixed
the number of members of the Board of Directors of Roadmaster at nine, (iii)
required that all action by the stockholders of Roadmaster be taken at an annual
or special meeting, (iv) provided for advance notice of nominations to the Board
of Directors of Roadmaster, (v) required a two-thirds vote of the members of the
Board of Directors of Roadmaster to terminate Roadmaster's existing Chief
Executive Officer and Chief Operating Officer, except that the Board of
Directors of Roadmaster will have the right to terminate such officers by a
majority vote if Roadmaster has not reported positive net income from continuing
operations for the fiscal year preceding the year in which the Board of
Directors elects to terminate such officers, and (vi) required super-majority
voting by the stockholders to amend certain provisions of Roadmaster's
Certificate of Incorporation and Bylaws.
On the Actava-Roadmaster Closing Date, Actava, Roadmaster, Henry Fong, the
Chief Executive Officer and a director of Roadmaster, and Edward E. Shake, the
Chief Operating Officer and a director of Roadmaster, entered into a
Shareholders Agreement (the "Roadmaster Shareholders Agreement") providing,
among other things, for the composition of the Board of Directors of Roadmaster.
The Roadmaster Shareholders Agreement expires on the fifth anniversary of the
Actava-Roadmaster Closing Date unless it is earlier terminated in accordance
with its terms. The parties to the Roadmaster Shareholders Agreement have agreed
to take all action necessary to cause Roadmaster's Board of Directors to be
fixed at nine directors, four of whom will be designated by Actava (the "Actava
Designated Directors") and five of whom will be designated by Roadmaster (the
"Roadmaster Designated Directors"). Two of the four persons initially elected to
serve as Actava Designated Directors were required to be persons who are not
employees, officers or affiliates of Roadmaster or Actava. In addition, three of
the five persons who serve as Roadmaster Designated Directors must be persons
who are not employees, officers or affiliates of Roadmaster or Actava. The
Actava Designated Directors were elected to the Board of Directors of Roadmaster
on December 16, 1994. They are Mr. Phillips, President and Chief Executive
Officer of Actava, Carl E. Sanders, a member of the Board of Directors of Actava
and the Chairman of the Atlanta law firm Troutman Sanders, Clay C. Long,
Chairman of the Atlanta law firm, Long, Aldridge & Norman and Michael P.
Marshall, a private investor and the former Chairman of the Board of Directors
of Resurgens. Mr. Phillips and Mr. Marshall are both general partners in
Renaissance Partners, a Georgia general partnership which owns 700,000 shares of
Common Stock. Mr. Sanders and Mr. Long are both partners in the law firms that
provide legal services to Actava. The Roadmaster Shareholders Agreement
obligates the parties to use their best efforts to cause at least one of the
Actava Designated Directors to serve on each committee of Roadmaster's Board of
Directors and to cause at least two Actava Designated Directors to serve on any
committee consisting of five or more members.
The Roadmaster Shareholders Agreement provides for a reduction in the number
of Actava Designated Directors in the event that Actava sells, transfers or
assigns a portion of the shares of Roadmaster Common Stock owned by Actava. If
the number of shares of Roadmaster Common Stock owned by Actava is reduced to a
number less than 12,000,000 but equal to or more than 8,000,000, then Actava
will become entitled to designate only three members to Roadmaster's Board of
Directors. If the number of shares of Roadmaster Common Stock owned by Actava is
reduced to less than 8,000,000 but equal to or more than 5,000,000, then Actava
will be entitled to designate only two members to Roadmaster's Board of
Directors. If the number of shares of Roadmaster Common Stock owned by Actava is
reduced to less than 5,000,000 but equal to or more than 2,000,000, then Actava
will be
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entitled to designate only one member to Roadmaster's Board of Directors and if
less than 2,000,000, Actava will not be entitled to designate any directors.
Subject to the limitations described above, the parties to the Roadmaster
Shareholders Agreement have agreed that they will at all times and upon every
opportunity affirmatively vote all of their shares of Roadmaster Common Stock to
cause the Board of Directors to be composed of five Roadmaster Designated
Directors and four Actava Designated Directors. In addition, Mr. Fong is
obligated to use his best efforts to cause Equitex, Inc. to support the
nomination and election of the Actava Designated Directors. Mr. Fong is the
President and Chief Executive Officer and a director of Equitex, Inc., which
currently owns 10.5% of the outstanding shares of Roadmaster Common Stock.
Actava's obligation to support the nomination and election of the Roadmaster
Designated Directors will terminate if (i) Roadmaster has not reported positive
net income from continuing operations for its last fiscal year, (ii) the Actava
Designated Directors have not been nominated and supported by the other parties
to the Roadmaster Shareholders Agreement, or (iii) the Actava Designated
Directors have not been elected to, and are not then serving on, the Roadmaster
Board of Directors. The obligation of Roadmaster, Mr. Fong and Mr. Shake to
support the nomination and election of the Actava Designated Directors will
terminate if the Roadmaster Designated Directors have not been supported by the
Company or if the Roadmaster Designated Directors have not been elected to, and
are not then serving on, the Roadmaster Board of Directors.
In addition to the voting provisions, the Roadmaster Shareholders Agreement
grants to Roadmaster a right of first refusal with respect to any proposed sale
of the shares of Roadmaster Common Stock issued to Actava in the
Actava-Roadmaster Exchange Transaction for as long as the Actava Designated
Directors have been nominated and elected to the Board of Directors of
Roadmaster. Such right of first refusal will not apply to any proposed sale,
transfer or assignment of such shares to any persons who would, after
consummation of such transaction, own less than 10% of the outstanding shares of
Roadmaster Common Stock or to any sale of such shares pursuant to a registration
statement filed under the Securities Act, if Actava has used its reasonable best
efforts not to make any sale pursuant to such registration statement to any
single purchaser or "Acquiring Person" who would own 10% or more of the
outstanding shares of Roadmaster Common Stock after the consummation of such
transaction. "Acquiring Person" generally is defined to mean any person or group
which together with all affiliates is the beneficial owner of 5% or more of the
outstanding shares of Roadmaster Common Stock. The right of first refusal also
would not apply to any proposed sale, transfer or assignment of Actava's shares
of Roadmaster Common Stock to an affiliate of Actava.
The shares of Roadmaster Common Stock issued to Actava in connection with
the Actava-Roadmaster Exchange Transaction have not been registered for resale
under the Securities Act. On the Closing Date, however, Actava and Roadmaster
entered into a Registration Rights Agreement (the "Actava-Roadmaster
Registration Rights Agreement") under which Roadmaster agreed to register such
shares ("Roadmaster Registrable Stock") at the request of Actava or its
affiliates or any transferee who acquires at least 1,000,000 of the shares of
Roadmaster Common Stock issued to Actava. Under the Actava-Roadmaster
Registration Rights Agreement, registration may be required at any time during a
ten-year period beginning as of the Actava-Roadmaster Closing Date (the
"Registration Period") by the holders of at least 50% of the Roadmaster
Registrable Stock if a "long-form" registration statement (i.e., a registration
statement on Form S-1, S-2 or other similar form) is requested or by the holders
of Registrable Stock with a value of at least $500,000 if a "short-form"
registration statement (i.e., a registration statement on Form S-3 or other
similar form) is requested. Roadmaster is required to pay all expenses incurred
(other than the expenses of counsel, if any, for the holders of Roadmaster
Registrable Stock, the expenses of underwriter's counsel, and underwriting fees)
for any two registrations requested by the holders of Roadmaster Registrable
Stock during the Registration Period. Roadmaster will become obligated to pay
the expenses of up to two additional registrations if Roadmaster is not eligible
to use a short-form registration statement to register the
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Roadmaster Registrable Stock at any time during the Registration Period. All
other registrations will be at the expense of the holders of the Roadmaster
Registrable Stock.
In addition to the demand registration rights described above, if Roadmaster
at any time proposes to register under the Securities Act any of its securities
for sale for its own account or for the account of any person, subject to
certain exceptions, it is required to provide the holders of Roadmaster
Registrable Stock with the opportunity to sell some or all of their Roadmaster
Registrable Stock pursuant to such registration. Roadmaster, however, is not
required to grant any concession or additional rights to any other person to
secure the right of any holder of Roadmaster Registrable Stock to participate in
such registration. In addition, Roadmaster will have the right at least once
during each twelve-month period to defer the filing of a demand registration
statement for a period of up to 90 days after request for registration by the
holders of the requisite number of shares of Roadmaster Registrable Stock.
Any future registration rights granted by Roadmaster may not impair the
priority of the registration rights granted to the holders of Roadmaster
Registrable Stock, but Roadmaster may grant registration rights that are
substantially similar to or that rank on a parity with the registration rights
granted under the Actava-Roadmaster Registration Rights Agreement.
Sale of Real Estate Investment
Actava during 1994 entered into an agreement, subject to certain conditions,
to sell to an investment group a parcel of real property located near Houston,
Texas and the related industrial revenue bonds owned by Actava, for $9 million
in cash, which is approximately equal to Actava's book value in the property and
bonds. The property, which is known as Sienna Plantation, was purchased by
Actava as an investment in 1973. This transaction was closed on June 30, 1995.
The transaction enabled Actava to recover its book value in the property and to
be relieved of the recurring costs of owning and maintaining the property.
Other Developments
On February 15, 1995, Triton, which owns approximately 25.3% of the issued
and outstanding shares of Common Stock, filed with the Commission its Schedule
13D Amendment relating to its ownership of Common Stock. In the Schedule 13D
Amendment, Triton indicated that based on its review of preliminary materials
regarding the Mergers, it opposed the Mergers and encouraged Actava's Board of
Directors and management to evaluate other alternative business strategies and
to exercise their obligations diligently under Delaware law relating to the sale
of Actava. In the Schedule 13D Amendment, Triton reported that it had sole
voting power and sole dispositive power over 4,413,598 shares of Common Stock.
On March 24, 1995, TAC, Inc. ("TAC"), filed with the Commission its Schedule
14D-1 and commenced a tender offer (the "Offer") to purchase for $1.80, net, in
cash all outstanding shares of common stock (including the associated common
stock purchase rights) of Triton. TAC is a company formed in order to commence
the Offer by John D. Phillips and Met Tac, Inc., a company owned by John W.
Kluge, trustee, and Stuart Subotnick. The Offer expired on May 5, 1995. The
following is a summary of the historical relationship between Actava and Triton
and a description of the events leading up to the Offer and of the Offer itself.
Triton and Actava have had significant contacts for a number of years prior
to the filing of the Schedule 13D Amendment and have had contacts since that
time. According to the Schedule 13D Amendment, Triton owns 4,413,598 shares of
the Common Stock, the majority of which were acquired in 1988 and 1989. In
February 1991, Charles R. Scott resigned as Chairman and Chief Executive Officer
of a predecessor of Triton and was appointed as the Chief Executive Officer of
Actava. Thereafter, in November 1991, Actava made a $32 million loan to Triton,
the terms of which were amended and restated in connection with Triton's
bankruptcy proceedings.
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In March 1994, Triton entered into discussions with Actava regarding the
possibility that Triton would prepay the loan to Actava. As a condition to
prepaying the loan, Triton demanded that (i) its representation on the Board of
Directors of Actava would be increased from two members to four members, (ii)
the Board of Directors of Actava agree to replace Mr. Scott as President and
Chief Executive Officer of Actava and also agree that no person would be offered
the position of President or Chief Executive Officer of Actava without Triton's
approval, (iii) the Board of Directors of Actava agree not to approve any
significant corporate actions (such as the sale of a major asset or the sale of
a significant equity interest) without Triton's approval, and (iv) Actava pay
Triton $1,000,000 to reimburse Triton for expenses incurred by Triton in
arranging for the financing necessary to prepay the loan. The Board of Directors
of Actava rejected Triton's demands, and the loan was not prepaid.
Triton has announced in its public filings that its goal is to return value
to its stockholders over a relatively short period and in keeping with this goal
Triton and Actava have had a number of discussions since Mr. Phillips was
elected as President and Chief Executive Officer of Actava regarding Triton's
substantial investment in Actava. These discussions were particularly focused on
the best manner in which to provide Triton and its stockholders liquidity in
their stock in light of the relatively low trading volume of Triton common stock
on AMEX. In August 1994, prior to the announcement of the Mergers, at Triton's
request, Mr. Phillips met with John C. Stiska, the Chairman and Chief Executive
Officer of Triton, and certain of its representatives regarding a potential
merger between Triton and Actava. Mr. Phillips indicated at such meeting that
Actava would not consider a transaction with Triton unless the Common Stock
owned by Triton was valued at its then current market price, without any
premium. Triton never contacted Mr. Phillips further about a merger proposal
following such meeting.
Between August 1994 and November 30, 1994, Messrs. Phillips and Stiska had
several discussions regarding the Mergers. Mr. Phillips and Mr. Stiska met again
on November 30, 1994, at which meeting Mr. Stiska discussed with Mr. Phillips
his concern about the inability of Triton or its larger stockholders, in the
event of a liquidation of Triton and a distribution of its assets to its
stockholders, to resell, either before or after the Mergers, the block of Common
Stock owned by Triton. Mr. Stiska also shared with Mr. Phillips his analysis of
the value of Triton utilizing various assumptions. At that meeting Mr. Phillips
suggested several alternatives as means of alleviating the liquidity problem for
Triton including the possibility of an underwritten secondary offering of the
Common Stock owned by Triton. Triton did not respond to Mr. Phillips'
suggestions.
Two days prior to the filing of the Schedule 13D Amendment, Mr. Stiska
contacted Mr. Phillips to inform him of Triton's opposition to the Mergers. On
February 15, 1995, Triton filed its Schedule 13D Amendment publicly announcing
its opposition to the proposed Mergers. During the period from February 15, 1995
through February 27, 1995, Mr. Phillips, certain members of Actava's Board of
Directors (including the two directors nominated by Triton) and Mr. Stiska
continued their discussions about Mr. Stiska's concerns regarding the inability
of Triton to dispose of the Common Stock, either before or after the Mergers. In
addition, during this period, Mr. Phillips discussed with Mr. Stiska the
possibility that Actava or, if Actava was not interested in pursuing a
transaction, Mr. Phillips, along with Messrs. Kluge and Subotnick, could either
purchase Triton's block of Common Stock at a price not in excess of its market
value or that Triton and Actava (or, Messrs. Phillips, Kluge and Subotnick)
could enter into a negotiated "put" and "call" arrangement with regard to
Triton's block of Common Stock. Mr. Stiska rejected these proposals as well as
Mr. Phillips' renewed proposal for an Actava-sponsored secondary offering of
Triton's block of Common Stock because of his stated concern that Triton not
receive any treatment better or different than Actava Stockholders, generally.
Mr. Phillips and Mr. Stiska had an additional meeting on February 27, 1995
following a meeting of the Board of Directors of Actava to address further Mr.
Stiska's concerns regarding the inability of Triton to resell its significant
investment in Actava. Mr. Stiska delivered a letter to Mr. Phillips dated
February 24, 1995 prior to the February 27 meeting confirming his rejection of
the proposed sale of the Common Stock owned by Triton and the put/call proposal
which Mr. Phillips had suggested prior to
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their meeting and reaffirming Triton's opposition to the Mergers. In addition,
during the February 27 meeting between Messrs. Phillips and Stiska, Messrs.
Phillips and Stiska discussed the possibility of a tender offer for Triton as a
means of providing Triton's stockholders with fair value and liquidity for their
shares within the two-year liquidation period previously announced by Triton as
its goal. Although Mr. Phillips and Mr. Stiska did not discuss the offer price
for any such tender offer, Mr. Stiska indicated that Triton would be receptive
to a tender offer which included a fair price.
At the March 19, 1995 meeting of the Board of Directors of Actava, Mr.
Phillips informed the Board (with the two representatives appointed by Triton
excused) that if Actava did not elect to commence a tender offer for the shares
of Triton common stock, TAC would commence the Offer. Following a discussion,
the Actava Board of Directors elected not to proceed with a tender offer and TAC
issued a press release announcing its intention to commence the Offer.
On March 21, 1995, Triton filed a Schedule 14D-9 announcing its opposition
to the Offer. On March 23, 1995, Triton issued a press release announcing that
its Board of Directors had adopted a "poison pill" by declaring a dividend of
one Right for each outstanding Share, payable to stockholders of record on April
3, 1995.
On March 24, 1995, TAC commenced the Offer. On March 27, 1995, Triton filed
Amendment No. 1 ("Amendment No. 1") to its Schedule 14D-9 disclosing that the
Board of Directors of Triton on March 22, 1995, authorized an amendment to
certain amended and restated post-employment agreements between Triton and its
three senior executive officers to provide that a "change in control" of Triton
constitutes a qualifying termination event for purposes of the amended and
restated post-employment agreements, rather than requiring an actual termination
of employment by Triton. Consummation of the Offer would have constituted a
"change in control" for purposes of each amended and restated post-employment
agreement.
According to Triton's Current Report on Form 8-K dated April 3, 1995, Triton
adopted a "poison pill" rights plan by declaring a dividend of one right for
each outstanding share of Triton common stock, payable to stockholders of record
on April 3, 1995.
According to Amendment No. 1, on March 21, 1995, three of Triton's
stockholders commenced actions against Triton and its Board of Directors in the
Chancery Court of the State of Delaware, entitled Moise Katz v. John C. Stiska,
et al. (C.A. No. 14132). Marve Camp v. John C. Stiska, et al. (C.A. No. 14133),
and Joseph Zoimen v. John C. Stiska, et al. (C.A. No. 14134), respectively. The
claims of the plaintiffs in these three class action complaints are
substantially similar, with each plaintiff alleging, among other things, that
Triton's Board of Directors has breached its fiduciary and other common law
duties by failing to exercise independent business judgment with respect to the
Offer and by failing to take all necessary actions to maximize stockholder
value.
In Amendment No. 1, Triton disclosed that it has been in discussions with
other parties who have indicated interest in Triton in a range higher than $1.80
per share to Triton's stockholders. Triton further disclosed that as of March
27, 1995, however, such discussions had not resulted in an agreement in
principle with any third party and that there could be no assurances that such
discussions would result in a higher offer for Triton's shares.
On March 31, 1995, TAC's Dealer Manager in the Offer (the "Dealer Manager")
and representatives of Triton's financial advisor, Patricof & Co. Capital Corp.
("Patricof"), held a telephone conference call in which Patricof presented its
assessment of Triton's assets and its analysis of the value of Triton's common
stock. On April 5, 1995, certain executive officers of TAC and its counsel met
with executive officers of Triton and representatives of Patricof. Also present
at the April 5, 1995 meeting was a representative of one of Triton's largest
stockholders. At this meeting, the representatives of Triton expressed their
view that the value of Triton's common stock was higher than TAC's initial $1.80
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offer price. TAC indicated at the April 5, 1995 meeting that it was not willing
at that point to increase its offer price.
During the following two weeks (April 10 through April 21, 1995),
representatives of Patricof and the Dealer Manager engaged in various telephone
conversations in which the parties attempted to negotiate the terms of a
consensual transaction. As a result of these discussions, by the end of the week
of April 17, 1995, TAC had indicated its willingness to increase its initial
offer price of $1.80 per share to $2.00 per share if Triton agreed to a
negotiated transaction which was conditioned upon consummation of the Mergers.
Triton, through Patricof, countered that it would agree to a negotiated
transaction at $2.10 per share, provided that consummation of such a transaction
was not conditioned upon consummation of the Mergers. In response, on April 21,
1995, the Dealer Manager indicated to Patricof that TAC would be willing to
raise further its offer price to $2.05 per share if Triton was able to reduce
the professional fees it was paying to its advisors in the transaction by
$500,000 (or approximately $.025 per share) and that the increased and revised
offer would not be conditioned upon consummation of the Mergers. On April 22,
1995, TAC was informed that the Board of Directors of Triton had considered
TAC's increased and revised offer and had rejected this increased and revised
offer. Representatives of Triton reiterated their willingness to enter into a
negotiated transaction at $2.10 per share on the same basis in which they had
previously indicated to TAC. On April 24, 1995, TAC issued a press release
announcing the extension of the Offer and increasing the consideration in the
Offer to $2.02 per share in cash.
On April 14, 1995, Triton filed Amendment No. 2 to its Schedule 14D-9,
disclosing among other things that on April 13, 1995, Triton filed a complaint
against TAC, Met Tac, Inc., John D. Phillips, Stuart Subotnick and John W. Kluge
in the United States District Court for the Southern District of California in
San Diego, California, entitled Triton Group Ltd. v. TAC, Inc., et al., (Case
No. 950482K(BTM)). The complaint alleges that the tender offer disclosures in
TAC's Tender Offer Statement on Schedule 14D-1 and TAC's initial Offer to
Purchase violate federal securities laws by failing to disclose material
information bearing on the value of Triton's stock, relating to the April 13,
1995 announcement by Actava, MITI, Orion and Sterling of a proposed business
combination among those entities to form a new media and communications
enterprise, Metromedia International Group. The complaint seeks preliminary and
permanent injunctive relief barring the consummation of the Offer.
On April 18, 1995, Triton filed an Application for Temporary Restraining
Order and Order To Show Cause Re: Preliminary Injunction (the "TRO
Application"). On April 19, 1995, TAC filed a Declaration of Arnold L. Wadler,
Senior Vice President, General Counsel and Secretary of TAC, in Opposition to
the TRO Application indicating that TAC would not consummate the Offer unless
Triton's Board of Directors redeemed the "poison pill" or until such "poison
pill" is judicially invalidated. In response to such Declaration in Opposition
to the TRO Application, Triton withdrew the TRO Application.
Subsequent to the extension of the Offer on April 26, 1995, Patricof
contacted the Dealer Manager proposing that TAC conduct a due diligence review
of Triton provided that TAC sign a confidentiality agreement, a draft of which
was provided to TAC. The draft confidentiality agreement was conditioned upon,
among other things, TAC agreeing to extend the Offer beyond its then current
expiration date of May 5, 1995. TAC indicated that it was unwilling to extend
the expiration date, and although Triton indicated it was willing to discuss
deletion of the condition requiring the extension of the expiration date, TAC
ultimately declined to enter into a confidentiality agreement with Triton and
decided not to extend further the Offer.
Triton disclosed in Amendment No. 3 to its Schedule 14D-9 filed with the SEC
on April 28, 1995 that a class action complaint had been filed on behalf of
Triton's stockholders against TAC, Met TAC, Inc., John D. Phillips, Stuart
Subotnick and John W. Kluge in the United States District Court for the
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Southern District of California entitled Moise Katz v. Tac, Inc., et al., (Case
No. 950509E(AJB)). Upon expiration of the Offer, the plaintiffs withdrew the
complaint.
Litigation
Three separate lawsuits have been filed in the Delaware Court, one against
Orion and its directors, one against Orion, its directors and Actava and one
against Actava, its directors, Orion, MITI and Sterling. Such lawsuits seek,
among other things, to enjoin consummation of the Mergers. See "LITIGATION."
NARRATIVE DESCRIPTION OF BUSINESS OF ACTAVA
Actava currently engages in the lawn and garden equipment industry through a
division of Actava doing business under the name "Snapper Power Equipment
Company." In addition, Actava is indirectly engaged in the sporting good
business through its ownership interest in Roadmaster.
Snapper Power Equipment Company
Actava's Snapper division manufactures Snapper(R) brand power lawnmowers,
lawn tractors, garden tillers, snow throwers, and related parts and accessories
and distributes blowers, string trimmers and edgers. The lawnmowers include rear
engine riding mowers, front engine riding mowers or lawn tractors, and
self-propelled and push-type walk-behind mowers. Snapper also manufactures a
line of commercial lawn and turf equipment and a BlackhawkTM line of mowers and
markets a fertilizer line under the Snapper(R) brand.
Snapper(R) products are premium priced, generally selling at retail from
$250 to $8,600. They are sold primarily through independent distributors to
approximately 7,300 dealers throughout the United States. In addition,
Snapper(R) products are exported to independent and company-owned distributors
covering approximately 41 foreign countries. Snapper does not manufacture any
lawn and garden equipment under private labels and historically has not sold its
products directly to multi-unit retailers or mass merchandisers. While the
ultimate consumers generally purchase lawnmowers in the spring and early summer,
Snapper sells to its distributors nearly year-round utilizing accounts
receivable dating programs, with the greatest volume of production and shipment
preceding ultimate consumer purchasing periods. Historically, Snapper has
provided its distributors accounts receivable redating programs under which due
dates for distributor accounts receivable were set to coincide with the
anticipated sales to the ultimate consumer. During 1994, Snapper revised its
redating programs for lawn and garden equipment in order to accelerate the
collection of its accounts receivable from distributors and thereby reduce
Snapper's working capital debt and improve its cash flow. As a result of the
revision of these programs, Snapper's distributors and dealers postponed orders
for new products during most of 1994 in order to reduce their inventory levels.
During December of 1994, however, Snapper's distributors accelerated their
purchases of Snapper(R) products in order to build their inventories prior to
the implementation of price increases by Snapper in 1995. Snapper anticipates
that its distributors in the future will continue their previous effort to match
retail inventories to consumer demand.
Snapper makes available, through General Electric Credit Corporation, a
retail customer revolving credit plan which allows consumers to pay for
Snapper(R) products in installments. Consumers also receive Snapper credit cards
which can be used to purchase additional Snapper(R) products. In addition,
Snapper has an agreement with a financial institution which makes floor plan
financing for Snapper(R) products available to dealers. This agreement provides
financing for dealer inventories and accelerates cash flow to Snapper's
distributors and to Snapper. Under the terms of the agreement, a default in
payment by one of the dealers on the program is non-recourse by the financial
institution to both the distributor and Snapper. The distributor, however, is
obligated to repurchase any unused equipment recovered from the dealer and
Snapper is obligated to repurchase the recovered equipment if the distributor
defaults.
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Snapper manufactures its products in McDonough, Georgia at facilities
totaling approximately 1,000,000 square feet. Snapper also manufactures a
substantial portion of the component parts for its products, excluding engines
and tires. Although most of the parts and materials for Snapper's products are
commercially available from a number of sources, Snapper has substantially
reduced the number of suppliers that it uses for parts and materials. In many
cases, Snapper has agreed to use a single supplier for a specific part or
material in order to obtain more favorable price, delivery and performance
terms. Snapper believes, however, that alternative suppliers are available for
all of the parts and materials that it needs in connection with the manufacture
of its products.
During the three years ended December 31, 1994, Snapper has spent an average
of $5 million per year for research and development. Although it holds several
design and mechanical patents, Snapper is not dependent upon any one or more
patents, nor does it consider that patents play a material role in its business.
Snapper does believe, however, that the registered trademark Snapper(R) is an
important asset in its business. Snapper walk-behind mowers are subject to
Consumer Product Safety Commission safety standards and are designed and
manufactured in accordance therewith.
The lawn and garden business is highly competitive, with the competition
being based upon price, image, quality and service. While no one company
dominates the market, Actava believes Snapper is one of the significant
manufacturers of lawn and garden products. There are approximately 50
manufacturers who produce products that compete with Snapper's products.
Snapper's principal brand name competitors in the sale of power lawnmowers
include The Toro Company, Lawn-Boy (a product group of the Toro Company), Sears,
Roebuck and Co., Deere & Company, Ariens Company, Honda Corporation, Murray Ohio
Manufacturing, Co., American Yard Products, Inc. (a subsidiary of AB
Electrolux), MTD Products, Inc., and Simplicity Manufacturing, Inc. Some of
Actava's competitors have greater financial resources than Actava.
At December 31, 1994, Snapper had approximately $94 million in backlog
orders believed to be firm as compared to approximately $122 million in backlog
orders at December 31, 1993.
Actava is actively seeking to identify synergistic business combinations for
Snapper and would ultimately like for Snapper to operate as, or as part of, a
publicly held company in which Actava has an interest. Although Actava would
prefer to own an interest in a publicly held Snapper, Actava is exploring other
alternatives for Snapper, including a possible sale or joint venture or the
continued operation of Snapper as a division or subsidiary. Actava currently is
not a party to any agreements with respect to any acquisitions or business
combinations regarding Snapper nor does it have any immediate plans or
agreements that would cause Snapper to become publicly owned. No assurances can
be given that Actava in the future will engage in such a transaction or effect
such a plan.
Investment in Roadmaster Industries, Inc.
Actava owns approximately 39% of the outstanding shares of Roadmaster Common
Stock as a result of the Actava-Roadmaster Exchange Transaction. Roadmaster,
through its operating subsidiaries, is one of the largest manufacturers of
bicycles and is a leading manufacturer of fitness equipment and toy products in
the United States. The following is certain information concerning the business
and operations of Roadmaster which was furnished to Actava by Roadmaster.
Roadmaster's major product lines consist of bicycles for the adult, teen and
juvenile markets, fitness equipment, including stationary aerobic equipment,
multi-station weight systems and benches, and toy products such as tricycles,
wagons, toy horses, bulk plastic toys, sleds and swing sets, and team sports and
camping equipment. Roadmaster markets its products, primarily through mass
merchandisers, under well established trade names with widespread consumer
recognition and long operating histories, including Roadmaster(R),
Vitamaster(R), Flexible Flyer(R), MacGregor(R), DP(R), Hutch(R), Reach(R),
Weather-Rite(R), and American Camper(R). In 1994, Roadmaster had sales greater
than $1 million to each of more than 20 leading mass merchandisers including
Toys "R" Us Inc. ("Toys "R" Us"), Wal-Mart Stores, Inc. ("Wal-Mart") and
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Target Stores, Inc. ("Target"). Roadmaster received Vendor of the Year awards
from Toys "R" Us in 1992 and 1993, Wal-Mart in 1991 and Target in 1990.
As a result of the Actava-Roadmaster Exchange Transaction, Roadmaster now
owns and operates the four sporting goods companies formerly owned and operated
by Actava. These companies are Diversified Products Corporation, Hutch Sports
USA, Inc., Nelson/Weather-Rite, Inc. and Willow Hoisery Company. These companies
manufacture, import and distribute products for a broad cross-section of the
sporting goods, fitness, camping, and leisure markets. The companies also sell
products under licenses from the National Football League, National Basketball
Association, National Hockey League, Major League Baseball, The Walt Disney
Company, Inc., Remington Arms Company, Inc. and numerous colleges and
universities.
Bicycle and fitness products together accounted for 78% of Roadmaster's net
sales in 1994. Roadmaster has experienced sales growth in bicycles and fitness
products of 540% and 144% respectively, from 1990 through 1994. Roadmaster's
management believes that Roadmaster's share of bicycles sold through mass
merchandisers, who sell approximately 80% of all bicycles in the United States,
has grown from 5% in 1990 to 25% in 1994. Roadmaster's total sales for the year
ended December 31, 1994 increased by 46% to $455.7 million from the year ended
December 31, 1993, primarily due to increased sales in Roadmaster's existing
product lines. Due to the seasonality of its business, Roadmaster's fourth
quarter sales over the past four years have accounted for approximately 35% of
its total annual sales.
Although international sales are not currently a significant part of
Roadmaster's consolidated operations, Roadmaster plans to expand its existing
distribution in Canada and Europe. In addition, Roadmaster intends to continue
to pursue acquisitions of complementary product lines in order to achieve
economies of scale and to leverage its existing relationships with mass
merchandisers.
Prior to consummation of the Actava-Roadmaster Exchange Transaction, the
manufacturing facility operated by Diversified Products in Opelika, Alabama was
underutilized. Diversified Products used approximately 60% of its production
space during its peak manufacturing season and approximately 30% of its
production space during non-peak periods. As a result of the Actava-Roadmaster
Exchange Transaction, Roadmaster has opened a new bicycle production line at
Diversified Products' manufacturing facility, which has substantially increased
the utilization of this facility. Roadmaster plans to add additional production
lines at this facility in the future.
Roadmaster's principal executive offices are located at the International
Sports Plaza, 250 Spring Street, N.W., Suite 3 South, Atlanta, Georgia 30303,
and its telephone number is (404) 586-9000. Roadmaster and each of its domestic
subsidiaries are incorporated under Delaware law.
DESCRIPTION OF ACTAVA CAPITAL STOCK
Common Stock
The authorized capital stock of Actava consists of 100,000,000 shares of
Common Stock, 1,000,000 shares of Preference Stock, without par value
("Preference Stock"), and 5,000,000 shares of Preferred Stock, par value $1.00
per share ("Preferred Stock"). No shares of Preference Stock or Preferred Stock
of Actava are presently outstanding. As of September 15, 1995, there were
17,474,401 shares of Common Stock outstanding held by approximately 6,200
holders of record. At the Effective Time, Actava's Restated Certificate of
Incorporation will be amended to provide for the authorization of 110,000,000
shares of Common Stock and 70,000,000 shares of Preferred Stock.
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Actava has not paid a dividend to its stockholders since the dividend
declared in the fourth quarter of 1993. The Surviving Corporation has no plans
to pay cash dividends in the foreseeable future. Any future dividends will
depend upon the Surviving Corporation's earnings, capital requirements,
financial condition and other relevant factors.
The holders of shares of Common Stock will be entitled to receive such
dividends, if any, that may be declared from time to time by the Surviving
Corporation's Board of Directors in its discretion from funds legally available
therefor, subject to the dividend priority of the holders of preferred stock of
the Surviving Corporation, if any. The holders of shares of Common Stock also
will be entitled to share in any distribution to stockholders upon liquidation,
dissolution or winding up of the Surviving Corporation, subject to the prior
liquidation rights of the holders of preferred stock of the Surviving
Corporation, if any.
Each holder of Common Stock is entitled to one vote for each share held of
record for all matters to be voted upon by stockholders. Directors of the
Surviving Corporation shall be elected by a plurality of the votes of the shares
present in person or represented by proxy at the meeting and entitled to vote on
the election of directors.
All of the outstanding shares of Common Stock are fully paid and
nonassessable. When issued, all of the shares of Common Stock to be issued in
connection with the Mergers will be fully paid and nonassessable. The holders of
Common Stock do not have preemptive rights.
AMENDMENTS TO ACTAVA'S RESTATED CERTIFICATE OF INCORPORATION AND BY-LAWS
The discussion set forth below with respect to the capital stock of the
Surviving Corporation is intended as an overview of the relevant provisions of
the Restated Certificate of Incorporation of the Surviving Corporation (the
"Surviving Corporation Restated Certificate") with respect thereto and is
qualified in its entirety by reference to such Surviving Corporation Restated
Certificate.
Increase in Number of Shares of Authorized Capital Stock
In connection with the consummation of the Mergers, Actava will issue a
substantial number of shares of Common Stock. Accordingly, at the Effective
Time, in connection with the Mergers, Actava's Restated Certificate of
Incorporation will be amended to provide for the authorization of 110,000,000
shares of Common Stock. Actava's Restated Certificate of Incorporation will also
be amended to provide for the authorization of 70,000,000 shares of Preferred
Stock. Article FOURTH of the Surviving Corporation Restated Certificate will
continue to provide that the Board of Directors can establish the preferences,
limitations and relative rights of any series of the Preferred Stock when and if
such stock is issued. In addition, Actava's Restated Certificate of
Incorporation will be amended to state that the name of the corporation will be
changed to "Metromedia International Group, Inc."
In addition, the foregoing and the other proposed amendments to Actava's
Restated Certificate of Incorporation are not intended to have an anti-takeover
effect. However, as a result of the increase in the number of shares of
authorized Common Stock, the Board of Directors of the Surviving Corporation
could, with certain restrictions, issue additional shares of Common Stock and
Preferred Stock without any further stockholder action. The issuance of such
shares of Common Stock and Preferred Stock could be used as an anti-takeover
measure by the Surviving Corporation's Board of Directors. Accordingly, the
amendments to Actava's Restated Certificate of Incorporation may have an
anti-takeover effect.
Revised Governance Structure
The discussion set forth below with respect to the governance structure of
the Surviving Corporation is intended as an overview of the relevant provisions
of the Surviving Corporation Restated Certificate and By-laws with respect
thereto and is qualified in its entirety by reference to such Surviving
Corporation Restated Certificate and By-laws.
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Pursuant to the Merger Agreement, Actava's Restated Certificate of
Incorporation will be amended. Subject to the possible downward adjustment
described below, upon consummation of the Mergers, the Surviving Corporation
Restated Certificate will provide for a ten member Board of Directors of the
Surviving Corporation. At the Effective Time, six of the ten directors are to be
designated by Orion and the remaining four directors are to be designated by
Actava. It is currently anticipated that Messrs. Kluge, Subotnick, Sherwin,
Wadler and White and Ms. Kessel will be designated by Orion to the Surviving
Corporation's Board of Directors and that John D. Phillips, Carl E. Sanders,
John P. Imlay, Jr. and Clark A. Johnson will be designated by Actava to the
Surviving Corporation's Board of Directors.
In addition, The Triton Stockholders Agreement generally provides that
Triton is entitled to nominate two members of Actava's Board of Directors if it
owns in excess of 20% of the outstanding Common Stock and to nominate one member
of the Actava Board of Directors if it owns more than 10%, but less than 20% of
the outstanding Common Stock. Because Triton would own in excess of 10% but less
than 20% of the Common Stock following consummation of the Mergers, the
Surviving Corporation, in accordance with the terms of the Triton Stockholders
Agreement, would be required to nominate one director designated by Triton to
the Surviving Corporation's Board of Directors. Unless Triton waives compliance
with that provision, it is currently anticipated that Triton will designate
Richard Nevins, who is currently a member of the Board of Directors of Actava,
to serve on the Board of Directors of the Surviving Corporation. In this event,
the Board of Directors of the Surviving Corporation will consist of nine persons
rather than ten persons as contemplated by the Merger Agreement. The nine
persons who will serve as directors under these circumstances will be (i) the
six persons designated by Orion and named above, (ii) Mr. Nevins, (iii) Mr.
Phillips and (iv) either Mr. Sanders, Mr. Imlay or Mr. Johnson. If the nine
persons referred to above are elected to the Board of Directors of the Surviving
Corporation and if Triton, at any time prior to the time when the Surviving
Corporation nominates directors for election at the Surviving Corporation's
first annual meeting of stockholders after the Effective Time, loses or waives
its right to nominate one director to the Surviving Corporation's Board of
Directors, it is anticipated that the two directors designated by Actava who
were not able to serve on the Surviving Corporation's Board of Directors at the
Effective Time will then be appointed to the Surviving Corporation's Board of
Directors.
The Board of Directors of the Surviving Corporation will be divided into
three classes. One class of directors will be initially elected for a term
expiring at the annual meeting of stockholders of the Surviving Corporation to
be held in 1996, a second class will be initially elected for a term expiring at
the annual meeting of stockholders of the Surviving Corporation to be held in
1997, and a third class will be initially elected for a term expiring at the
annual meeting of stockholders of the Surviving Corporation to be held in 1998.
Members of each class will hold office until their successors are elected and
qualified. At each succeeding annual meeting of the stockholders of the
Surviving Corporation, the successors of the class of directors whose term
expires at that meeting shall be elected by a plurality vote of all votes cast
at such meeting and will hold office for a three-year term.
TRANSFER AGENT AND REGISTRAR
Chemical Mellon Shareholder Services will be the transfer agent and
registrar for the Common Stock.
RESTRICTIONS ON RESALE OF COMMON STOCK BY AFFILIATES
Under Rule 145 of the Securities Act, certain persons who receive Common
Stock pursuant to the Orion Merger, the MITI Merger or the Sterling Merger and
who are deemed to be "affiliates" of Orion, MITI or Sterling, as the case may
be, will be limited in their right to resell the stock so received. The term
"affiliate" is defined to include any person who, directly or indirectly,
controls, or is controlled by, or is under common control with Orion, MITI or
Sterling, as the case may be, at the time the Orion Merger, the MITI Merger and
the Sterling Merger are submitted to a vote of the stockholders of Orion,
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MITI and Sterling, respectively. Each affiliate of Orion, MITI and Sterling
(e.g., generally any director or executive officer of Orion, MITI and Sterling
or any stockholder of Orion, MITI and Sterling who beneficially owns a
substantial number of outstanding shares of Orion Common Stock, MITI Common
Stock or Sterling Common Stock, as the case may be) who desires to resell the
Common Stock received in the Orion Merger, the MITI Merger and the Sterling
Merger, as the case may be, must sell such stock either pursuant to an effective
Registration Statement or in accordance with the applicable provisions of Rule
145(d) under the Securities Act.
Rule 145(d) requires that persons deemed to be affiliates resell their stock
pursuant to those requirements of Rule 144 under the Securities Act which relate
to the availability of current public information concerning an issuer, the
volume of securities permitted to be sold, and the manner in which securities
may be sold, if such stock is sold within the first two years after the receipt
thereof. After two years, if such person is not an affiliate of the Surviving
Corporation and if either the Surviving Corporation is current in the filing of
its periodic securities law reports under the Exchange Act or there otherwise
exists certain public information concerning the Surviving Corporation, a former
affiliate of Orion, MITI or Sterling, as the case may be, may freely resell the
stock received in the Orion Merger, the MITI Merger, the Sterling Merger,
respectively, without limitation. After three years from the date of issuance of
the stock, if such person is not an affiliate of the Surviving Corporation at
the time of sale and for a period of at least three months prior to such sale,
such person may freely resell such stock, without limitation, regardless of the
status of the Surviving Corporation's periodic securities law reports under the
Exchange Act. Certificates for shares of Common Stock to be received by
affiliates of Orion, MITI and Sterling in the Orion Merger, the MITI Merger and
the Sterling Merger, respectively, will be legended as to the restrictions
imposed upon resale of such stock.
Actava has filed the Shelf Registration to register the shares of Common
Stock to be issued to the Metromedia Holders. Upon the effectiveness of the
Shelf Registration, the Metromedia Holders will hold shares of Common Stock
which may be resold in accordance with Rule 145(d) under the Securities Act.
COMPARISON OF THE RIGHTS OF STOCKHOLDERS OF ORION, MITI, STERLING AND ACTAVA
General
As a result of the Mergers, the stockholders of Orion, MITI, Sterling and
Actava, whose rights are currently governed by Delaware law and the Orion
Restated Certificate of Incorporation (the "Orion Certificate") and By-laws, the
MITI Certificate of Incorporation (the "MITI Certificate") and By-laws, the
Sterling Certificate of Incorporation (the "Sterling Certificate") and By-laws
and the Actava Restated Certificate of Incorporation (the "Actava Certificate")
and By-laws, respectively, will become stockholders of the Surviving
Corporation, whose rights will be governed by Delaware law and the Surviving
Corporation Restated Certificate and By-laws. The following discussion is
intended only to highlight certain of the rights of stockholders under Delaware
law, generally and specifically, certain differences between the rights of
stockholders of Orion, MITI, Sterling and Actava and the Surviving Corporation.
The discussion does not purport to constitute a detailed comparison of the
provisions of Delaware law, or any of the parties' certificates of incorporation
and By-laws and stockholders are referred to that law and the appropriate
certificates of incorporation and By-laws for a definitive treatment of the
subject matter.
Cumulative Voting
Under Delaware law, a corporation may provide in its certificate of
incorporation for cumulative voting by stockholders in elections of directors
(i.e., each stockholder casts as many votes for directors as he has shares of
stock multiplied by the number of directors to be elected). The Orion
Certificate, the Actava Certificate and the MITI Certificate do not provide for
cumulative voting. Subject to certain restrictions, the Sterling Certificate
does provide for cumulative voting. The Surviving Corporation Restated
Certificate will not provide for cumulative voting.
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Classification of the Board of Directors
Delaware law permits (but does not require) classification of a
corporation's board of directors into one, two or three classes. The Orion
Certificate, the Actava Certificate and the MITI Certificate provide for the
annual election of all directors. The Sterling Certificate provides that
Sterling's Board of Directors is to be divided into three classes, with the
directors of each class being elected for staggered three year terms. The
Surviving Corporation Restated Certificate will provide for a classified Board
of Directors. The Board of Directors of the Surviving Corporation will be
divided into three classes. One class of directors will be initially elected for
a term expiring at the annual meeting of stockholders of the Surviving
Corporation to be held in 1996, a second class will be initially elected for a
term expiring at the annual meeting of stockholders of the Surviving Corporation
to be held in 1997, and a third class will be initially elected for a term
expiring at the annual meeting of stockholders of the Surviving Corporation to
be held in 1998. Members of each class will hold office until their successors
are elected and qualified. At each succeeding annual meeting of the stockholders
of the Surviving Corporation, the successors of the class of directors whose
term expires at that meeting shall be elected by a plurality vote of all votes
cast at such meeting and will hold office for a three year term.
Restriction on Repurchases of Shares
The Actava Certificate currently provides that any purchase by Actava of
shares of its voting stock from any Interested Stockholder (defined as any
person which directly or indirectly is the beneficial owner of 5% or more of the
voting stock of Actava) who has beneficially owned such voting stock for less
than 24 months prior to the date of such purchase, at a price in excess of the
average price paid by the Interested Stockholder for such shares requires the
approval of not less than a majority of the voting stock held by persons other
than the Interested Stockholder. Such provision of the Actava Certificate does
not apply to any purchase of shares of Actava voting stock if such purchase is
pursuant to (i) an offer of substantially the same value to all holders of the
outstanding shares of the same class as those purchased, (ii) a tender offer or
exchange offer by Actava for some or all of the outstanding shares of a class of
Actava's voting stock made on the same terms to all holders of such shares,
(iii) any purchase effected on the open market and not the result of a privately
negotiated transaction.
None of the Orion Certificate, the MITI Certificate nor the Sterling
Certificate contains a similar provision restricting repurchases by Orion, MITI
or Sterling, respectively, of its capital stock. The Surviving Corporation
Restated Certificate will not contain such a provision restricting repurchases
by it of its capital stock.
Amendments to Charter Documents
Under Delaware law, the power to adopt, amend or repeal By-laws rests with
the stockholders entitled to vote; provided, however, that any corporation may
in its certificate of incorporation, confer the power to adopt, amend or repeal
By-laws upon its directors. The Actava Certificate and By-laws provide that its
By-laws may be amended by affirmative vote of either a majority of the entire
Actava Board of Directors then in office or by the holders of a majority of the
outstanding capital stock entitled to vote thereon. The MITI Certificate and
By-laws provide that its By-laws may be amended by affirmative vote of either a
majority of the entire MITI Board of Directors then in office or by the holders
of a majority of the outstanding capital stock entitled to vote thereon.
Similarly, the Surviving Corporation Restated Certificate and By-laws will
provide that its By-laws may be amended by the affirmative vote of either a
majority of the Surviving Corporation's Board of Directors then in office or by
the holders of a majority of the outstanding capital stock entitled to vote
thereon. The Sterling Certificate and By-laws provide that its By-laws may be
amended by the affirmative vote of either a majority of the entire Sterling
Board of Directors or by the holders of 75% of the outstanding capital stock
entitled to vote thereon. The Orion Certificate and By-laws contain certain
specified provisions regarding their amendment as described below.
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In connection with the Mergers, the Orion Certificate and By-laws will be
terminated. A number of the provisions set forth in such documents were included
in the Orion Certificate and By-laws as a result of the compromises reached
between Orion and its principal creditors as set forth in the Plan. Orion's
Certificate and By-laws required that these mandatory provisions which are
described below be included in Orion's constitutive documents until November 5,
1997 unless they were amended in accordance with the terms of such documents.
Such provisions will be deleted pursuant to the Mergers. Such mandatory
provisions include fixing the size of Orion's Board of Directors in a range
between nine and twelve Directors, obligating Orion to nominate and use its
reasonable best efforts to cause the election of certain individuals not
affiliated with Metromedia (the "Non-Metromedia Directors") to Orion's Board of
Directors, giving the power to remove and fill vacancies of Non-Metromedia
Directors to a majority of Non-Metromedia Directors then in office, creating an
Executive Committee of Orion's Board of Directors to oversee the day-to-day
operations of Orion and requiring that one member of the Executive Committee be
elected by the Non-Metromedia Directors and that such member may only be removed
and a vacancy may only be filled to replace such Non-Metromedia Director by a
vote of a majority of the Non-Metromedia Directors then in office (collectively,
the "Mandatory Governance Provisions"). The Orion Certificate and By-laws
currently provide that until November 5, 1997, in addition to any requirements
of the DGCL, such Mandatory Governance Provisions may only be amended with
either the consent of all of the members of the Executive Committee or by a
majority of the shares of the outstanding Orion Common Stock not beneficially
owned by Metromedia and its affiliates (the "Amendment Procedure"). The
Amendment Procedure is also a Mandatory Governance Provision, which will also be
deleted in connection with the Mergers. Accordingly, following the Effective
Time, the Orion Stockholders will be stockholders of the Surviving Corporation
and the Surviving Corporation Restated Certificate will be amendable, in
accordance with Delaware law, by the affirmative vote of either a majority of
the Board of Directors then in office or by the holders of a majority of
outstanding capital stock entitled to vote thereon.
Removal of Directors
Under Delaware law, although stockholders may generally remove directors
with or without cause by a majority vote, stockholders may remove members of
classified boards only for cause unless the certificate of incorporation
provides otherwise. The Sterling Certificate (which provides for a classified
board) provides that any director may be removed, with or without cause, by the
holders of at least 75% of the then outstanding shares then entitled to vote at
an election of directors. The Orion Certificate and By-laws, the Actava
Certificate and By-laws and the MITI Certificate and By-laws provide that any
director or the entire Board of Directors may be removed, with or without cause,
by the holders of a majority of shares entitled to vote at an election of
directors. The Surviving Corporation Restated Certificate, which provides for a
classified board, will not provide for the removal of directors with or without
cause. Accordingly, stockholders of the Surviving Corporation may only remove
members of its Board of Directors for cause.
Power to Call Special Meetings of Stockholders
Under Delaware law, special meetings of stockholders may be called by the
Board of Directors or by such person or persons as may be authorized by the
certificate of incorporation or by the By-laws. Under the Orion Certificate and
By-laws, special meetings of its stockholders may be called by its Board of
Directors, or by its President, and shall be called by its President at the
request of the holders of a majority of the holders of Orion's capital stock.
Under the Actava Restated Certificate and By-laws, special meetings of its
stockholders may be called by Actava's Chairman of the Board, Actava's
President, Actava's Board, or by stockholders of Actava holding of record in the
aggregate at least 25% of the outstanding stock of Actava entitled to vote at
such a meeting. The MITI Certificate and By-laws provide that special meetings
of its stockholders may be called at any time by MITI's Board of Directors or by
MITI's Chairman of the Board. The Sterling By-laws provide that special meetings
of its stockholders may be called only by Sterling's Chairman of the Board or by
Sterling's Board pursuant to a resolution adopted by a majority of the total
number of directors which the Corporation would have if
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there were no vacancies. The Surviving Corporation Restated Certificate will
provide that special meetings of stockholders may only be called at any time by
the Chairman or Vice Chairman of its Board of Directors.
Issuance of Rights
The Sterling Certificate provides that the Sterling Board of Directors is
authorized to create and issue "rights" entitling the holders thereof to
purchase from Sterling shares of stock or other securities of Sterling or any
other corporation. Similar to "blank check" preferred stock, the Sterling Board
can act in this regard without the approval of stockholders and, also similar to
"blank check" preferred stock, the times at which and the terms upon which such
rights are to be issuable will be determined by Sterling's Board of Directors
and set forth in the contracts or instruments that evidence such rights. The
Orion Certificate, the Actava Certificate and the MITI Certificate do not
contain a similar provision authorizing the issuance of rights. The Surviving
Corporation Restated Certificate will not contain a similar provision
authorizing the issuance of rights.
Consideration of Other Constituencies in Board of Director Action
Delaware law generally provides that a corporation's board of directors act
in the best interest of its stockholders and it does not explicitly provide for
the consideration of societal interests by a corporation's board of directors in
making decisions. The Delaware Supreme Court has, however, held that, in
discharging their responsibilities, directors shall consider the interests of
stockholders and may consider constituencies other than stockholders, such as
creditors, customers, employees and perhaps even the community in general, as
long as there are rationally related benefits accruing to stockholders as well.
The Delaware Supreme Court has held, however, that concern for non-stockholder
interests is inappropriate when the sale of any company is inevitable and an
auction among active bidders is in progress. The Sterling Certificate provides
that Sterling directors shall consider the interests of the Sterling
Stockholders and may consider, in their discretion, the interests of Sterling's
employees, suppliers, creditors and customers, community and societal interests,
and the long-term as well as short-term interests of Sterling and its
stockholders including the possibility that these interests may be best served
by the continued independence of Sterling. The Orion Certificate, the Actava
Certificate and the MITI Certificate do not directly discuss the consideration
of societal factors. The Surviving Corporation Restated Certificate will not
directly discuss the consideration of societal factors by its board of
directors.
Preemptive Rights
Delaware law does not provide for preemptive rights to acquire a
corporation's unissued stock. However, such right may be expressly granted to
the stockholders in a corporation's certificate of incorporation. The MITI
Certificate provides for preemptive rights. None of the Orion Certificate, the
Actava Certificate nor the Sterling Certificate provide for preemptive rights
for holders of Orion Common Stock, Common Stock and Sterling Common Stock,
respectively, and the Surviving Corporation Restated Certificate will not
provide for preemptive rights for holders of Common Stock.
Action by Written Consent
Delaware law provides that, unless otherwise provided in the certificate of
incorporation, stockholders may act by written consent in lieu of a meeting if
consents are signed representing not less than the minimum number of votes that
would be necessary to take such action at a meeting where all shares entitled to
vote were present and voted. None of the Orion Certificate, the Actava
Certificate, the MITI Certificate and the Sterling Certificate provide
otherwise. The Surviving Corporation Restated Certificate will prohibit
stockholder action by written consent. Accordingly, all action by the
stockholders of the Surviving Corporation must be taken at a duly called annual
or special meeting.
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Stockholder Nominations and Proposals
The Surviving Corporation's By-laws will establish procedures that must be
followed for stockholders to nominate individuals to the Board of Directors of
the Surviving Corporation or to propose business at the annual meeting of
stockholders. In order to nominate individuals to the Board of Directors of the
Surviving Corporation, a stockholder must provide timely notice of such
nomination in writing to the Secretary of the Surviving Corporation and a
written statement by the candidate of his or her willingness to serve. Such
notice must include the information required to be disclosed in solicitations
for proxies for election of directors pursuant to Regulation 14A under the
Exchange Act, along with the name, record address, class and number of shares of
Common Stock beneficially owned by the stockholder giving such notice.
In order properly to propose that certain business come before the annual
meeting of stockholders, a stockholder must provide timely notice in writing to
the Secretary of the Surviving Corporation which notice must include a brief
description of the business desired to be brought before the annual meeting and
the reasons for conducting such business at the annual meeting. In addition, the
notice must contain the name, record address, class and number of shares of the
Surviving Corporation's capital stock beneficially owned by the stockholder
giving such notice and any material interest of the stockholder in such
business.
To be timely, notice must be delivered to the Surviving Corporation not less
than 60 days nor more than 90 days prior to the first anniversary of the date of
the Surviving Corporation's annual meeting for the preceding year or, under
certain circumstances, within ten days after notice of the annual or special
meeting at which directors are to be elected or the proposed business is to be
conducted.
None of the Orion Certificate, the Actava Certificate or the MITI
Certificate establish procedures that stockholders must follow to nominate
individuals to their respective boards of directors or to propose business at
the annual meeting of stockholders. The Sterling Certificate establishes certain
procedures that its stockholders must follow to nominate individuals to the
Sterling Board of Directors.
Stockholder Rights Plan
Each of Orion, Actava, MITI and Sterling has agreed to use its best efforts
to have the Board of Directors of the Surviving Corporation adopt a stockholder
rights plan within 30 days following the Effective Time. Although the specific
terms of such rights plan have not been determined, it is expected that such
rights plan will cause substantial dilution to a person or group that attempts
to acquire the Surviving Corporation on terms not approved by the Surviving
Corporation's Board. Such rights plan may have an anti-takeover effect. Other
than the provision in the Sterling Certificate described above with respect to
the issuance of rights, none of the Orion Certificate, the Actava Certificate,
the MITI Certificate and the Sterling Certificate provide for a stockholder
rights plan.
ACTAVA DESIGNEES TO THE SURVIVING CORPORATION'S BOARD OF DIRECTORS
Pursuant to the terms of the Merger Agreement, the Board of Directors of the
Surviving Corporation will be fixed at ten directors. At the Effective Time, six
of the ten directors will be designated by Orion and four directors will be
designated by Actava. It is currently anticipated that Messrs. Kluge, Subotnick,
Sherwin, Wadler and White and Ms. Kessel will be designated by Orion to the
Surviving Corporation's Board of Directors and that John D. Phillips, Carl E.
Sanders, John P. Imlay, Jr. and Clark A. Johnson will be designated by Actava to
the Surviving Corporation's Board of Directors.
In addition, the Triton Stockholders Agreement generally provides that
Triton is entitled to nominate two members of Actava's Board of Directors if it
owns in excess of 20% of the outstanding Common Stock and to nominate one member
of the Actava Board of Directors if it owns more than 10% but less than 20% of
the outstanding Common Stock. Because Triton would own in excess of 10% but
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less than 20% of the Common Stock following consummation of the Mergers, the
Surviving Corporation, in accordance with the terms of the Triton Shareholders
Agreement, would be required to nominate one director designated by Triton to
the Surviving Corporation's Board of Directors. Unless Triton waives compliance
with that provision, it is currently anticipated that Triton will designate
Richard Nevins, who is currently a member of the Board of Directors of Actava,
to serve on the Board of Directors of the Surviving Corporation. In this event,
the Board of Directors of the Surviving Corporation will consist of nine persons
rather than ten persons as contemplated by the Merger Agreement. The nine
persons who will serve as directors under these circumstances will be (i) the
six persons designated by Orion and named above, (ii) Mr. Nevins, (iii) Mr.
Phillips and (iv) either Mr. Sanders, Mr. Imlay or Mr. Johnson. If the nine
persons referred to above are elected to the Board of Directors of the Surviving
Corporation and if Triton, at any time prior to the time when the Surviving
Corporation nominates directors for election at the Surviving Corporation's
first annual meeting of stockholders after the Effective Time, loses or waives
its right to nominate one director to the Surviving Corporation's Board of
Directors, it is anticipated that the two directors designated by Actava who
were not able to serve on the Surviving Corporation's Board of Directors at the
Effective Time will then be appointed to the Surviving Corporation's Board of
Directors.
The Board of Directors of the Surviving Corporation will be divided into
three classes. One class of directors will be initially elected for a term
expiring at the annual meeting of stockholders of the Surviving Corporation to
be held in 1996, a second class will be initially elected for a term expiring at
the annual meeting of stockholders of the Surviving Corporation to be held in
1997, and a third class will be initially elected for a term expiring at the
annual meeting of stockholders of the Surviving Corporation to be held in 1998.
Members of each class will hold office until their successors are elected and
qualified. At each succeeding annual meeting of the stockholders of the
Surviving Corporation, the successors of the class of directors whose term
expires at that meeting shall be elected by a plurality vote of all votes cast
at such meeting and will hold office for a three year term.
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INFORMATION REGARDING MITI
BUSINESS OF MITI
Overview
MITI, through its wholly owned subsidiaries, ITI and MII currently owns
interests in and participates along with local partners in the management of
certain joint ventures which operate communications businesses in certain
countries in Eastern Europe and certain of the former Soviet Republics. ITI
currently owns interests in and participates in the management of joint ventures
which operate (i) wireless cable television systems in six cities in Russia and
certain of the other former Soviet Republics, (ii) paging systems in six cities
in Russia, certain of the other former Soviet Republics and Romania, (iii) an
international toll calling service which operates throughout the Republic of
Georgia, and (iv) a trunked mobile radio service which operates in certain areas
in Romania (collectively referred to herein as "Subscription Related
Businesses"). MII currently owns a radio station which broadcasts on an AM radio
frequency and two FM radio frequencies in Budapest, Siofok and Khebegy, Hungary
and owns interests in and participates in the management of certain joint
ventures which operate a radio station which broadcasts on two FM radio
frequencies in Moscow, Russia, radio stations which broadcast on an AM and an FM
radio frequency in St. Petersburg, Russia, a radio station which broadcasts on
an FM radio frequency in Sochi, Russia and a radio station which broadcasts on
an FM radio frequency in Riga, Latvia ("Advertising Related Businesses"). In
addition, MITI holds ownership interests in joint ventures which are currently
constructing wireless cable television systems in Bucharest, Romania and Nizhny
Novgorod, Russia, a paging system in Almaty, Kazakhstan and a wireless local
loop telephony system in Tashkent, Uzbekistan. MITI is also in the process of
purchasing an ownership interest in a joint venture which is constructing a
paging system in St. Petersburg, Russia. Whenever a reference is made in this
section to MITI operating or providing communications services, it shall mean
the operations of or services provided by its Subscription Related Businesses or
Advertising Related Businesses whether through ownership of such businesses or
ownership of interests in joint ventures which operate such businesses.
MITI is seeking to enter into joint venture arrangements for additional
wireless cable television, paging, wireless telephony and radio broadcast
projects in various markets in which it has existing operations as well as in
additional markets in Eastern Europe and the former Soviet Republics. MITI is
also pursuing opportunities to expand its communications businesses into other
emerging markets in areas such as the Far East, including China. MITI's strategy
of investing in a variety of different communications projects in a number of
different markets is intended to (i) reduce the negative impact that political
or economic instability in any one market would have on MITI, and (ii) enable
MITI to offer multiple communications services in many of its markets which
reduces the possibility that MITI's business prospects would be adversely
affected if a particular communications service offered by it is not widely
accepted or becomes obsolete. There can be no assurance that MITI will be
successful in obtaining interests in any additional communications projects or
that new competing technologies will not emerge in the future which will enable
other parties to introduce new or enhanced services which render MITI's
communications services obsolete or significantly less desirable. SEE "RISK
FACTORS--Risks Inherent in Growth Strategy" and "--Technological and Product
Obsolescence for MITI."
MITI was organized under the laws of the State of Delaware on August 8, 1994
in connection with the reorganization of two predecessor companies, one of which
was formed in 1989 to pursue Subscription Related Businesses and the other of
which was formed in 1993 to pursue Advertising Related Businesses. MITI's
executive offices are located at 41 West Putnam Avenue, Greenwich, Connecticut
06830 and its telephone number is (203) 862-9200.
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Markets
A summary of MITI's markets and existing projects, their status, MITI's
direct or indirect ownership interest in each such project, the year such
projects became operational and the amount of capital contributed to such
projects by MITI and loaned to such projects by MITI is detailed in the chart
below:
<TABLE><CAPTION>
MITI
DIRECT OR AMOUNT
INDIRECT AMOUNT CONTRIBUTED
MARKETS AND OWNERSHIP YEAR LOANED TO PROJECTS(9)
PROJECTS STATUS INTEREST OPERATIONAL TO PROJECTS(9) -
- ---------------------------------- ----------------- --------- ----------- --------------
<S> <C> <C> <C> <C> <C>
1. MOSCOW, RUSSIA
Wireless Cable Television......... Operational 50.0% 1992 7,811,409 1,092,896
FM Radio (2 Frequencies).......... Operational 51.0% 1994(1) 1,315,468 822,750
2. TBILISI, GEORGIA
Wireless Cable Television......... Operational 49.0% 1993 2,777,156 779,000
International Toll Calling
(throughout the Republic of
Georgia)(2)....................... Operational 30.0% 1994 75,290 2,769,098
Paging(3)......................... Operational 45.0% 1994 369,025 250,000
3. RIGA, LATVIA
Wireless Cable Television......... Operational 50.0% 1992 6,870,844 819,000
Paging(3)......................... Operational 50.0% 1995(4) 495,299 450,000
FM Radio.......................... Operational 55.0% 1995(5) -- 140,009
4. TASHKENT, UZBEKISTAN
Wireless Cable Television......... Operational 50.0% 1993 2,543,738 580,000
Paging............................ Operational 50.0% 1994
Wireless Local Loop Telephony..... License Pending, 50.0% 1995
under
Construction
5. TALLINN, ESTONIA
Paging(3)......................... Operational 39.0% 1993 2,208,576 396,150
6. BUCHAREST, ROMANIA
Wireless Cable Television......... Licensed, under 99.0% 1995 457,231 681,930
Construction
Paging............................ Operational 54.1% 1993 1,937,686 490,000
Trunked Mobile Radio.............. Operational 54.1% 1995 284,047 --
7.KISHINEV, MOLDOVA
Wireless Cable Television......... Operational 50.0% 1994 1,069,533 400,000
8.ALMATY, KAZAKHSTAN
Wireless Cable Television......... Operational 50.0% 1995 751,499 218,693
Paging............................ Licensed, under 50.0% 1995
Construction
9. ST. PETERSBURG, RUSSIA
AM Radio.......................... Operational 50.0% 1995(6) -- --
FM Radio.......................... Operational 50.0% 1995(6) 457,803 --
Paging............................ Licensed, under 40.0% 1995(7) -- 264,581
Construction,
Completion of
Acquisition of
MITI Ownership
Interest Pending
10. NIZHNY NOVGOROD, RUSSIA
Wireless Cable Television......... License Pending 50.0% 1995 18,068 159,411
under
Construction
Paging............................ Operational 45.0% 1994 104,708 330,000
11. MINSK, REPUBLIC OF BELARUS
Wireless Cable Television......... Under 50.0% 1995 447,923 400,000
Construction
</TABLE>
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<TABLE>
<S> <C> <C> <C> <C> <C>
12. BUDAPEST, SIOFOK, AND KHEBEGY,
HUNGARY(8)
AM Radio.......................... Operational 100.0% 1994 1,238,183 8,106,890
FM Radio (2 Frequencies).......... Operational 100.0% 1994 --
13. SOCHI, RUSSIA
FM Radio.......................... Operational 51.0% 1995 70,087
14. LITHUANIA(10)
Paging............................ License 49.0% 1996 --
Application
Submitted
</TABLE>
- ------------
(1) Purchased equity of existing operating company in 1994; the predecessor
company was formed in 1991.
(2) Provides international toll calling services between Georgia and the rest
of the world and is the only Intelsat designated representative in Georgia
to provide such service.
(3) The licenses for paging services in Georgia, Latvia, Estonia and Romania
are for nationwide operations and MITI is currently expanding the services
of such operations to cover additional cities in each of these countries.
(4) Purchased equity of existing operating company in 1995; the company was
formed in 1994.
(5) Purchased equity of existing operating company in 1995; the company was
formed in 1993.
(6) Purchased equity of existing operating company in 1995; the company was
formed in 1993.
(7) Registration and acquisition of interest expected to be completed in 1995;
the company was formed in 1994.
(8) Purchased equity of existing operating company in 1994; the company was
formed in 1989.
(9) Represents amounts loaned and contributed as of August 31, 1995.
(10) The license application for paging services in Lithuania is for operations
in the cities of Vilnius, Kaunas, Kliepeda, Shyaylyia and Panyevzhis.
MITI selects markets in Eastern Europe, the former Soviet Republics and the
Far East based upon the following characteristics: large populations, usually
the capital city of a country, republic or province; strong economic potential
and in many cases frequent and short airline schedules from MITI's Moscow and
Vienna headquarters. Management of MITI believes that most of its markets have a
concentration of educated people who desire quality entertainment, sports and
news as well as reliable and efficient communications service. As principal
cities of their respective countries, republics or provinces, these markets are
in many cases home to a significant number of foreign diplomats, businessmen and
advisors who MITI anticipates will often become premium service customers.
MITI believes that the vast majority of the political, social and economic
leaders of these markets recognize the importance of communications as a means
to modernizing their societies. Currently, the breadth of television programming
is somewhat limited in MITI's markets and there exists a demand for quality
entertainment and news programming. Additionally, the antiquated telephone
systems in many of these markets do not have the capacity to serve residents
adequately. MITI's management believes that its systems can provide a solution
to these problems because: (i) MITI's wireless cable television and AM and FM
broadcast services will provide a wide selection of quality entertainment,
sports broadcasting, educational programming, and international news at an
affordable rate to both local and foreign residents; (ii) MITI's wireless
telephony services will be a comparatively low-cost means of quickly providing
intra-country communications as well as telephone access to the rest of the
world using international satellite links; and (iii) MITI's alphanumeric and
digital display paging services will be a dependable and efficient means to
communicate one-way without the need for a recipient to access a telephone
network, which is often overloaded or unavailable. MITI is not aware of any
significant governmental restrictions with respect to broadcasting time or
program content in its existing cable television and radio broadcasting markets
which have a material adverse effect on MITI and its operations in these
markets.
In most cities where MITI provides or expects to provide service, a
substantial percentage of the population (approximately 90% in Moscow) lives in
large apartment buildings. This characteristic lowers the cost of installation
and eases penetration of wireless cable television and wireless telephony
services into a city, because a single microwave receiving location can bring
service to a large number of people.
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MITI currently is licensed to provide wireless cable television to markets
which have in the aggregate approximately 8.6 million households, and paging
services in markets with a population totaling approximately 57.6 million. MITI
believes that the cost of constructing a coaxial cable television system
covering the same number of households as are covered by each of MITI's systems
would be significantly more expensive than the costs incurred by MITI in
constructing a wireless system.
MITI, ITI and a newly formed, wholly-owned subsidiary of ITI, ITISPS,
recently entered into a commitment letter with OPIC, whereby OPIC agreed to
provide loan guarantees enabling ITI and ITISPS to obtain Loans in an amount of
up to $29,900,000 for the operation and management of MITI's wireless cable
television systems in Moscow, Russia, Riga, Latvia, Tbilisi, Georgia, Tashkent,
Uzbekistan and Kishinev, Moldova. It is anticipated that the Loans will be
provided to ITI and ITISPS directly by OPIC and that interests in 100% of the
Loans will be sold by the Placement Agent on a best efforts basis to one or more
institutional investors. The interests in the Loans will be evidenced by COPs
issued by OPIC to such institutional investors and OPIC will guarantee the
repayment in full of the COPs by affixing a guaranty endorsement to each COP.
OPIC will have no obligation to provide any Loans to ITI and ITISPS, unless the
Placement Agent is able to sell all of the COPs to eligible institutional
investors. There can be no assurance that the Placement Agent will be able to
sell any of the COPs to such institutional investors. The Loans, will be
guaranteed by MITI and secured by MITI's indirect ownership interest in the
joint ventures which operate such cable television systems, are also subject to
the satisfaction of certain additional condition precedents, including the
obtaining of all necessary governmental authorizations and approvals to
effectuate a transfer of the ownership interests in such joint ventures from ITI
to ITISPS and the negotiation and exemption of definitive financing and security
documents among OPIC, MITI, ITI and ITISPS. MITI, ITI and ITISPS are in the
process of negotiating these financing and security documents with OPIC and
anticipate that ITI and ITISPS will be able to borrow funds pursuant to this
loan facility by the end of 1995.
MITI has obtained political risk insurance from OPIC for its operating cable
television systems in Moscow, Riga, Tbilisi and Tashkent, and may endeavor to
obtain OPIC insurance for additional systems which are eligible for such
insurance. OPIC is a United States governmental agency which provides to United
States investors insurance against expropriation, political violence and loss of
business income in more than 130 developing nations. MITI currently has
expropriation and political violence insurance coverage with OPIC in the amount
of (i) $2,800,000 with respect to its Moscow cable television system, (ii)
$2,200,000 with respect to its Riga cable television system, (iii) $1,600,000
with respect to its Tbilisi cable television system, and (iv) $2,000,000 with
respect to its Tashkent cable television system. MITI currently has loss of
business income insurance with OPIC in the amount of (i) $1,500,000 with respect
to its Moscow cable television system, (ii) $1,000,000 with respect to its Riga
cable television system, and (iii) $550,000 with respect to its Tbilisi cable
television system. MITI is also currently eligible to purchase additional
expropriation and political violence insurance and loss of business income
insurance from OPIC with respect to these systems. There can be no assurance
that any insurance obtained by MITI from OPIC will adequately compensate MITI
for any losses it may incur or that MITI will elect to obtain or be able to
obtain OPIC insurance for any of its additional systems.
Joint Ventures
As a general rule, if MITI desires to obtain an interest in a particular
Subscription Related Business or Advertising Related Business, it will enter
into discussions with the appropriate Ministry of Communications or local
parties which have interests in communications properties in a particular
market. If the negotiations are successful a joint venture agreement is entered
into and then is registered with the appropriate governmental authority. Upon
completion of registration, the right to use frequency licenses are contributed
to the joint venture by MITI's local partner or are allocated by the appropriate
governmental authority to the joint venture, construction of the system then
commences with operations starting upon completion of construction. In the case
of MITI's Advertising Related
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Businesses, MITI has in many cases directly purchased companies with an
operating radio station or an ownership interest in a joint venture which is
operating a radio station.
Generally, MITI owns approximately 50% of the equity in a joint venture with
the balance of such equity being owned by a local entity, often a
government-owned enterprise. Legislation has been previously proposed and
rejected by the upper house of the Russian Federation's legislature which would
limit the interest which a foreign person is permitted to own in entities
holding broadcasting licenses. If legislation is enacted in Russia or any of
MITI's other markets limiting foreign ownership of broadcasting licenses and
MITI is required to reduce its interests in any of the ventures in which it owns
an interest, it is unclear how such reduction would be effected. SEE "RISK
FACTORS--Restrictions on Foreign Investment and Exchange Control Regulations."
Each joint venture's day-to-day activities are managed by a local management
team selected by its board of directors or its shareholders. The operating
objectives, business plans, and capital expenditures of a joint venture are
approved by the joint venture's board of directors, or in certain cases, by its
shareholders. In most cases, an equal number of directors or managers of the
joint venture are selected by MITI and its local partner. In other cases, a
differing number of directors or managers of the joint venture may be selected
by MITI on the basis of the percentage ownership interest of MITI in the joint
venture.
In most cases, the credit agreement pursuant to which MITI loans funds to a
joint venture provides MITI with the right to appoint the general manager of the
joint venture and to approve unilaterally the annual business plan of the
venture. These rights continue so long as amounts are outstanding under the
credit agreement. Such rights may also exist by reason of MITI's percentage
ownership interest in the joint venture or under the terms of the joint
venture's governing instruments.
MITI's joint ventures are limited liability entities which are permitted to
enter into contracts, acquire property and assume and undertake obligations in
their own names. Under the joint venture agreements, each of MITI and the local
joint venture partner is obligated to make initial capital contributions to the
joint venture. In general, a local joint venture partner does not have the
resources to make cash contributions to the joint venture. In such cases, MITI
has established or plans to establish an agreement with the joint venture
whereby, in addition to cash contributions by MITI, each of MITI and the local
partner makes in-kind contributions (usually communications equipment in the
case of MITI and frequencies, space on transmitting towers and office space in
the case of the local partner), and the joint venture signs a credit agreement
with MITI pursuant to which MITI loans the venture certain funds. Typically,
such credit agreements provide for interest payments to MITI at MITI's current
cost of borrowing in the United States and for payment of principal and interest
from 90% of the joint venture's available cash flow prior to any pro rata
distributions to MITI and the local partner. After the full repayment of the
loan owed by the joint venture to MITI, the distributions from the joint venture
to MITI and the local partner are made on a pro rata basis in accordance with
their respective ownership interests.
Services to and Payments from Joint Ventures
In addition to loaning funds to the joint ventures, MITI often provides
certain services to each of the joint ventures including in the case of its
cable television businesses, the use of MITI's Cine Plus movie channel (see
"Cine Plus" below). MITI currently charges its cable television ventures a fee
for supplying Cine Plus programming to these ventures and plans to charge its
ventures in the future for other services it provides to them.
Under existing legislation in certain of MITI's markets, distributions from
a joint venture to its partners will be subject to taxation. The laws in MITI's
markets vary markedly with respect to the tax treatment of distributions to
joint venture partners and such laws have also recently been revised
significantly in many of MITI's markets. There can be no assurance that such
laws will not continue to
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undergo major changes in the future which could have a significant negative
impact on MITI and its operations. SEE "RISK FACTORS--Developing Legal
Structures in MITI's Target Markets."
Marketing
MITI targets its wireless cable television service toward foreign national
households, embassies, foreign commercial establishments, international and
local hotels, local households and local commercial establishments. Paging
services are targeted toward people who spend a significant amount of time
outside of offices, have a need for mobility, or are business people without
ready access to telephones. Paging market segments include the local police, the
military, foreign and local business people and embassy personnel.
Radio station programming is targeted toward 25 to 55 year old consumers,
who are believed by management of MITI to be the most affluent in the emerging
societies of Eastern Europe and the former Soviet Republics. Each station's
format is intended to appeal to the particular listening interests of this
consumer group in its market. This is intended to enable the commercial sales
departments of each joint venture to present to advertisers the most desirable
market for their products and services, thereby heightening the value of the
station's commercial advertising time. Advertising on these stations is sold to
local and international advertisers.
Development of Communications Systems
Wireless Cable Television. Wireless cable television is a technology
experiencing rapid growth worldwide. In the United States, wireless cable
television, also referred to as MMDS (multichannel, multi-point distribution
service), is gaining acceptance as a competitor to coaxial cable service. In
addition, the service has low installation and maintenance costs relative to
coaxial cable services.
Each of MITI's wireless cable television systems is expected to operate in a
similar manner. Various programs, transmitted to satellite transponders, will be
received by the joint venture's satellite dishes located in a central facility.
The signal will then be transmitted to a video switching system located in the
joint venture's facilities, generally near the city's main transmission tower.
Other programs, such as movies, will be combined into a predetermined set of
channels and fed to solid state, self diagnostic transmitters and antennae
located on the transmission tower. Encrypted multichannel signals will then be
broadcast as far as 50 kilometers in all directions.
The specialized compact receiving antenna systems, installed on building
rooftops as part of the system, will receive the multiple channel signals
transmitted by the transmission tower antennae and convert and route the signals
to a set-top converter and a television receiver via a coaxial cabling system
within the building. The set-top converter descrambles the signal and is also
used as a channel selector to augment televisions having a limited number of
channels.
Cable services in markets served by MITI's joint venture partners initially
carry at least eight channels of cable programming transmitted via satellite
from international cable networks such as CNN International, BBC and MTV Europe.
Additionally, cable service includes the local on-air broadcast networks. MITI
plans to add additional channels as needed in its markets and anticipates that a
total of over twenty-four channels will ultimately be available in each of its
markets.
Wireless Cable Television Programming. The broadcast channel lineup of the
local broadcast television systems currently in existence in MITI's markets
consists mainly of national news, local news, dubbed cartoons, single and
multiple voice dubbed movies, and music and quiz shows. All programs broadcast
are in the local language.
MITI currently offers English, French, German and Arabic special interest
programming, with plans to expand into Japanese and other languages as the need
arises. Some of MITI's channels are dubbed and others are subtitled into the
local language. MITI's "basic" service provides programming of local off-air
channels and an additional six channels with European or American sports, music,
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international news and general entertainment. MITI's "premium" service includes
the channels which make up its basic service as well as up to sixteen additional
satellite channels and "Cine Plus," a movie channel created by MITI which began
operations in July 1992. Cine Plus offers recent and classic movies, which
feature such actors as Robert De Niro, Candice Bergen, Charles Bronson and Sean
Connery. The Motion Picture Association of America ("MPAA") ban has in the past
prohibited the exhibition of major motion pictures in parts of Eastern Europe
and all of the former Soviet Republics because of the lack of copyright laws in
these countries. MITI expects, but there can be no assurance, the MPAA ban will
be gradually removed as copyright laws are passed in MITI's markets, increasing
MITI's access to major motion pictures. Subscribers paying for premium service
will view Cine Plus movies in advance of subscribers with basic service. MITI is
planning to introduce its Cine Rus Service in many of its markets which is the
same service as Cine Plus except that the movies are "lip-synched" dubbed and
"voiced over" in local language. Movies that are "lip synched" dubbed give the
appearance that the language of the characters is in the local language.
MITI's service options currently include news channels such as BBC World,
CNN International, Sky News and Euronews, music, sports and entertainment
channels such as BBC Prime, MTV Europe, Eurosport, TNT/Cartoon Network, NBC
Super Channel and Discovery Channel Europe and movie channels such as Cine Plus.
MITI currently offers "Pay Per View" and "Pay Per Day" services, movies,
concerts and sports programming on its Baltcom cable television system which
operates in Riga, Latvia and is planning in the future to add such programming
to its program lineups in certain of its markets. The subscriber pays for "Pay
Per View" and "Pay Per Day" services in advance, and the intelligent decoders
that MITI uses automatically deduct the purchase of a particular service from
the amount paid in advance.
Paging. MITI's paging systems represent a moderately priced service which is
complementary to telephony. Alphanumeric and digital display paging systems are
useful in Eastern European countries, the former Soviet Republics and Far
Eastern emerging markets for sending information one-way without the need for a
recipient to access a telephone network, which is often overloaded or
unavailable.
MITI will offer service with three types of pagers: tone only, which upon
encoded signaling produces several different tones depending on the code
transmitted; digital display, which emits a variety of tones and permits the
display of up to 16 digits; and alphanumeric, which emits a variety of tones and
displays as many as 63 characters. Subscribers may also purchase additional
services, such as paging priority, group calls and other options.
As an adjunct to paging services, the joint ventures operate 24 hour service
bureaus to receive calls and record and transmit messages. In addition,
automatic paging messages are accepted from personal computers, telex machines
and cellular telephones.
Wireless Telephony. Management of MITI believes that similar to MITI's cable
systems, wireless telephony is a time and cost effective means of improving the
communications infrastructure in Eastern Europe, the former Soviet Republics and
emerging markets in the Far East. The current telephone systems in these markets
are antiquated and overloaded. Accordingly, a significant percentage of the
population has applied for service but has not received service after years of
waiting.
MITI's fixed wireless local loop telephony offers the current telephone
service provider a rapid and cost effective method to expand their service base.
The system eliminates the need to build additional fixed wire line
infrastructure by utilizing a microwave connection directly to the subscriber.
AM and FM Radio. MITI currently owns 51% of the joint venture known as SAC
which operates "Radio Seven" broadcasting on two FM radio frequencies in Moscow,
Russia and 100% of the entities which operate "Radio Juventus" broadcasting on
one AM and two FM frequencies in the cities of Budapest, Siofok and Khebegy,
Hungary. MITI also currently owns 50% of Radio Katusha, a joint venture which
broadcasts on one AM and one FM frequency in the city of St. Petersburg, Russia,
51%
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of Radio Nika, a joint venture which broadcasts on an FM radio frequency in the
city of Sochi, Russia and 55% of Radio Skonto, a joint venture which broadcasts
on an FM radio frequency in Riga, Latvia. MITI is also actively pursing
opportunities to acquire interests in additional joint ventures which are
establishing or presently operate radio stations in other major cities in
Russia, other former Soviet Republics and Eastern Europe. Programming in each of
MITI's markets is designed to appeal to the particular interests of a specific
demographic group in such markets. Although MITI's radio programming formats are
constantly changing, programming generally consists of popular music from the
United States, Western Europe, and the local area. News is given by local
announcers in the language appropriate to the region, and announcements and
commercials are locally produced. By developing a strong listenership base
comprised of a specific demographic group in each of its markets, MITI believes
it will be able to attract advertisers seeking to reach these listeners. MITI
believes that the technical programming and marketing expertise that it provides
to its joint ventures enhances the performance of the joint ventures' radio
stations. MITI hopes to establish an international advertising sales and
marketing organization to cross market its various communications services.
International Toll Calling. In May 1994, MITI completed the formation of a
joint venture known as Telecom Georgia with the Ministry of Communications of
the Republic of Georgia and two other entities. Telecom Georgia began providing
International Toll Calling Services for the entire Republic of Georgia in
September, 1994. MITI owns approximately 30% of Telecom Georgia. Telecom Georgia
handles all international calls inbound to and outbound from the Republic of
Georgia to the rest of the world. Telecom Georgia is currently making
interconnect arrangements with several international long distance carriers such
as Sprint and Telespazio of Italy. For every international call made to the
Republic of Georgia, a payment will be due to Telecom Georgia by the
interconnect carrier and for every call made from the Republic of Georgia to
another country, Telecom Georgia will bill its subscribers and pay a destination
fee to the interconnect carrier.
Trunked Mobile Radio. MITI has also recently begun to provide trunked mobile
radio ("TMR") services in certain areas in Romania. TMR systems are primarily
designed to provide mobile voice communications among members of user groups and
interconnection to the public switched telephone network.
Competition
Wireless Cable. Most of MITI's current cable television competitors in its
markets are undercapitalized, small, local companies that are providing limited
programming to their subscribers. MITI does not, however, have or expect to have
exclusive franchises with respect to its cable television operations and may
therefore face more significant competition in the future from highly
capitalized entities seeking to provide services similar to MITI's in its
markets. MITI also encounters competition in some markets from unlicensed
competitors which may have lower operating expenses and may be able to provide
cable television service at lower prices than MITI. MITI currently competes in
all of its markets with over-the-air broadcast television stations which often
offer a wider array of programming than MITI. MITI is also aware that equipment
is being manufactured for the purpose of unlawfully receiving and decoding
encrypted signals transmitted by wireless cable television ventures. MITI
believes that it has thus far only experienced unlawful receipt of its signal on
a limited basis with respect to certain of its wireless cable television
services. In addition, another possible source of competition for MITI are
videotape cassettes. MITI's wireless cable also competes with individual
satellite dishes. SEE "RISK FACTORS--Competition for MITI."
Paging. MITI faces competition from a segment of radio paging operations
utilizing FM Subcarrier Frequency transmissions. In some of MITI's paging
markets, MITI has experienced and can expect to continue to experience
competition from existing small, local, paging operators who have limited areas
of coverage and as well as competition by, in some cases, Western European
paging operators. The local phone systems are also considered to be a
significant competitor to MITI's paging operations. MITI does not have or expect
to have exclusive franchises with respect to its paging operations and may
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therefore face more significant competition in the future from highly
capitalized entities seeking to provide services similar to MITI's in the
company's markets.
Wireless Telephony. While the existing wireline telephone systems in Eastern
Europe and the former Soviet Republics are often antiquated, the fact that these
systems are already well-established and operated by governmental authorities
means that they are a source of competition for MITI's wireless telephony
operations. In addition, one-way paging service may be a competitive alternative
which is adequate for those who do not need a two-way service, or it may be a
service that reduces wireless telephony usage among wireless telephony
subscribers. MITI does not have or expect to have exclusive franchises with
respect to its wireless telephony operations and may therefore face more
significant competition in the future from highly capitalized entities seeking
to provide services similar to or competitive with MITI's in the company's
markets. In certain markets, cellular telephone operators exist and represent a
competitive alternative to MITI's wireless telephony. A cellular telephone can
be operated in the same manner as a wireless loop telephone in that either type
of service can simulate the conventional telephone service by providing local
and international calling from a fixed position in its service area. Both
services are connected directly to a telephony switch operated by the local
telephone company and therefore can initiate calls to or receive calls from
anywhere in the world currently served by the international telephone network.
Cellular telephony and wireless loop telephony eliminate the need for trenching
and laying of wires for telephone services and thus deploy telephone service
quickly and cost effectively. Wireless loop technology utilizes radio
frequencies, instead of copper or fiber optic cable, to transmit between a
central telephone and a subscriber's building. Cellular telephony enables a
subscriber to move from one place in a city to another while using the service
while wireless loop telephony is intended to provide fixed telephone services
which can be deployed as rapidly as cellular telephony and at a lower cost.
FM and AM Radio. In each of MITI's existing markets, there are either a
number of stations in operation already or plans for competitive stations to be
in service shortly. As additional stations are constructed and commence
operations, MITI expects to face significantly increased competition for
listeners and advertising revenues from parties with programming, engineering
and marketing expertise comparable to MITI's. Other media businesses, including
broadcast television, cable television, newspapers, magazines and billboard
advertising also compete with MITI's radio stations for advertising revenues.
Employees
As of September 20, 1995, MITI had approximately 50 full-time employees with
respect to its operations in the United States, and approximately 30 full-time
employees with respect to its operations in Eastern Europe and the former Soviet
Republics. These figures do not include employees of MITI's joint ventures. MITI
employees are not covered by a collective bargaining agreement and MITI believes
its employee relations to be satisfactory.
Property
MITI's principal executive offices are currently located in approximately
4,500 square feet of leased space in Greenwich, Connecticut. MITI recently
leased approximately 11,000 square feet of space in Stamford, Connecticut and is
planning to move its principal executive offices to this location in November
1995. The employees located at MITI's principal office are primarily responsible
for the financial and administrative functions of MITI.
MITI also leases approximately 1,900 square feet of office space in Moscow,
Russia and 7,500 square feet of office space in Vienna, Austria. These offices
are primarily responsible for coordinating the overseas operations of MITI's
telecommunications systems.
MITI's management believes that these facilities are adequate for its
intended activities in the reasonably foreseeable future.
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Legal Proceedings
MITI is not a party, nor to its knowledge has MITI been threatened to be
made a party to any litigation or governmental proceeding which its management
believes could result in any judgments or fines that would have a material
adverse effect on MITI or its financial condition or business operations.
Three separate lawsuits have been filed in the Delaware Court, one against
Orion and its directors, one against Orion, its directors and Actava and against
Actava, its directors, Orion, MITI and Sterling. Such lawsuits seek, among other
things, to enjoin consummation of the Mergers. See "LITIGATION."
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information regarding the beneficial
ownership of the MITI Common Stock as of September 20, 1995 by (i) each person
known by MITI to be the record or beneficial owner of more than 5% of the issued
and outstanding MITI Common Stock, (ii) each director of MITI and executive
officer of MITI and (iii) all executive officers and directors of MITI as a
group. All individuals' addresses are at MITI's headquarters unless otherwise
noted.
<TABLE><CAPTION>
AMOUNT AND
NAME AND ADDRESS OF NATURE OF BENEFICIAL PERCENT
BENEFICIAL OWNER OWNERSHIP(1)(2) OF CLASS (2)
- ---------------------------------------------------------------- -------------------- ------------
<S> <C> <C>
John W. Kluge(3)................................................ 915,747 53.36%
c/o Metromedia Company
215 East 67th Street
New York, New York 10021
Stuart Subotnick(4)............................................. 901,858 52.55%(6)
c/o Metromedia Company
215 East 67th Street
New York, New York 10021
Richard J. Sherwin(5)........................................... 164,452 8.96%
Carl C. Brazell, Jr............................................. 8,344 *
c/o Metromedia International Inc.
4514 Cole Avenue
Suite 1200
Dallas, Texas 75205
Howard Finkelstein.............................................. 0 0
William B. Manning(6)........................................... 3,280 *
James E. Lindstrom(6)........................................... 3,075 *
Karl S. Brooks(6)............................................... 4,374 *
John W. Stanton(7).............................................. 36,060 2.10%
c/o Stanton Communications, Inc.
11400 Southeast Eighth Street
Suite 445
Bellevue, Washington 98004
Frederick A. Moran(8)........................................... 91,845 5.35%
c/o Moran & Associates, Inc.
41 West Putnam Avenue
Greenwich, Connecticut 06830
Kenneth Moelis.................................................. 0 0
c/o Donaldson, Lufkin & Jenrette
2121 Avenue of the Stars
30th Floor
Los Angeles, California 90067
Uzi Zucker...................................................... 27,777 1.62%
c/o Bear Stearns & Co., Inc.
245 Park Avenue
3rd Floor
New York, New York 10167
</TABLE>
195
<PAGE>
<TABLE><CAPTION>
AMOUNT AND
NAME AND ADDRESS OF NATURE OF BENEFICIAL PERCENT
BENEFICIAL OWNER OWNERSHIP(1)(2) OF CLASS (2)
- ---------------------------------------------------------------- -------------------- ------------
<S> <C> <C>
Kenneth Horowitz................................................ 83,333 4.86%
23 Sloans Curve Drive
Palm Beach, Florida 33480
Arnold L. Wadler(9)............................................. 2,778 *
c/o Metromedia Company
One Meadowlands Plaza
East Rutherford, New Jersey 07073-2137
Silvia Kessel................................................... 556 *
c/o Metromedia Company
215 East 67th Street
New York, New York 10021
Met Telcell, Inc.(10)........................................... 797,613 46.48%
c/o Metromedia Company
One Meadowlands Plaza
East Rutherford, New Jersey 07073-2137
Alexander Lapshin............................................... 5,162 *
c/o International Telcell, Inc.
113/1 Leninsky Prospekt
Moscow, Russia 117198
All executive officers and directors as a group (16
people)(3)(4)(5)(6)(7)(8)(9).................................... 1,388,450 75.24%
</TABLE>
- ------------
* Less than 1%.
(1) All persons listed above have sole voting and dispositive power with
respect to their shares unless otherwise indicated.
(2) Based on the aggregate number of shares of MITI Common Stock outstanding
at, or acquirable within 60 days of September 20, 1995.
(3) Includes 797,613 shares of MITI Common Stock held by Met Telcell and 62,578
shares of MITI Common Stock held by Met International, the shares of which
may be deemed to be beneficially owned by Mr. Kluge by virtue of the fact
that he and Mr. Stuart Subotnick are the sole directors and stockholders of
these companies.
(4) Includes 41,667 shares of MITI Common Stock owned by Mr. Subotnick and his
wife, Anita Subotnick as joint tenants. Mr. and Mrs. Subotnick share the
ultimate power to vote and dispose of such shares. Also includes 797,613
shares of MITI Common Stock held by Met Telcell and 62,578 shares of MITI
Common Stock held by Met International, the shares of which may be deemed
to be beneficially owned by Mr. Subotnick by virtue of the fact that he and
Mr. Kluge are the sole directors and stockholders of these companies.
(5) Includes options to purchase 118,557 shares of MITI Common Stock, all of
which are currently exercisable.
(6) Includes options to purchase 3,280, 3,075 and 4,374 shares of MITI Common
Stock held by Messrs. Manning, Lindstrom and Brooks, respectively, which
are currently exercisable.
(7) Mr. Stanton and his wife, Theresa E. Gillespie, own such shares as joint
tenants and share the ultimate power to vote and dispose of such shares.
(8) Includes 45,895 shares of MITI Common Stock held by the four children of
Mr. Moran, as to which Mr. Moran disclaims beneficial ownership.
(9) Includes 2,778 shares of MITI Common Stock held by ARNSSA, Inc., a company
of which Mr. Wadler is the principal stockholder.
(10) Met Telcell is a corporation owned and controlled by Messrs. Kluge and
Subotnick. See footnotes (3) and (4) above.
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<PAGE>
NOMINEE TO THE SURVIVING CORPORATION'S BOARD OF DIRECTORS
Orion intends to nominate to the Surviving Corporation's Board of Directors,
Richard J. Sherwin, the Co-President and a director of MITI. The following is
certain information regarding Mr. Sherwin.
<TABLE>
<S> <C> <C>
Richard J. Sherwin......................... 52 CO-PRESIDENT OF METROMEDIA INTERNATIONAL
TELECOMMUNICATIONS, INC. Mr. Sherwin has
served as a President and director of MITI
and its predecessor companies since October
1990. Prior to that, Mr. Sherwin served as
the Chief Operating Officer of Graphic
Scanning Corp. a paging and wireless
telecommunications company.
</TABLE>
SELECTED FINANCIAL DATA
The selected data presented below under the captions "Selected Financial
Information" for, and as of the end of, the years ended December 31, 1994 and
1993 are derived from the consolidated financial statements of Metromedia
International Telecommunications, Inc. and Subsidiaries, which financial
statements have been audited by KPMG Peat Marwick LLP, independent certified
public accountants.
The selected data presented below under the captions "Selected Financial
Information" for, and as of the end of the year ended December 31, 1992 are
derived from the combined financial statements of International Telcell, Inc.
and International Telcell Group Limited Partnership (predecessor entities to
MITI and its subsidiaries), which financial statements have been audited by
Arthur Andersen LLP, independent certified public accountants.
The selected data should be read in conjunction with the consolidated
financial statements for the years ended December 31, 1994, 1993 and 1992, the
related notes and the independent auditors' reports. The independent auditors'
report for the years ended December 31, 1994 and 1993 refers to a change in the
policy of accounting for investments in Joint Ventures in 1994. The independent
auditors' reports for the years ended December 31, 1994, 1993 and 1992,
appearing elsewhere in this Joint Proxy Statement/Prospectus, contain an
explanatory paragraph that states that MITI's significant recurring losses and
negative operating and investing cash flows raise substantial doubt about the
MITI's ability to continue as a going concern. The consolidated financial
statements and selected data do not include any adjustments that might result
from the outcome of that uncertainty.
The selected data presented below under the captions "Selected Financial
Information" for, and as of the end of, the year ended December 31, 1991 and for
and as of the six months ended June 30, 1995 and 1994 are derived from unaudited
financial statements which in the opinion of management include all adjustments
(none of which were other than normal recurring entries) necessary for a fair
presentation of such data. The results of operations for interim periods are not
necessarily indicative of a full year's operations.
197
<PAGE>
SELECTED FINANCIAL INFORMATION
<TABLE><CAPTION>
SIX MONTHS ENDED
-------------------- YEAR ENDED DECEMBER 31,
JUNE 30, JUNE 30, -----------------------------------
1995 1994 1994 1993 1992 1991
-------- -------- ------- ------- ------ ------
<S> <C> <C> <C> <C> <C> <C>
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Revenues.................................. $ 3,316 1,495 3,545 51 24 0
Selling, general and administrative
expenses................................ 12,635 5,976 19,312 6,108 2,392 660
Depreciation and Amortization............. 725 516 1,149 174 22 0
Equity in losses of Joint Ventures(1)..... (2,221) (362) (2,257) (777) (269) (120)
Net Loss.................................. (13,122) (5,156) (19,141) (7,334) (2,870) (808)
Loss Per Share............................ (7.65) (3.52) ($12.05) ($12.96) N/A N/A
Investments in and Advances to Joint
Ventures................................ 33,133 15,455 24,311 9,712 5,220 1,507
Total Assets.............................. 50,673 29,843 40,282 12,637 6,083 1,850
Notes Payable............................. 45,930 7,520 23,723 9,999 5,266 0
Long-Term Obligations..................... 992 193 1,225 0 0 0
Stockholders' Equity (Deficit)............ (7,734) 17,925 5,120 (185) (455) 660
</TABLE>
(1) During 1994, MITI changed its policy of accounting for the Joint Ventures by
recording its equity in their losses based upon a three month lag. As a
result, the 1994 Statement of Operations reflects nine months of operations
through September 30, 1994 for the Joint Ventures compared to twelve months
for 1993. Additionally, as a result of this change in policy, statement of
operations data for the three months ended March 31, 1994 does not reflect
any amounts for equity in losses of the Joint Ventures. Had MITI applied
this method from October 1, 1993, the effect on reported 1994 operating
results would not have been material. Future years will reflect twelve
months of activity based upon a September 30 reporting period for the Joint
Ventures.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
The following discussion should be read in conjunction with MITI's Financial
Statements, the notes related thereto, and the other financial data included
elsewhere in this Joint Proxy Statement/Prospectus.
General
MITI was formed in August 1994 in connection with the reorganization of ITI
and MII, under common control. Since the inception of the predecessor companies,
activities and resources have been devoted primarily to the identification,
formation and development of communications related business opportunities in
Eastern Europe and certain of the former Soviet Republics and to obtaining
capital through various forms of equity and debt. The results of operations of
the predecessor companies have been combined in a manner similar to a pooling of
interests to reflect the reorganization and all assets and liabilities have been
reflected at their historical cost values.
MITI, through its wholly-owned subsidiaries, ITI and MII, currently owns
interests in and participates along with local partners in the management of
joint ventures which operate wireless cable television systems, radio paging
systems, radio stations, trunked mobile radio services and various types of
telephone services.
MITI's and its consolidated and unconsolidated joint ventures' primary
sources of revenue are cable and paging subscriptions, the sale of broadcasting
time on its radio stations for advertising, and the provision of telephone
services. MITI's most significant operating expenses are employee salaries,
travel and lodging and professional fees in connection with the development and
management of its joint ventures.
198
<PAGE>
Liquidity and Capital Resources
Since inception, MITI has invested significant cash amounts (in the form of
capital contributions or loans) in its joint ventures. MITI has also incurred
significant expenses in identifying and pursuing communications opportunities.
MITI and its joint venture investees are experiencing continued losses and
negative cash flow since the businesses continue to be in the development and
start up phase.
The wireless cable television, paging, fixed wireless loop telephony, and
international toll calling businesses are extremely capital intensive. MITI
generally provides the primary source of funding for its joint ventures both for
working capital and capital expenditures. MITI's joint venture agreements
generally provide for the initial contribution of assets or cash by the joint
venture partners, and for the creation of a line of credit from MITI to the
joint venture. Under a typical arrangement, MITI's joint venture partner
contributes the necessary licenses or permits under which the joint venture will
conduct its business, studio or office space, transmitting tower rights and
other equipment. MITI's contribution is generally cash and equipment, but may
consist of other specific assets as required by the joint venture agreement.
MITI generally enters into a credit agreement with the joint venture to
provide it with sufficient funds for operations and equipment purchases. The
credit agreements generally provides for interest to be accrued at MITI's
current cost of borrowing in the United States and for payment of principal and
interest from 90% of the joint venture's available cash flow, as defined, prior
to any distributions of dividends to MITI or the local partners. The credit
agreements also often provide MITI the right to appoint the general director of
the joint venture and the right to approve the annual business plan of the joint
venture. Advances under the credit agreements are made to a joint venture in the
form of cash, for working capital purposes, as direct payment of expenses or
expenditures, or in the form of equipment, at the cost of the equipment plus
cost of shipping. As of June 30, 1995 and December 31, 1994, MITI was committed
to provide funding under the various credit lines in an aggregate amount of
approximately $46,625,000, and $43,000,000, respectively, of which $24,711,000
and $24,044,000 remains unfunded, respectively. MITI's funding commitments under
a credit agreement are contingent upon its approval of the joint venture's
business plan.
MITI has relied on certain stockholders for capital, in the form of both
debt and equity, to fund its operating and capital requirements. MITI's
investments in the joint ventures are not expected to become profitable or
generate significant cash flow in the near future. Additionally, if the joint
venture investees do become profitable and generate sufficient cash flows in the
future, there can be no assurance that the joint ventures will pay dividends or
return capital at any time.
MITI's consolidated and unconsolidated joint ventures' ability to generate
positive operating results is dependent upon the sale of commercial advertising
time, the ability to attract subscribers to its systems and its ability to
control operating expenses. Management's current plans with respect to the joint
ventures are to increase subscriber and advertiser base and thereby their
operating revenues by developing a broader band of programming packages for
wireless cable and radio broadcasting and offering additional services and
options for paging and telephony services. By offering the large local
populations of the countries in which the joint ventures operate desired
services at attractive prices, management believes that the joint ventures can
increase their subscriber and advertiser bases and generate positive operating
cash flow, reducing their dependence on MITI for funding of working capital.
Additionally, advances in wireless subscriber equipment technology are expected
to reduce capital requirements per subscriber. Further initiatives to develop
and establish profitable operations include reducing operating costs as a
percentage of revenue and developing management information systems and
automated customer care and service systems.
The ability of MITI and its consolidated and unconsolidated joint ventures
to establish profitable operations is also subject to special political,
economic and social risks inherent in doing business in
199
<PAGE>
Eastern Europe and the former Soviet Republics. These include matters arising
out of government policies, economic conditions, imposition of or changes to
taxes or other similar charges by governmental bodies, foreign exchange
fluctuations and controls, civil disturbances. deprivation or unenforceability
of contractual rights, and taking of property without fair compensation.
During 1994, 1993 and 1992, MITI's primary sources of funds were from the
issuance of notes payable and from equity contributions. Notes payable are due
either on demand or within one year of the note and carry interest rates ranging
from the prime rate to the prime rate plus 2%.
During 1992, MITI's predecessors received approximately $1,800,000 of equity
contributions and issued notes payable of approximately $5,300,000.
During 1993, MITI's predecessors received approximately $7,600,000 in
capital contributions and approximately $4,700,000 through the issuance of notes
payable.
During 1994, MITI received equity contributions of approximately
$24,200,000. $6,500,000 of this amount consisted of the conversion to equity of
notes payable in that amount. During 1994, MITI received financing of
$20,105,000 through the issuance of notes payable.
During the six months ended June 30, 1995, MITI borrowed approximately
$22,200,000 from Metromedia.
Proceeds of MITI's borrowings and equity issuances were used, in part, to
purchase and provide equipment to its joint venture investees under credit
lines, to fund initial equity contributions to joint ventures and for MITI's
operating activities. Cash utilized by operating activities during the six
months ended June 30, 1995 and 1994 was primarily for selling, general and
administrative expenses.
MITI considers its ability to raise debt and equity capital as the principal
indicators of its liquidity. Although working capital is not considered to be an
indicator of MITI's liquidity, MITI experienced a decrease in working capital at
June 30, 1995, December 31, 1994 and 1993. The decrease is primarily due to the
use of the proceeds from MITI's short term borrowings to fund MITI's investments
in and advances to the joint ventures under the joint venture and credit line
agreements, respectively.
Cash utilized by operating activities during the six months ended June 30,
1995 and during 1994, 1993 and 1992 was primarily for selling, general and
administrative expenses.
Cash used for investing activities in 1994, includes $7,033,000 paid to
complete MITI's acquisition of East News Channel Trading and Services, Kft. in
addition to the approximately $1,055,000 paid in 1993. The remaining amount of
funds invested in joint ventures for 1994, 1993 and 1992 were to fund MITI's
required capital contributions as required by the respective joint venture
agreements and to provide equipment and working capital under lines of credit.
These capital requirements amounted to approximately $16,409,000, $4,715,000 and
$4,535,000 for 1994, 1993 and 1992, respectively. MITI continues to seek out and
enter into arrangements whereby it can offer communications services through
joint venture arrangements. Additional joint ventures are presently being
planned in countries in which MITI currently has investments and in new target
markets in the Far East. Capital expenditures in 1994, 1993 and 1992 were
primarily the result of expanding MITI's operations and establishing offices in
Moscow, Russia, Vienna, Austria and Budapest, Hungary.
MITI requires significant capital infusions both to fund operations and to
make capital contributions and loans to its joint ventures. Management
anticipates MITI will require significant additional financing in order to
satisfy its ongoing working capital requirements. No assurance can be given that
additional financing will be available to MITI on acceptable terms, if at all.
200
<PAGE>
MITI's anticipated capital commitments for fiscal year 1995 are comprised of
four primary categories: (i) subscriber equipment, (ii) working capital
advances, (iii) expansion of existing facilities and (iv) new construction. Most
of MITI's joint ventures, once operational, require subscriber equipment and
working capital infusions for a significant period of time until funds generated
by operations are sufficient to cover operating expenses and capital expenditure
requirements. In some cases, the joint venture and MITI agree to expand the
existing facilities to increase or enhance existing services. In those cases
when the joint venture cannot provide these funds from operations, MITI provides
the funding. During the construction phase of the joint venture, MITI normally
provides the funds required to build out the project.
Through June 30, 1995 MITI expended $2,779,000 in subscriber and equipment
funding, $1,712,200 in working capital advances and $4,574,000 for expansion of
existing systems. In addition, MITI anticipates that it will expend
approximately $6,050,000 in subscriber equipment funding, $2,950,000 in working
capital advances, $4,000,000 for expansion of existing systems and $8,100,000 in
new construction for the remainder of 1995. MITI anticipates that its aggregate
interest obligation will be $5,127,000 for 1995.
During the latter part of April 1995, MITI entered into a commitment letter
with OPIC whereby OPIC has agreed to provide loan guarantees enabling MITI's
affiliates, ITI and ITISPS, to borrow up to $29.9 million subject to the
satisfaction of certain conditions, such loan guarantees to be secured by MITI's
indirect ownership interests, in certain wireless cable television joint
ventures, and to be subject to the satisfaction of certain terms and conditions
which include a transfer of the ownership interests in such joint ventures from
ITI to ITISPS. These conditions are expected to be complied with by the end of
1995 at which time the funds are expected to be available to ITI and ITISPS`.
MITI's commitment letter with OPIC specifies that interest will be at a rate to
be determined which is acceptable to OPIC and that guaranty fees and other fees
will be imposed.
MITI is a party to the proposed Merger Agreement with Orion, Actava and
Sterling whereby the ownership interests of the companies will be combined in a
stock-for-stock transaction. Subsequent to the Mergers, it is expected that the
combined entity will have greater access to capital and capital necessary to
fund MITI's operations will be provided.
Should the Mergers not be consummated, MITI will be required to continue to
raise the necessary funds to operate and invest in its businesses or will be
required to curtail its operations. MITI also believes that its ability to
borrow will increase as more of its Joint Venture investees commence operations
and if it is successful in reducing the dependence of its Joint Ventures on MITI
for funding. There can, however, be no assurance that additional capital in the
form of debt or equity will be available to MITI at all or on terms and
conditions that are acceptable to MITI.
Results of Operations
Six Months Ended June 30, 1995 Compared to Six Months Ended June 30, 1994
Revenues
Revenues increased to $3,316,000 for the six months ended June 30, 1995 from
$1,495,000 for the six months ended June 30, 1994. This growth in revenue has
resulted primarily from an increase of radio operations in Hungary and paging
service operations in Romania. Revenue from radio operations for the six months
ended June 30, 1995 was $2,588,000 compared to $1,247,000 for the six months
ended June 30, 1994. Radio paging services generated revenue of $464,000 in the
first six months of 1995 compared to $40,000 in the first six months of 1994 due
to an increase in the subscriber base.
201
<PAGE>
General and Administrative Expenses
General and administrative expenses increased by $6,659,000 or 111% for the
six months ended June 30, 1995 compared to the six months ended June 30, 1994.
The increases relate principally to the hiring of new staff and to the
incurrence of additional travel and lodging expenditures which are attributable
to the increase in the number of joint ventures, expansion of MITI's Moscow
operations and the establishment of an office in Vienna, Austria to support and
assist the operations of the joint ventures.
Interest Income
In 1994 MITI commenced interest charges to the joint ventures for credit
facilities provided to the ventures by MITI. Interest was charged at rates
ranging from the prime rate to the prime rate plus two percent as provided for
in each respective credit agreement. As a result of increasing advances to the
joint ventures for their operating and investing cash requirements, interest
income earned under credit lines increased to $1,085,000 for the six months
ended June 30, 1995 from $321,000 for the six months ended June 30, 1994.
Interest Expense
Interest expense increased to $2,011,000 for the six months ended June 30,
1995 from $160,000 for the six months ended June 30, 1994 due to an increase in
indebtedness.
Equity in Losses of Joint Ventures
MITI recognized equity in the losses of joint venture investees of
$2,221,000 for the six months ended June 30, 1995 as compared to $362,000 for
the six months ended June 30, 1994. The losses recorded for the six months ended
June 30, 1995 represent MITI's equity in the losses of the ventures for the six
months ended March 31, 1995. On January 1, 1994, MITI changed its policy of
accounting for the joint ventures by recording its equity in their losses based
upon a three-month lag. Accordingly results of operations for the six month
period ended June 30, 1995 reflect equity in losses of the joint ventures for
the period from October 1, 1994 to March 31, 1995. Results of operations for the
six months ended June 30, 1994 reflect equity in losses of the joint ventures
for the period from January 1, 1994 to March 31, 1994. Had MITI applied this
method from October 1, 1993, the effect on reported operating results for the
six months ended June 30, 1994 would not have been material. As a result of the
start-up nature of the joint ventures, additional losses are expected. Equity in
the losses of the joint ventures are generally reflected according to the level
of ownership by MITI of the joint venture until each joint ventures contributed
capital has been fully depleted. Subsequently, MITI recognizes the full amount
of losses generated by the joint venture since MITI is generally the sole
funding source of the joint ventures.
Results of Operations
Year Ended December 31, 1994 Compared to Year Ended December 31, 1993 and to
Year Ended December 31, 1992
Revenues
Revenues increased to $3,545,000 in 1994 from $51,000 in 1993 and $24,000 in
1992 . This growth in revenue resulted primarily from the acquisition of MITI's
radio operations in Hungary and the commencement of operations of radio paging
services in Romania. Revenue from radio operations during 1994 amounted to
$2,960,000. Radio paging services during 1994 generated revenues amounting to
$266,000. MITI did not generate significant revenue during 1993 and 1992 since
no joint ventures or subsidiaries which are consolidated had commenced
operations.
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MITI accounts for the majority of its joint venture investees under the
equity method of accounting since it generally does not exercise control of
these ventures. Under the equity method of accounting, MITI reflects its
proportionate share of equity, adjusted for its share of income or losses of the
joint ventures, on its balance sheet and reflects only its proportionate share
of income or losses of the joint ventures as a separate caption in its statement
of operations. Additionally, MITI changed its policy of accounting for the joint
ventures in 1994 by recording the results of operations based on a three month
lag. As a result, the 1994 statement of operations reflects nine months of
activity through September 30, 1994 for the joint ventures compared to twelve
months for 1993 and 1992. Future years will reflect a full twelve months of
activity based on a September 30 reporting period for the joint ventures.
General and Administrative Expense
General and administrative expense increased by $13,200,000, or 216%, in
fiscal 1994 as compared to fiscal 1993 and by $3,700,000, or 155%, in fiscal
1993 as compared to fiscal 1992. The increases relate principally to the hiring
of additional staff and additional expenses associated with the general growth
of MITI. During 1994, MITI completed the staffing of its Moscow office and
opened its Vienna office. The commencement of radio paging services in Romania
and the acquisition of the radio station operations in Hungary resulted in
$3,800,000 of the 1994 increase.
Included in selling, general and administrative expense for 1994 is
$3,600,000 of compensation expense relating to the granting of stock options to
MITI's Chief Executive Officer.
Interest Income
In 1994, MITI began to charge interest to the joint ventures for credit
facilities granted to the ventures by MITI. The interest was charged at rates
ranging from the prime rate to the prime rate plus two percent.
Interest Expense
Interest expense increased in 1994 and 1993 largely due to increased
indebtedness from affiliates and others used to finance the operations and
investment activities of MITI during these periods.
Equity in Losses of Joint Ventures
MITI recognized equity in losses of joint venture investees of approximately
$2,300,000, $800,000 and $300,000 for 1994, 1993 and 1992, respectively. As a
result of the start up nature of the joint ventures, additional losses are
expected. Equity in the losses of the joint ventures are generally reflected
according to the level of ownership of the joint venture by MITI until each
joint venture's contributed capital has been fully depleted. Subsequently, MITI
recognizes the full amount of losses generated by the joint venture since MITI
is generally the sole funding source for the joint ventures.
Foreign Currency
MITI presently has limited foreign currency exposure as virtually all
revenues are billed and collected in United States dollars or an equivalent
local currency amount adjusted on a monthly basis for currency fluctuation.
MITI's joint ventures are generally permitted to maintain U.S. dollars accounts
to service their dollar denominated credit lines, thereby significantly reducing
foreign currency exposure. As MITI and its joint venture investees grow and
become more dependent on local currency based transactions, MITI expects its
foreign currency risk and exposure to increase. MITI does not hedge against
foreign currency exchange rate risks.
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RELATIONSHIP WITH METROMEDIA
During the first quarter of 1994, approximately $3.5 million of loans made
by Metromedia or its affiliates to ITI was converted into equity of ITI.
Metromedia has also made separate loans to MITI at different times during the
period from September 1994 to June 1995 in an aggregate principal amount of
$34.1 million (including accrued interest). Each of these loans is payable one
year from the date of the making of such loan and bears interest annually at a
rate per annum equal to the publicly announced prime rate of interest of
Chemical Bank in New York as in effect from time to time (8.75% on September 20,
1995) until the repayment of the indebtedness.
Met International has made separate loans to MII, at different times during
the period from May 1994 to September 1994 in an aggregate principal amount of
approximately $5.5 million (which amount has accrued interest through September
20, 1995 of approximately $.7 million) and from June 1995 to September 1995 in
an aggregate principal amount of approximately $8.6 million. Each of these loans
is payable one year from the date of the making of such loan and bears interest
annually at a rate per annum equal to the publicly announced prime rate of
interest of Chemical Bank in New York as in effect from time to time (8.75% on
September 20, 1995) until repayment of the indebtedness. In addition, Metromedia
has guaranteed a substantial portion of a $5.5 million loan made to an affiliate
of MITI by a major commercial bank. At the Effective Time, Metromedia intends to
repay the entire amount of this loan.
It is a condition to the consummation of the Merger Agreement and the
transactions contemplated thereby that the indebtedness of MITI and its
affiliates to Metromedia and its affiliates be refinanced, repaid in full or
converted into Common Stock as provided in the Contribution Agreement. See
"PROPOSAL NO. 1--THE PROPOSED MERGERS--Terms and Conditions of the Contribution
Agreement."
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INFORMATION REGARDING STERLING
BUSINESS OF STERLING
General
Sterling, through its subsidiaries, is engaged in international and domestic
distribution and production of motion pictures and other entertainment product.
Sterling also provides financial and operational consulting services principally
to businesses in the entertainment industry. The principal strategic objective
of Sterling is to capitalize on niche markets unexploited or under-exploited by
the "major" studios, large distributors, and established entertainment
financiers, as well as traditional financial consulting firms. Sterling is the
successor to MCEG, Inc. and 34 of its subsidiaries pursuant to the successful
Chapter 11 reorganization of those companies in March 1992. Prior to the
commencement of the bankruptcy proceedings of MCEG, Inc. and these subsidiaries,
Sterling operated as a diversified entertainment company engaged in the
production and distribution of motion pictures and other entertainment product,
world-wide home video distribution and talent management.
Sterling was incorporated under the laws of the State of Delaware in
September, 1986. Sterling's principal executive offices are located at 1888
Century Park East, Suite 1777, Los Angeles, CA 90067 and its telephone number is
(310) 282-0871.
Additional information concerning Sterling and its subsidiaries is contained
in Sterling's Annual Report on Form 10-K for the year ended March 31, 1995, its
Quarterly Report on Form 10-Q for the quarter ended June 30, 1995 and its
Current Report on Form 8-K dated April 12, 1995 and its other public filings.
See "AVAILABLE INFORMATION" and "INCORPORATION OF CERTAIN DOCUMENTS BY
REFERENCE."
Sterling holds distribution rights to approximately 400 motion pictures in
various territories throughout the world, consisting of a home video library
comprising approximately 100 titles to which Sterling holds principally domestic
home video rights and an international film library of approximately 300 titles
to which Sterling holds rights in various media in various territories.
Distribution fees are calculated as a percentage of total revenue paid out of
the license territory to a motion picture licensor. Sterling's distribution fees
typically average 25% of such total revenue.
Sterling's home video library include such rental and sell-through titles as
"CHAINS OF GOLD" (starring John Travolta), "WITHOUT YOU I'M NOTHING" (starring
Sandra Bernhard) and "CONVICTS" (starring Robert Duvall), as well as such
sell-through titles as "MYSTIC PIZZA" (starring Julia Roberts) and "HOLLYWOOD
SHUFFLE" (starring Robert Townsend).
Sterling also distributes the film libraries of certain of its consulting
clients pursuant to various sales agency or similar agreements. The libraries
presently being distributed pursuant to such consulting arrangements include
approximately 100 active titles, as well as such films as "TERMINATOR,"
"PLATOON" and "BETHUNE."
Film distribution rights generally range from 7 to 15 years in duration and
typically extend to most, if not all, media of exhibition, with various
territorial rights up to and including, in some cases, worldwide distribution.
Distribution fees are calculated as a percentage of total revenues paid out of
the licensed territory to a motion picture licensor. Sterling's distribution
fees typically average 25% of such total revenue. Sterling intends to continue
to exploit its licensed film distribution rights throughout the world.
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During 1994, Sterling began producing and acquiring films and other
entertainment product for the first time since its reorganization in March 1992.
Through March 1995, Sterling's distribution subsidiary produced, acquired or
licensed rights to distribute a number of new films, each at various stages of
development, including: "NUMBER ONE FAN," "THE DONOR," "IMPLICATED," "ITALIAN
MOVIE," "DEAD ON SIGHT," "ANGEL OF DESIRE," "TRYST," "THE NIGHT AND THE MOMENT,"
"STUDENT BODY" and "RED STEEL."
With the exception of the newly acquired films described above, most of
Sterling's film distribution library, and that of its consulting clients, has
been at least partially exploited theatrically and in video; Sterling's current
and anticipated future emphasis for its international film library is television
exploitation. The potential revenue value of a motion picture tends to diminish
based upon the chronological age of the picture, because the older the picture
is, the more likely it is that all of the exploitable rights in all of the
available territories have been fully exercised and that future rights will be
renewed on a less favorable basis. Accordingly, the acquisition of new films is
important to maintaining and enhancing the value of the existing film library.
In addition, the acquisition of new films permits the packaging of such films
with existing library product and can enhance the return from such existing
product.
In fiscal 1995, Sterling's total revenues by geographic region approximated
the following: United States and Canada - $4,129,000; Europe (excluding UK) -
$2,549,000; Far East - $1,264,000; United Kingdom and other English speaking
countries - $138,000; and Latin America and others - $363,000. At March 31,
1995, Sterling had domestic and foreign sales contract commitments of over
$730,000. For further information, see Note 14 to the Sterling Consolidated
Financial Statements included elsewhere in this Joint Proxy
Statement/Prospectus.
Foreign operations are subject to the imposition by foreign governments of
quotas and other restrictions on the importation and exhibition of American
motion pictures and television programs. Almost all of Sterling's agreements
with foreign subdistributors provide for fixed payments to Sterling in United
States currency and, accordingly, such payments are not subject to the risk of
fluctuations in currency exchange rates. However, such payments are subject to
the risk that certain foreign governments may impose restrictions on the
conversion of their currency into United States currency, thereby impeding the
payment by foreign distributors of amounts due from them to Sterling. While
Sterling cannot predict the extent to which such quotas and currency conversion
restrictions will affect its foreign operations in the future, they have not had
a material effect on the distribution of motion pictures and television
programming in Sterling's foreign operations to date.
Through a subsidiary, Sterling provides financial and operations consulting
assistance to financially distressed companies utilizing the crisis management
skills collectively acquired by management in their consultation with,
representation, operation, restructuring or reorganization on a going concern or
liquidation basis of various entertainment companies. Management of Sterling
consists of a group of individuals specializing in guiding financially troubled
companies through the diverse challenges of financial crises or bankruptcy in an
effective manner. Management's backgrounds include operating management, sales
and product servicing operations, financial management, accounting, business
affairs and bankruptcy case legal and financial administration.
Management believes that its consulting activities place Sterling in a
particularly good position to support both debtors and creditors through the
bankruptcy or workout process. Sterling has the personnel and experience to
consult with operating management in either developing a comprehensive turn
around business plan or liquidating financially distressed companies, and to
assist both secured and unsecured creditors in maximizing their recovery from a
bankruptcy or workout situation.
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As most of Sterling's consulting contracts are terminable on 30 to 90 days'
notice, no assurance can be given as to the continuation of these arrangements.
Sterling anticipates that these operations will continue to generate both
consulting fees and success bonuses, as well as opportunities to acquire equity
positions in successfully restructured or reorganized companies.
Competition
Sterling faces competition with respect to its entertainment and consulting
activities from niche competitors, such as itself and more established
competitors with substantially greater resources (including, without limitation,
financial, marketing, personnel and product resources) than Sterling.
Seasonality
Certain aspects of Sterling's business are subject to seasonal fluctuations.
Foreign sales of motion pictures and other entertainment product tend to peak
when the major international film markets are held. These film markets are
generally held in February, May and October with the exact dates fluctuating
from year to year. Domestic theatrical motion picture distributors compete with
one another for access to desirable motion picture screens, especially during
the Thanksgiving and Christmas holidays and the summer season.
Employees
Sterling has approximately 24 full-time employees. Sterling also engages
free-lance production staff for specific motion pictures or television
productions, as well as outside consultants with respect to its consulting
business. None of Sterling's employees are represented by unions. Management
believes that its relationship with its employees is satisfactory and that a
prolonged strike in the motion picture industry would not have a material
adverse effect on Sterling's current motion picture operations or its current
consolidated financial condition.
PROPERTIES
Sterling leases approximately 11,000 square feet of office space at 1888
Century Park East, Suite 1777, Los Angeles, California 90067 at an initial
annual rental of $179,000, which increases to $252,000 annually in February
1998. The lease term extends through January 31, 2003.
In addition, Sterling leases approximately 4,300 square feet of warehouse
space in Los Angeles, California primarily for film elements and advertising
materials used in its distribution business at an annual rental of $38,700. The
lease expires August 31, 1996.
LEGAL PROCEEDINGS
Chapter 11 Bankruptcy Proceedings
On August 17, 1990, an involuntary petition for relief under chapter 7 of
the Bankruptcy Code was filed against MCEG Productions, Inc., a subsidiary of
Sterling, in the United States District Court for the Central District of
California (the "California Court"). On October 31, 1990, involuntary petitions
for relief were filed in the California Court against Sterling and another of
its subsidiaries. In late 1990 and early 1991, Sterling and 34 subsidiaries
consented to the entry of orders for relief under chapter 11, thereby converting
the involuntary liquidation cases to voluntary reorganizations under chapter 11
of the Bankruptcy Code. From November 1990 through June 1991, most of Sterling's
other subsidiaries filed voluntary petitions for relief under chapter 11. During
the pendency of the chapter 11 reorganization cases, MCEG and its subsidiaries
continued in possession of their property and conducted their business as
"debtors in possession," with the assistance of a new management group
consisting of certain members of Sterling's current management.
Sterling and most of its subsidiaries emerged from bankruptcy effective
March 30, 1992 pursuant to the Debtors' Second Amended Joint Plan of
Reorganization (the "Sterling Plan") dated February 5,
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1992. Two of Sterling's subsidiaries were not included in the Sterling Plan, and
their respective chapter 11 cases are still pending. Sterling anticipates that
such subsidiaries will be liquidated. Set forth below is a synopsis of the
Sterling Plan which contains only a brief summary of such plan and is qualified
in its entirety by reference to the Sterling Plan.
Under the Sterling Plan, Sterling issued a total of 10,000,000 shares of its
common stock to former creditors, former stockholders and certain other persons.
As of March 20, 1995, all objections to preconfirmation claims of creditors
were resolved, and all administrative claims, tax claims, priority claims and
secured claims, except the secured claims of certain talent guilds, were paid in
full. A settlement between Sterling and the various talent guilds with respect
to secured and unsecured claims arising from certain collective bargaining
agreements became effective March 20, 1995, pursuant to which Sterling is to pay
the guilds a total of $689,000 in full settlement of all pre-petition guild
claims.
Pursuant to the Sterling Plan, holders of claims based upon, among other
things, profit participations, royalties or other performance based upon
Sterling's exploitation of film rights (Class C-1), received an aggregate of
3,200,000 shares of Sterling Common Stock, together with a share of the net cash
proceeds, if any, from litigation claims assigned by Sterling to the liquidation
estate under the Sterling Plan.
Holders of allowed general unsecured claims (Class C-2) received an
aggregate of 3,200,000 shares of Sterling Common Stock under the Sterling Plan,
together with a share of the net cash proceeds, if any, from litigation claims
assigned by Sterling to the liquidation estate under the Sterling Plan.
The shares of Sterling Common Stock issuable to holders of Class C-1 and C-2
claims are held in a voting trust. See "Security Ownership of Certain Beneficial
Owners and Management" below. To facilitate the exchange of shares under the
Merger Agreement, these shares will be held in the voting trust until such time
as the Merger Agreement becomes effective or terminates.
Holders of allowed claims with respect to Sterling's 14% Convertible
Subordinated Debentures due January 15, 2009 (the "Old Sterling Debentures") and
with respect to the Sterling Subordinated, Participating, Exchangeable Notes
(the "Old Sterling Notes") (collectively, Class C-3), received an aggregate of
1,900,000 shares of Sterling Common Stock under the Sterling Plan, and, under
certain circumstances, may receive a share of the net cash proceeds from
litigation claims assigned by Sterling to the liquidation estate under the
Sterling Plan. Distributions under the Sterling Plan with respect to the Old
Sterling Debentures are subject to a lien under the indenture relating thereto
to reimburse the trustee thereunder for its reasonable costs and expenses in
Sterling's chapter 11 case. As required under the Sterling Plan, the shares of
the Sterling Common Stock distributable to the Old Sterling Debenture holders
were issued to the indenture trustee thereunder for further distribution to the
former debenture holders.
As of September 1, 1995, Sterling had settled all but one lawsuit assigned
by it to the liquidation estate. In accordance with the Sterling Plan, a portion
of the proceeds of such litigation, after deduction of certain fees, of
participation shares and the repayment of certain indebtedness, will be used to
pay the amounts payable to the guilds under the settlement described above. The
balance of such proceeds, together with any additional net proceeds from
outstanding litigation claims, is to be divided among the various creditor
classes and Sterling in accordance with the Sterling Plan.
Litigation
Litigation. Sterling is subject to certain claims and legal proceedings in
the ordinary course of its business and believes that these matters will not
have a material adverse effect on its financial condition or results of
operations.
Litigation Concerning Subsidiary Held for Disposition. See Note 11 of the
Notes to MCEG Sterling Incorporated Consolidated Financial Statements for the
year ended March 31, 1995 and
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Note 7 of the Notes to MCEG Sterling Incorporated Condensed Consolidated
Financial Statements for the quarter ended June 30, 1995 included elsewhere in
this Joint Proxy Statement/Prospectus for a discussion of certain commitments
and contingencies with respect to Badger Holdings, Inc. and its subsidiaries
(collectively, "Badger"), which were acquired by Sterling for the sole purpose
of liquidation. Because Badger is excluded from Sterling's consolidated
financial statements, Sterling believes that the ultimate resolution of such
matters will not have a material adverse effect on its financial condition or
results of operations. See "INFORMATION REGARDING STERLING--Certain
Relationships and Related Transactions."
Effective July 20, 1995, all of the capital stock of Badger Holdings, Inc.
(an unconsolidated wholly-owned subsidiary of Sterling) was transferred to an
affiliate of John Hyde and Ann Jacobus, the Chief Executive Officer and
Executive Vice President and General Counsel, respectively, of Sterling, for a
purchase price equal to the nominal consideration originally paid by Sterling
for such stock, which management believes represents the fair market value of
such stock. The former parent of Badger consented to the sale. The transaction
did not result in any gain or loss to Sterling.
Stockholder Litigation. Three separate lawsuits have been filed in the
Delaware Court, one against Orion and its directors, one against Orion, its
directors and Actava and one against Actava, its directors, Orion, MITI and
Sterling. Such lawsuits seek, among other things, to enjoin consummation of the
Mergers. See "LITIGATION."
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Set forth below is information as of September 20, 1995 concerning the
beneficial ownership of Sterling Common Stock by each of Sterling's directors,
executive officers and all other persons known to Sterling who own 5% or more of
Sterling Common Stock. Unless otherwise indicated: (i) each person has sole
investment and voting power (or shares such powers with his or her spouse) with
respect to the shares set forth in the following table; and (ii) the address of
each such person is c/o MCEG Sterling Incorporated, 1888 Century Park East,
Suite 1777, Los Angeles, CA 90067.
<TABLE><CAPTION>
AMOUNT AND NATURE OF
BENEFICIAL OWNERSHIP PERCENT OF CLASS
------------------------------------------------ -----------------------------------------------
SOLE VOTING SHARED VOTING SOLE VOTING SHARED VOTING
& INVESTMENT & INVESTMENT TOTAL VOTING & & INVESTMENT & INVESTMENT TOTAL VOTING &
NAME POWER POWER INVESTMENT POWER POWER POWER INVESTMENT POWER
- ---------------- ------------ ------------- ---------------- ------------ ------------- ----------------
<S> <C> <C> <C> <C> <C> <C>
John Hyde(1).... 2,107,200 6,400,000(2) 8,507,200 18.8% 57.1%(2) 75.9%
Don Edmonds..... -- 6,400,000(2) 6,400,000 -- 57.1%(2) 57.1%
Kathryn Cass.... 289,900 6,400,000(2) 6,689,900 2.6% 57.1%(2) 59.7%
Ann K. Jacobus.. 256,700 -- 256,700 2.3% -- 2.3%
Sterling Voting
Trust........... 6,400,000 -- 6,400,000 57.1% -- 57.1%
Directors and
Executive
Officers as a
Group (4
persons)...... 2,653,800 6,400,000(2) 9,053,800 23.7% 57.1%(2) 80.8%
</TABLE>
- ------------
(1) Consists of 1,000,000 shares of the Sterling Common Stock owned by the John
W. Hyde Living Trust, of which Mr. Hyde is the sole trustee and beneficiary
and 1,107,200 shares owned by Producers Sales Organization, a corporation
wholly owned by the John W. Hyde Living Trust.
(2) Consists of 6,400,000 shares in the Sterling Voting Trust, of which John
Hyde, Kathryn Cass and Don Edmonds are the trustees (the "Voting Trustees").
Mr. Hyde and Ms. Cass are directors and executive officers of the Sterling
and Mr. Edmonds is a director of the Sterling. The shares included in this
trust were issued pursuant to the Sterling Plan for allowed claims of Class
C-1 and Class C-2 claimants. The Voting Trustees are authorized to vote the
shares held in the Voting Trust in all matters to come before the Sterling
Stockholders. The Voting Trustees disclaim beneficial ownership of such
securities. Virgin Communications Limited, 186 Campden Hill Rd., London,
England
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and Bayerische Vereinbank, 335 Madison Avenue, New York, New York 10017 are
entitled to 825,799 and 660,623 respectively of such shares.
MARKET INFORMATION
There is no active trading market for the Sterling Common Stock. Sterling
has not paid any cash dividends on its common stock during the past two years
and does not anticipate doing so in the foreseeable future.
SELECTED FINANCIAL DATA
The Sterling historical financial data as of March 31, 1995 and 1994 and for
each of the fiscal years ended March 31, 1995, 1994, 1993 and 1992 has been
derived from the historical financial statements of Sterling, which statements
have been audited by Arthur Andersen LLP, independent public accountants, as
indicated in their reports included elsewhere in this Joint Proxy
Statement/Prospectus.
<TABLE><CAPTION>
THREE MONTHS ENDED YEARS ENDED MARCH 31,
----------------------------- ----------------------------------
JUNE 30, 1995 JUNE 30, 1994 1995 1994 1993 1992
------------- ------------- ------ ------ ------ -------
(IN THOUSANDS, EXCEPT PER-SHARE
AMOUNTS)
<S> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA
Revenues................................. $ 1,705 $ 1,355 $8,443 $7,839 $7,137 $ 7,795
Income (loss) before extraordinary
item................................... $ 16 $ (22) $ 259 $ 400 $ 284 $ (244)
Net income............................... $ 16 $ (22) $ 259 $ 550 $ 284 $67,363
Income (loss) before extraordinary item
per share.............................. $-- $-- $ .02 $ .04 $ .03 $ (.02)
Net income (loss) per common share:...... $-- $-- $ .02 $ .05 $ .03 $ 6.74
BALANCE SHEET DATA
Total assets............................. $ 7,074 $ 9,150 $8,146 $8,562 $7,791 $ --
Debt..................................... $ 495 $-- $ 495 -- -- --
Total shareholders' equity............... $ 3,766 $ 3,288 $3,737 $3,293 $2,358 $ 1,953
</TABLE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
Results of Operations
Three Months Ended June 30, 1995 Compared to Three Months Ended June 30, 1994
Total revenues for the quarter ended June 30, 1995 increased 26% to
$1,705,000, compared to $1,355,000 for the prior three-month period. Film
distribution revenues increased 49% to $1,184,000 compared to $797,000 for the
prior year three month-period. The increase was principally due to the
recognition of a $625,000 domestic television distribution agreement and the
recognition of a $100,000 free television license which had been previously
deferred.
Participations and consulting revenues represent Sterling's share of profits
in various films released by third parties, and fees relating to consulting
services provided to third parties. Participations and consulting services
generated 7% higher revenues in the prior three month period totaling $558,000
compared to the current year total of $521,000. Included in the current period
are fees earned by Sterling in connection with Mr. Hyde's appointment as
bankruptcy trustee for certain clients. See "INFORMATION REGARDING
STERLING--Certain Relationships and Related Transactions" for a description on
Mr. Hyde's non-exclusive consulting agreement with Sterling, which may be
terminated by either party upon 60 days' notice. Consulting fees may vary in
future reporting periods, as fees earned and services requested in Sterling's
consulting assignments differ, and the timing of certain fee awards is dependent
upon a variety of factors, including court approval.
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Costs of revenues increased 38% to $922,000 for the quarter ended June 30,
1995, compared to $670,000 for the prior three-month period. Costs of revenues
consist principally of amortization of film costs and other direct distribution
expenses and, in 1995, changed proportionately to the change in film
distribution revenues for the current quarter.
Film distribution margins approximated 22% in 1995. Film distribution
margins were lower in 1994 at 16% due to higher third party participations and
increased consulting activities which make a significant contribution to
Sterling's income before taxes.
General and administrative expenses were $754,000 for the quarter ended June
30, 1995, compared to $707,000 for the prior three month period.
The provision rate for Federal, state and foreign taxes estimated for the
year ended March 31, 1996 is 45%. No provision was accrued during the period
ended June 30, 1994 due to the nominal loss reported for the quarter.
Fiscal Year Ended March 31, 1995 Compared to Fiscal Year Ended March 31, 1994.
In 1995, combined worldwide revenues increased 8% to $8,443,000 from
$7,839,000 in 1994, due primarily to increased film distribution activity. Gross
profit margins remained comparable at 45% and 44% for the fiscal years ended
1995 and 1994, respectively. Income before extraordinary item decreased 35% to
$259,000 from $400,000 in 1994, reflecting an increase in General and
Administrative expenses relating principally to Sterling's Employee Incentive
Bonus Plan as discussed further in the General and Administrative comparison
below.
In addition to steady revenues and earnings growth, an important strategic
and financial objective of Sterling is to achieve a strong return on equity and,
therefore, improve shareholder value. Sterling generated a return on equity of
12% in 1995 as compared to 29% in 1994. This percentage takes into account the
fact that, at least in the short term, Sterling has been able to utilize a
portion of its deferred net operating losses. The decline in return on equity
can be attributed to the above described increase in General and Administrative
expenses.
Sterling's film distribution revenues totalled $5,966,000, a 13% increase
from fiscal 1994 revenues of $5,262,000. As in 1994, Sterling commenced
distribution of three new, internally financed films in fiscal 1995. The 1995
produced films generated $1,493,000 (25%) and 1994 produced films generated
$1,754,000 (29%) of the total film distribution revenues during the fiscal year
ended 1995. Included in the $1,754,000 are $750,000 of domestic home video
revenues earned on the 1994 produced titles. Sterling continued to exploit its
library throughout the world and recorded approximately $250,000 in sales agency
fees for the distribution of films under various consulting contracts. Sales
personnel participate in all major foreign sales markets, including the American
Film Market, the Cannes Film Festival and MIFED.
At March 31, 1995, the foreign sales backlog relating to future pay and free
television contracts totalled approximately $730,000. In fiscal 1995, Sterling
recognized revenues of $750,000 representing domestic home video licenses
relating to contractual commitments at March 31, 1994.
Sterling believes that it can continue to market its foreign and domestic
rights over the next several years. As in fiscal 1995, Sterling intends to
further enhance the overall library value by expanding the existing library with
new titles obtained through acquisition or in-house development. See the
"Liquidity and Capital Resources" discussion below regarding subsequent
licensing activities.
Participations and consulting revenues represent Sterling's share of profits
in various films released by third parties, and fees relating to consulting
services provided to third parties. Included in consulting revenues are fees
earned by Sterling in connection with the appointment of John Hyde, Sterling's
Chairman and Chief Executive Officer, as bankruptcy trustee for certain clients.
Consulting fees may
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vary in future reporting periods, as fees earned and services requested in
Sterling's consulting assignments differ, and the timing of certain fee awards
is dependent upon a variety of factors, including court approval. See Note 9 to
Sterling's Consolidated Financial Statements included elsewhere in this Joint
Proxy Statement/Prospectus.
In 1995, Sterling's participation revenues totalled $431,000, a 28% decrease
from Sterling's fiscal 1994 revenues of $596,000. The decrease is attributed to
declining receipts from domestic third party distributors in which Sterling
maintains profit participations.
Consulting revenues totalled $2,046,000 in fiscal 1995, compared to
$1,981,000 in fiscal 1994. Revenues in 1995 were generated from new consulting
arrangements with Cannon Pictures, Inc., Ulysse Entertainment, Inc., Grove
Television Enterprises, Inc., Mercantile National Bank and 21st Century Film
Corp., while Sterling continued to service NSB Film Corp., AME, Inc. and its
subsidiary held for liquidation, Badger Holdings, Inc. Collection fees for MRCC,
a subsidiary still in chapter 11 bankruptcy proceedings, were $300,000 and
$73,000 in 1995 and 1994, respectively. Fees earned in fiscal 1995 from the
former parent of Badger related to the liquidation of Badger were $314,000 in
1995 (15.3% of total consulting revenues) compared to $1,250,000 in 1994 (63.1%
of total consulting revenues). The $314,000 earned in 1995 includes $214,000
earned in connection with Sterling acting as the executive producer for the
television series "HOMICIDE." The liquidation of Badger is substantially
completed, and Sterling does not expect to receive any significant additional
consulting revenues from the former parent of Badger, but it may receive
additional executive producer fees should "HOMICIDE" be picked up in future
periods. Excluding revenues from the former parent of Badger and MRCC, nine
other clients accounted for the remaining 70% of consulting revenues, none of
which individually contributed revenues greater than 10% of consolidated
revenues. Subsequent to March 31, 1995, Sterling entered into a new consulting
arrangement, while continuing to negotiate with several other companies
regarding providing consulting and other bankruptcy related services. No
assurance can be provided that agreements will be consummated with any of these
companies.
In 1995, Sterling's cost of revenues increased 7% to $4,656,000, as compared
to $4,366,000 in fiscal 1994. This increase reflects the proportionate increase
in the film distribution revenues. Film distribution margins in Sterling's
fiscal 1995 and 1994 were 22% and 18%, respectively. The increase is
attributable to the successful distribution efforts of Sterling's recent
productions and library acquisitions made during the year ended 1995. Direct
costs of participations and consulting activities are nominal when compared to
revenues and remained constant with the prior year. Consequently, these
activities make a significant contribution to Sterling's income before taxes.
General and administrative expenses for Sterling's fiscal year ended 1995
increased 20% to $3,330,000, as compared to $2,768,000 in 1994. The increase is
primarily attributable to additional compensation expense of $414,000 relating
to bonuses earned in 1995 in accordance with the 1994 Employee Incentive Bonus
Plan (the "Sterling Bonus Plan") in which all employees of Sterling participate.
In brief, the Sterling Bonus Plan provides for bonuses based upon pre-tax
income, market share value and stockholders' equity increases.
The provision for Federal, state and foreign taxes remained relatively
constant for 1995 and 1994 at 43.3% and 43.2%, respectively. Due to Sterling's
reorganization, net operating loss position and current statutory regulations,
taxes payable reflect only state taxes payable at 1995. The balance of the
provision at 1995 and 1994 is $168,000 and $295,000, respectively, net of
foreign taxes paid, which is effectively eliminated by utilizing pre-bankruptcy
net operating losses, and was recorded as a credit to equity in accordance with
fresh start accounting guidelines.
Effective April 1, 1993, Sterling adopted the Statement of Accounting
Standards No. 109 "Accounting for Income Taxes" ("SFAS 109"). Under this method,
deferred tax assets and liabilities are recognized with respect to the tax
consequences attributable to the differences between the financial
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statement carrying values and tax bases of existing assets and liabilities.
There was no material effect on Sterling's financial position based upon this
change in method of accounting for income taxes.
Fiscal Year Ended March 31, 1994 Compared to Fiscal Year Ended March 31, 1993
In the fiscal year ended March 31, 1994, revenues increased 10% to
$7,839,000 from $7,137,000 in fiscal 1993 due primarily to greater film
distribution activity. Income before extraordinary item increased 41% to
$400,000 from $284,000 in 1993 reflecting modest operating growth and certain
cost containments in Sterling's consulting business.
Film distribution revenues totalled $5,262,000, a 13% increase from
Sterling's fiscal 1993 revenues of $4,652,000. In Sterling's fiscal 1994,
Sterling commenced distribution of three new, internally financed films. The
three new productions accounted for $1,192,000 (approximately 23%) of film
distribution revenues. The foreign sales backlog and a deferred sales contract
to a domestic video distributor for two films combine for over $1 million in
contractual commitments at March 31, 1994.
In Sterling's fiscal 1994, Sterling recognized revenues of $1,362,000
representing the pay and free television licenses remaining from agreements
entered into prior to Sterling's reorganization. Revenues recognized in
Sterling's fiscal 1993 under the same agreement totalled $200,000. Revenues in
Sterling's fiscal 1993 had included $1.4 million on the theatrical release of
"BREAKING THE RULES" and almost $1 million in revenues with respect to domestic
video distribution.
Participation revenues for Sterling's fiscal 1994 totalled $596,000, a 39%
decrease from Sterling's fiscal 1993 revenues of $977,000, principally due in
Sterling's fiscal 1993 to recognition of certain contract settlements with a
third-party distributor.
Consulting revenues totalled $1,981,000 in Sterling's fiscal 1994, compared
to $1,508,000 in Sterling's fiscal 1993 and reflect a mix of new and old
clients. Included in 1994 consulting revenues are $1.25 million (63.1% of total
consulting revenues) in fees earned under Sterling's agreement with the former
owners of Badger which was entered into in fiscal 1994. These fees are
associated with the liquidation and wind down of Badger as further described in
Note 11 to Sterling Consolidated Financial Statements included elsewhere in this
Joint Proxy Statement/Prospectus. Collection fees from MRCC were $73,000 and
$468,000 in Sterling's fiscal 1994 and Sterling's fiscal 1993, respectively.
Costs of revenues in Sterling's fiscal 1994 and Sterling's fiscal 1993
changed in proportion to the change in film distribution revenues. Film
distribution margins in 1994 and 1993 were 18% and 20%, respectively, reflective
of slightly higher marketing costs on newly released titles. Direct costs of
participations and consulting activities decreased substantially in Sterling's
fiscal 1994 and are nominal when compared to revenues. General and
administrative expenses for Sterling's fiscal 1994 totalled $2,768,000, a 5%
increase over Sterling's fiscal 1993 expenses of $2,638,000, due principally to
higher lease obligations relating to Sterling's larger office facilities.
The provision for Federal, state and foreign taxes for Sterling's fiscal
1994 and 1993 is 43.2% and 44.8% respectively. Lower foreign withholding taxes
caused the overall rate to decrease slightly in Sterling's fiscal 1994. Due to
Sterling's reorganization, net operating loss position and current statutory
regulations, taxes payable were adjusted to reflect solely the minimum amount of
state taxes payable for Sterling's fiscal 1994. The balance of the provision of
$295,000 and $181,000 in Sterling's fiscal 1994 and 1993, respectively, net of
foreign taxes paid, was recorded as a credit to equity. Sterling's adoption of
SFAS No. 109, "Accounting for Income Taxes," in the first quarter of Sterling's
fiscal 1994 had no material effect on Sterling's financial position.
Sterling recognized in Sterling's fiscal 1994 an extraordinary gain of
$150,000 based on the resolution or payment of a substantial portion of the
participations, claims and other costs associated with the 1992 reorganization
proceedings. The remaining accrual was approximately $579,000, down from the
original 1992 $3.3 million reserve.
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Liquidity and Capital Resources
Three Months Ended June 30, 1995
Cash flows provided by operations totaled $231,000 for the three months
ended June 30, 1995. As anticipated, Sterling is funding acquisition and
development costs from cash on hand and loan proceeds from third parties. Based
on cash on hand at June 30, 1995 and estimated cash flow projections over the
next 12 months, Sterling believes it has adequate resources to meet its
obligations. At June 30, 1995, Sterling had domestic and foreign sales contract
commitments of approximately $3.5 million, of which $231,000 had been received.
In May 1995, Sterling entered into an agreement to acquire foreign rights for
six films, "DOWN CAME A BLACKBIRD," "TRADE OFF," "MRS. MUNCK," "UNDERTOW," "RUBY
JEAN AND JOE" and "BASTARD OUT OF CAROLINA" for minimum guaranteed advances
totaling approximately $9.5 million. These amounts are payable through
approximately December 1996, with funding for such payments expected to be
generated from presales of the foreign territories acquired. As of June 30,
1995, none of the above-mentioned films had been delivered to Sterling. During
the three-month period ended June 1995, Sterling made presales totaling
approximately $2 million in contract commitments for the titles listed above.
The first scheduled payment toward the minimum guaranteed advances is
approximately $1.1 million and is due 15 days from delivery of film elements.
Sterling anticipates receiving delivery of three titles in the quarter ended
September 30, 1995.
Sterling intends to continue to service entertainment clients in need of
operational or turnaround consultation as well as to expand the scope of its
entertainment consulting practice to related industries, although no assurance
can be given that it will be successful in doing so.
Fiscal Year Ended March 31, 1995
Cash Flows used in operations totalled $1,762,000 for the year ended 1995 as
compared to cash flows from operations providing $386,000 in 1994. The
significant change in cash is attributable to the productions funded and the
payment of accrued production liabilities during the fiscal year ended 1995.
Specifically, Sterling paid $2.3 million collectively for the acquisition of
domestic and foreign rights for three films, "NUMBER ONE FAN," "THE DONOR" and
"IMPLICATED."
Sterling's liquidity is generated from operations and a borrowing. Based
upon the cash on hand at March 31, 1995 and estimated cash flow projections,
Sterling believes it has adequate resources to meet its obligations over the
next twelve months.
In October 1994, Sterling acquired two film libraries having both domestic
and foreign rights available on approximately 100 titles, for a net purchase
price of $411,000. Sterling financed these acquisitions through a loan provided
by Metromedia which is payable not later than December 31, 1995 with interest
calculated at the prime rate.
During the quarter ended December 31, 1994, Sterling borrowed from and
repaid to an affiliate $265,000, and made nominal purchases of computer
equipment.
In March 1995, Sterling agreed to distribute the foreign rights to ten
pictures which are currently at various stages of development and production.
There are no acquisition costs relating to this agreement and Sterling will
receive distribution fees and expenses for its service under the contract.
Subsequent to March 31, 1995, Sterling entered into an agreement to acquire
foreign rights for six films, "DOWN CAME A BLACKBIRD," "TRADE OFF," "MRS.
MUNCK," "UNDERTOW," "RUBY JEAN AND JOE" and "BASTARD OUT OF CAROLINA" for
minimum guaranteed advances totalling $9.5 million. These amounts are payable
through approximately December 1996, with funding for such payments expected to
be generated from pre-sales of the foreign territories acquired.
Sterling intends to continue to service entertainment clients in need of
operational or turnaround consulting services as well as expand the scope of its
entertainment consulting practice to related industries, although no assurance
can be given that it will be successful in doing so. Additionally,
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Sterling's ability to expand may be limited by the availability of additional
financing, as to which no assurance can be given. Sterling anticipates that it
will have access to expanded sources of financing as a result of the Mergers
described herein, although no assurance can be given in this regard.
Fiscal Year Ended March 31, 1994
During 1994, Sterling generated its liquidity from its operations.
Distribution and consulting contract collections totalled $6.1 million and funds
were used to acquire new film product, pay producers and participants and
service overhead. In the third quarter of 1994, Sterling borrowed against
certain fees and repaid the amounts in the same quarter. In fiscal 1994,
Sterling received $2.5 million from Badger in connection with Sterling's
agreement with Badger to pay on Badger's behalf certain production obligations
with respect to the television series "HOMICIDE." In fiscal 1995, Sterling paid
a total of $1.9 million to third parties with respect to such production
obligations; the remainder of such obligations, totalling $600,000 was paid in
April 1995. Additionally, in fiscal 1994, Sterling acquired domestic and foreign
rights for three films, "DEAD ON SIGHT," "ANGEL OF DESIRE" and "TRYST" for a
total of $3.1 million.
The acquisition in July 1993 of Badger was for a nominal amount and was made
for the express purpose of liquidating Badger's assets and liabilities in the
most efficient manner. Sterling earned consulting and producing fees of $314,000
and $1,250,000 for 1995 and 1994, respectively, for services provided to the
former parent of Badger regarding this disposition, and it is anticipated that
certain reimbursable wind-down costs and litigation activities will continue
through Sterling's fiscal 1996. No significant additional consulting revenues
are anticipated to be received from the former parent of Badger, although
Sterling may receive additional monies related to its duties as the executive
producer for the television series "HOMICIDE." Sterling has completed
substantially all of its required services to the former parent of Badger with
its ongoing involvement pertaining principally to litigation supervision.
Sterling believes that the ultimate resolution of such litigation and other
matters will not have a material adverse effect on its financial condition or
results of operations.
In fiscal 1994, Sterling borrowed from and repaid to an affiliate a total of
$500,000. Sterling also purchased equipment and leasehold improvements totaling
$198,000 and repurchased stock for a total of $40,000 to facilitate a settlement
with Sterling's former debentureholders.
Fiscal Year Ended March 31, 1993
In 1993, cash flows provided by operations were derived primarily from
collections of distribution and consulting receivables, as well as direct
collections on certain other contracts, including $1,350,000 representing the
balance of a minimum guarantee from Miramax Films with respect to "BREAKING THE
RULES," and a $500,000 payment for a multi-picture contract with Tri-Star
Pictures, Inc.
Cash flows used in operations were primarily for payments to producers for
royalties earned on collections, to professionals for bankruptcy related
services, and to various parties for completion costs on internally produced
films. Royalty payments to producers totalled $1,157,000 in 1993.
During fiscal 1993, Sterling acquired $136,000 of computer equipment and
leasehold improvements. In addition, Sterling repurchased stock from former
employees for a total of $20,000.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
John W. Hyde, the Chairman and Chief Executive Officer of Sterling, retains
the right, pursuant to an agreement, to receive 40% of any producer fees and 50%
of all profit participations or contingent or deferred compensation payable in
connection with the sequel, remake and television rights to the motion pictures
"FLIGHT OF THE NAVIGATOR, " "SHORT CIRCUIT" and "8 MILLION WAYS TO DIE" (with
the "Matthew Scudder" character by Lawrence Block). Mr. Hyde or one of his
affiliates may, pursuant to an agreement, receive a percentage (to be negotiated
in the future) of producer's fees and profit participations or contingent or
deferred payments on certain new productions, although the specific percentages
will be negotiated in the future.
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The services of Mr. Hyde are made available to Sterling pursuant to a
non-exclusive consulting agreement with an affiliate of Mr. Hyde. The consulting
agreement is subject to either party's right to terminate upon 60 days' prior
notice. Pursuant to this agreement Mr. Hyde is paid a weekly fee of $7,693, a
monthly car allowance and certain other benefits.
Effective July 20, 1995, all of the capital stock of Badger Holdings, Inc.
(an unconsolidated wholly-owned subsidiary of Sterling) was transferred to an
affiliate of John Hyde and Ann Jacobus, the Chief Executive Officer and
Executive Vice President and General Counsel, respectively, of Sterling, for a
purchase price equal to the nominal consideration originally paid by Sterling
for such stock, which management believes represents the fair market value of
such stock. The former parent of Badger consented to the sale. The transaction
did not result in any gain or loss to Sterling.
METROMEDIA LOAN AGREEMENT
MCEG Sterling Computer Services, a wholly-owned subsidiary of Sterling
("Sterling Computer"), and Metromedia, entered into a Credit Agreement and
Pledge Agreement, as amended (the "Loan Documents"), pursuant to which
Metromedia loaned to Sterling Computer $495,000 (the "Metromedia-Sterling Loan")
to fund the acquisition of certain film library assets by Sterling. Sterling and
Metromedia entered into a letter agreement, as amended, pursuant to which
Sterling has guaranteed all obligations of Computer under the Loan Documents.
The Metromedia-Sterling Loan matures not later than December 31, 1995 and
accrues interest at a rate per annum equal to Chemical Bank's then announced
prime rate. The Metromedia-Sterling Loan is secured by a pledge of the stock of
Sterling Computer, which holds title to the film library assets acquired with
the proceeds of the Metromedia-Sterling Loan.
It is a condition to the consummation of the Merger Agreement and the
transactions contemplated thereby that the indebtedness of Sterling and its
affiliates to Metromedia and its affiliates be refinanced or repaid in full. See
"PROPOSAL NO. 1--THE PROPOSED MERGERS--Background of the Mergers."
LEGAL OPINIONS
The validity of the shares of Common Stock offered by this Joint Proxy
Statement/Prospectus will be passed upon for Actava by Long, Aldridge & Norman
("LA&N"). LA&N is the beneficial owner of 52,708 shares of Common Stock.
EXPERTS
The consolidated financial statements and related schedule of Orion as of
February 28, 1995 and 1994 and for each of the years in the three-year period
ended February 28, 1995, have been included herein and in the Joint Proxy
Statement/Prospectus in reliance upon the report of KPMG Peat Marwick LLP,
independent certified public accountants, appearing elsewhere herein, and upon
the authority of said firm as experts in accounting and auditing.
The report of KPMG Peat Marwick LLP on the February 28, 1995, 1994 and 1993
consolidated financial statements of Orion contains an explanatory paragraph
that states that Orion is a defendant in certain litigation which alleges
various breaches of agreements by Orion, and seeks certain damages. It is not
possible to assess the ultimate damages, if any, at this time.
The report of KPMG Peat Marwick LLP on the February 28, 1995 consolidated
financial statements of Orion contains an explanatory paragraph that states that
based upon Orion's inability to meet required debt payments that are due within
the next year under the terms of its Indentures (as defined in Note 6 of the
Notes to Consolidated Financial Statements) there exists substantial doubt about
Orion's ability to continue as a going concern. The consolidated financial
statements do not include any adjustments that might result from the outcome of
that uncertainty.
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The report of KPMG Peat Marwick LLP on the February 28, 1994 consolidated
financial statements of Orion includes an explanatory paragraph on Orion's
change in method of accounting for income taxes.
The consolidated financial statements and related schedules of The Actava
Group Inc. appearing in The Actava Group Inc. Annual Report on Form 10-K for the
year ended December 31, 1994, have been audited by Ernst & Young LLP,
independent auditors, as set forth in their report thereon included therein and
incorporated herein by reference. Such consolidated financial statements and
related schedules are incorporated by reference in reliance upon such report
given upon the authority of such firm as experts in accounting and auditing.
The consolidated financial statements of MITI as of December 31, 1994 and
1993 and for each of the years in the two-year period ended December 31, 1994,
have been included herein and in the Joint Proxy Statement/Prospectus in
reliance upon the report of KPMG Peat Marwick LLP, independent certified public
accountants, appearing elsewhere herein, and upon the authority of said firm as
experts in accounting and auditing.
The report of KPMG Peat Marwick LLP on the December 31, 1994 and 1993,
consolidated financial statements of MITI contains an explanatory paragraph that
states that MITI's significant recurring losses and negative operating and
investing cash flows raise substantial doubt about MITI's ability to continue as
a going concern. The consolidated financial statements do not include any
adjustments that might result from the outcome of that uncertainty.
The independent auditor's report for the years ended December 31, 1994 and
1993, refers to a change in policy of accounting for investments in Joint
Ventures in 1994.
The combined financial statements of International Telcell, Inc. (ITI) and
International Telcell Group Limited Partnership (ITGLP) (predecessor entities of
MITI) as of December 31, 1992 and for the year then ended have been included
herein and in the Joint Proxy Statement/Prospectus in reliance upon the report
of Arthur Andersen LLP, independent public accountants, appearing elsewhere
herein, and upon the authority of said firm as experts in accounting and
auditing.
The report of Arthur Andersen LLP covering the December 31, 1992, combined
financial statements of ITI and ITGLP contains an explanatory paragraph that
states that MITI's significant recurring losses and negative operating and
investing cash flows raise substantial doubt about MITI's ability to continue as
a going concern. The combined financial statements do not include any
adjustments that might result from the outcome of that uncertainty.
The financial statements of Kosmos TV as of December 31, 1993 and September
30, 1994, and for the year ended December 31, 1994 and for the nine months ended
September 30, 1994 have been included herein and in the Joint Proxy
Statement/Prospectus in reliance upon the report of KPMG, independent auditors,
appearing elsewhere herein, and upon the authority of said firm as experts in
accounting and auditing.
The report of KPMG on the December 31, 1993 and September 30, 1994 financial
statements of Kosmos TV contains an explanatory paragraph that states that
Kosmos TV's recurring losses from operations and net capital deficiency raise
substantial doubt about Kosmos TV's ability to continue as a going concern. The
financial statements do not include any adjustments that might result from the
outcome of that uncertainty.
The audited consolidated financial statements and related schedules of
Sterling as of March 31, 1995 and 1994 and for each of the fiscal years ended
March 31, 1995, 1994, and 1993, included herein and elsewhere in this Joint
Proxy Statement/Prospectus have been audited by Arthur Andersen LLP, independent
public accountants, as indicated in their reports with respect thereto, and are
included herein in reliance upon the authority of said firm as experts in giving
said reports.
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GLOSSARY
The following is a glossary of frequently used terms in the Joint Proxy
Statement/Prospectus. This glossary is qualified in its entirety by reference to
the Joint Proxy Statement/Prospectus.
ACTAVA: The Actava Group Inc., a Delaware corporation.
ACTAVA AVERAGE CLOSING PRICE: average of the closing sale prices for the
Common Stock as officially reported on the NYSE for the last 20 consecutive
trading days ending on the business day immediately prior to the Determination
Date.
ACTAVA-METROMEDIA CREDIT AGREEMENT: Credit Agreement dated as of October 11,
1994 between Actava and Metromedia pursuant to which Actava agreed to make
certain loans to Metromedia in an amount not to exceed an aggregate of $55
million.
ACTAVA-ROADMASTER EXCHANGE TRANSACTION: the sale of Actava's four sporting
goods subsidiaries to Roadmaster effective as of December 6, 1994.
ACTAVA SPECIAL MEETING: the Special Meeting of the Stockholders of Actava to
be held on November 1, 1995.
ACTAVA STOCKHOLDERS: holders of Common Stock.
ALEX. BROWN: Alex. Brown & Sons Incorporated, financial advisor to the Orion
Special Committee.
AMENDMENTS: the amendment and restatement in its entirety of the Initial
Merger Agreement and the amendment of certain related ancillary agreements by
Orion, Actava, MITI and Sterling.
AMEX: the American Stock Exchange, Inc.
BANK GUARANTEE: Guarantee delivered to the Banks by Metromedia and John W.
Kluge under the Third Restated Credit Agreement.
BANKRUPTCY PERIOD: the period from the Filing Date to November 5, 1992.
BANKS: the banks that are parties to the Third Amended and Restated Credit
Agreement with Orion.
CHEMICAL: Chemical Bank.
CLASS A COMMON STOCK: Class A Common Stock, par value $1.00 per share, of
the Surviving Corporation. At the time of the Initial Merger Agreement, it was
contemplated the Class A Common Stock would be issued to the Metromedia Holders.
CODE: the Internal Revenue Code of 1986, as amended.
COMMISSION: the Securities and Exchange Commission.
COMMON STOCK: the common stock, par value $1.00 per share, of Actava.
CONTRIBUTION AGREEMENT: the contribution agreement among Actava and the
Metromedia Holders to be executed at the Effective Time.
COPS: as part of New MITI's anticipated financing arrangements, up to $29.9
million of certificates of participation in Loans to be provided to ITI and
ITISPS, which certificates are expected to be placed with institutional
investors by the Placement Agent.
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COURT: the United States Bankruptcy Court for the Southern District of New
York.
CREDITOR NOTES: the Creditor Notes of Orion due March 1, 1999.
DAVIS POLK: Davis Polk & Wardwell, independent counsel to the Orion Special
Committee.
DELAWARE COURT: the Delaware Court of Chancery.
DGCL: the Delaware General Corporation Law.
DETERMINATION DATE: The day five days before the Meetings on which the Orion
Exchange Ratio, the MITI Exchange Ratio, and the Sterling Exchange Ratio will be
determined, or if such day is not a business day, the business day immediately
preceding such date.
DISCLOSURE STATEMENT: the Disclosure Statement for Orion's Modified Third
Amended Joint Consolidated Plan of Reorganization.
EFFECTIVE TIME: the date on which the Mergers are effective.
EVENT OF DEFAULT: an Event of Default as specified pursuant to the
indentures under which the Creditor Notes and Talent Notes were issued.
EXCHANGE ACT: the Securities Exchange Act of 1934.
EXCHANGE OFFERS: exchange offers for the Orion Subordinated Indebtedness and
certain of Actava's indebtedness that were contemplated as part of the Surviving
Corporation's refinancing plan at the time the Merging Parties' Boards of
Directors considered the Initial Merger Agreement.
EXCHANGE RATIO: the Orion Exchange Ratio, the Sterling Exchange Ratio and
the MITI Exchange Ratio.
FILING DATE: December 11 and 12, 1991, the dates Orion and certain of its
subsidiaries filed for bankruptcy protection pursuant to Chapter 11 of the
United States Bankruptcy Code.
FIRST BOSTON: CS First Boston Corporation, financial advisor to Actava in
connection with the Mergers.
GKM: Gerard Klauer Mattison & Co., L.L.C. financial advisor to MITI in
connection with the MITI Merger.
GOVERNANCE AMENDMENTS: certain of the Amendments relating to the Surviving
Corporation's governance.
HOULIHAN LOKEY: Houlihan, Lokey, Howard & Zukin, Sterling's financial
advisor in connection with the Sterling Merger.
INITIAL MERGER AGREEMENT: the original Merger Agreement dated as of April
12, 1995 among Actava, Orion, MITI and Sterling.
ITI: International Telcell, Inc., a Delaware corporation and a wholly-owned
subsidiary of MITI.
LOANS: as part of New MITI's anticipated financing arrangements, up to $29.9
million of loans to be provided by OPIC to ITI and ITISPS and interests of which
will be evidenced by the COPs, which are expected to be placed with
institutional investors by the Placement Agent.
MANDATORY MINIMUMS: certain mandatory minimum amounts specified in certain
of Orion's indentures for the Creditor Notes and Talent Notes.
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MEETINGS: the Actava Special Meeting, the Orion Special Meeting and the
Sterling Special Meeting.
MERGER AGREEMENT: Amended and Restated Agreement and Plan of Merger, dated
as of September 27, 1995, among Orion, Actava, OPC Mergerco, MITI Mergerco, MITI
and Sterling.
MERGERS: the Orion Merger, the Sterling Merger and the MITI Merger.
MERGING PARTIES: the parties to the Merger Agreement: Actava, Orion, MITI
and Sterling.
MET INTERNATIONAL: Met International, Inc., an affiliate of Metromedia.
METPRODUCTIONS: MetProductions, Inc., an affiliate of Metromedia.
METROMEDIA: Metromedia Company, a Delaware general partnership.
METROMEDIA HOLDERS: Metromedia, its two general partners, John W. Kluge and
Stuart Subotnick, Met International, Met Telcell and MetProductions, each of
which is a corporation controlled by Messrs. Kluge and Subotnick.
METROMEDIA INTERNATIONAL GROUP: the Surviving Corporation.
MET TELCELL: Met Telcell, Inc., an affiliate of Metromedia.
MII: Metromedia International, Inc., a Delaware corporation.
MIG CREDIT FACILITY: a revolving credit facility that the Surviving
Corporation will enter into with an affiliate of Chemical at the Effective Time
for up to $35 million based on a percentage of the Surviving Corporation's
investment in the Roadmaster Common Stock.
MITI: Metromedia International Telecommunications, Inc., a Delaware
corporation.
MITI ACTION BY WRITTEN CONSENT: the action in accordance with Section 228 of
the DGCL which MITI Stockholders will be asked to take in order to approve and
adopt the Merger Agreement.
MITI CERTIFICATE: MITI's Certificate of Incorporation.
MITI COMMON STOCK: common stock, par value $.001 per share, of MITI.
MITI EXCHANGE RATIO: the number of shares of Common Stock each holder of
MITI Common Stock will be entitled to receive in exchange for a share of MITI
Common Stock at the Effective Time.
MITI MERGER: MITI's merger with and into MITI Mergerco, with MITI Mergerco
being the surviving corporation.
MITI MERGERCO: a newly formed, wholly-owned subsidiary of Actava, which MITI
will merge with and into pursuant to the MITI Merger and which will be the
Surviving Corporation of the MITI Merger.
MITI OPTIONS: options and other rights to purchase shares of MITI Common
Stock.
MITI STOCKHOLDERS: holders of MITI Common Stock.
MITI STOCKHOLDERS' AGREEMENT: Stockholders' Agreement dated as of August 15,
1994, by and among MITI and each of its stockholders.
NASDAQ/NMS: the Nasdaq National Market of the National Association of
Securities Dealers, Inc.
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NEW MITI: MITI Mergerco, which will continue the business and operations of
MITI.
NEW ORION: Orion Mergerco, which will continue the business and operations
of Orion and Sterling.
NEW ORION CREDIT FACILITY: a credit facility that New Orion will enter into
with Chemical at the Effective Time consisting of the Term Loan and the
revolving Credit Facility.
NEW SNAPPER: a newly formed subsidiary of the Surviving Corporation to which
the Surviving Corporation will transfer all of the assets of its Snapper
division, which will continue the business and operations of its Snapper
division.
NYSE: the New York Stock Exchange.
OHEC: Orion Home Entertainment Corporation, a wholly owned subsidiary of
Orion.
OHV: Orion Home Video, a division of OHEC.
OPC MERGERCO: a newly formed, wholly-owned subsidiary of Actava, which Orion
will merge with and into pursuant to the Orion Merger and which will be the
Surviving Corporation of the Orion Merger.
OPIC: Overseas Private Investment Corporation, a United States governmental
agency which provides to United States investors insurance against
appropriation, political violence and loss of business income in more than 130
developing nations.
ORION: Orion Pictures Corporation, a Delaware corporation.
ORION CERTIFICATE: Orion's Restated Certificate of Incorporation.
ORION COMMON STOCK: the common stock, par value $.25 per share, of Orion.
ORION EXCHANGE RATIO: the number of shares of Common Stock each holder of
Orion Common Stock will be entitled to receive in exchange for a share of Orion
Common Stock at the Effective Time.
ORION MERGER: Orion's merger with and into OPC Mergerco, with OPC Mergerco
being the surviving corporation.
ORION SENIOR INDEBTEDNESS: Orion's obligations to the Banks under the Third
Restated Credit Agreement and to Sony pursuant to a letter agreement entered
into by Orion in connection with the Plan.
ORION SPECIAL COMMITTEE: a special committee of independent directors of the
Orion Board of Directors formed to consider the terms of the Merger Agreement,
including the Orion Merger, and make a recommendation to the full Board of
Directors of Orion regarding the Merger Agreement.
ORION SPECIAL MEETING: the Special Meeting of the Stockholders of Orion to
be held on November 1, 1995.
ORION SUBORDINATED INDEBTEDNESS: collectively, the Talent Notes, the
Creditor Notes and the 10% Debentures.
ORION STOCKHOLDERS: holders of Orion Common Stock.
PLACEMENT AGENT: an affiliate of Chemical that has agreed to place the COPs
with institutional investors, subject to the terms and conditions of a
commitment letter related thereto.
PLAN: Orion's Modified Third Amended Joint Consolidated Plan of
Reorganization.
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PLAN CONFIRMATION DATE: October 20, 1992, the date the Plan was confirmed.
PLAN EFFECTIVE DATE: November 5, 1992, the date the Plan became effective.
PREFERENCE STOCK: the Preference Stock, without par value, of Actava.
PREFERRED STOCK: the Preferred Stock, par value $1.00 per share, of Actava.
REGISTRATION RIGHTS AGREEMENT: the registration rights agreement among
Actava and the Metromedia Holders.
REGISTRATION STATEMENT: the Registration Statement on Form S-4 and the
exhibits thereto.
REIMBURSEMENT AGREEMENT: Reimbursement Agreement dated as of October 20,
1992, among Orion, Metromedia and John W. Kluge, providing for, among other
things, the reimbursement by Orion of Metromedia and/or Mr. Kluge if Metromedia
and/or Mr. Kluge make certain payments on Orion's behalf under the Bank
Guarantee or to Sony.
REVOLVING CREDIT FACILITY: a revolving credit facility which New Orion will
enter into at the Effective Time with Chemical for up to $50 million, including
a $10 million letter of credit subfacility, which will be personally guaranteed
by John W. Kluge, Stuart Subotnick and John D. Phillips.
ROADMASTER: Roadmaster Industries, Inc., a Delaware corporation. Actava owns
approximately 39% of the outstanding shares of the Roadmaster Common Stock.
ROADMASTER COMMON STOCK: the common stock $.01 par value, of Roadmaster.
SHARE EXCHANGE: the contemplated transaction pursuant to which the
Metromedia Holders were to exchange with the Surviving Corporation all of their
shares of Common Stock received in the Mergers for an equivalent number of
shares of Class A Common Stock.
SHARE EXCHANGE AGREEMENT: the agreement pursuant to which the Share Exchange
was to be effectuated.
SHELF-REGISTRATION: a Form S-3 Registration Statement pursuant to Rule 415
under the Securities Act of the Surviving Corporation which will be declared
effective on or prior to the Effective Time and will register the Metromedia
Holders' shares of Common Stock.
SHOWTIME: Showtime Networks Inc.
SHOWTIME AGREEMENT: a licensing agreement Orion entered into with Showtime
during fiscal 1994 and 1993.
SHOWTIME SETTLEMENT: the settlement between Orion and Showtime, settling
certain litigations and disputes, which was approved by the United States
District Court for the Southern District of New York on March 12, 1994, and
became effective on the same date.
SNAPPER: Snapper Power Equipment Company, a division of Actava.
SONY: Sony Pictures Entertainment Corp.
SONY THEATRICAL AGREEMENT: an agreement to distribute motion pictures in
foreign countries that Orion entered into with Sony in February 1990.
SONY VIDEO AGREEMENT: a licensing agreement Orion entered into with Sony in
February 1990.
STERLING: MCEG Sterling Incorporated, a Delaware corporation.
STERLING CERTIFICATE: Sterling's Certificate of Incorporation.
222
<PAGE>
STERLING COMMON STOCK: the common stock, par value $.001 per share, of
Sterling.
STERLING EXCHANGE RATIO: the number of shares of Common Stock each holder of
Sterling Common Stock will be entitled to receive in exchange for a share of
Sterling Common Stock at the Effective Time.
STERLING MERGER: Sterling's merger with and into Actava, with Actava being
the surviving corporation.
STERLING SPECIAL MEETING: the Special Meeting of the Stockholders of
Sterling to be held on November 1, 1995.
STERLING STOCKHOLDERS: holders of Sterling Common Stock.
STERLING VOTING TRUST: trust which holds 6,400,000 shares of the outstanding
shares of Sterling Common Stock.
SURVIVING CORPORATION: Metromedia International Group, Inc., a Delaware
corporation.
SURVIVING CORPORATION RESTATED CERTIFICATE: the Restated Certificate of
Incorporation of the Surviving Corporation.
TAC: TAC, Inc., a Delaware corporation formed by John W. Kluge, Stuart
Subotnick, and John D. Phillips which commenced a tender offer for Triton.
TALENT NOTES: the Talent Notes of Orion due March 1, 1999.
10% DEBENTURES: the 10% Subordinated Debentures of Orion due October 31,
2001.
TERM LOAN: a secured term loan of up to $135 million provided by Chemical to
New Orion.
THIRD RESTATED CREDIT AGREEMENT: the Third Amended and Restated Credit
Agreement among Orion and the Banks.
TRITON: Triton Group Ltd., a Delaware corporation.
TRITON STOCKHOLDER AGREEMENT: the restated stockholders agreement among
Triton and Actava.
UNRELEASED FILMS: 10 substantially completed but unreleased films owned by
Orion at the Plan Effective Time.
223
<PAGE>
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<S> <C>
Orion Pictures Corporation Consolidated Financial Statements........................ F-2
Metromedia International Telecommunications, Inc. and Subsidiaries Financial
Statements........................................................................ F-44
Kosmos TV Financial Statements...................................................... F-72
MCEG Sterling Incorporated Consolidated Financial Statements........................ F-88
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT AUDITORS
The Board of Directors and Stockholders
ORION PICTURES CORPORATION:
We have audited the consolidated balance sheets of Orion Pictures
Corporation and subsidiaries as of February 28, 1995 and 1994, and the related
consolidated statements of operations, common stock, paid-in surplus and
accumulated deficit and cash flows for each of the years in the three-year
period ended February 28, 1995. In connection with our audits of the
consolidated financial statements, we also have audited the consolidated
financial statement Schedule II--Valuation and Qualifying Accounts. These
consolidated financial statements and the consolidated financial statement
schedule are the responsibility of the Company's management. Our responsibility
is to express an opinion on these consolidated financial statements and the
consolidated financial statement schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Orion
Pictures Corporation and subsidiaries as of February 28, 1995 and 1994, and the
results of their operations and their cash flows for each of the years in the
three-year period ended February 28, 1995, in conformity with generally accepted
accounting principles. Also in our opinion, the related consolidated financial
statement schedule when considered in relation to the basic consolidated
financial statements taken as a whole, presents fairly, in all material
respects, the information set forth therein.
As discussed in Note 10 of notes to consolidated financial statements, the
Company is a defendant in litigation with a producer who alleges various
breaches of agreements by the Company in its distribution of certain motion
pictures which the plaintiff produced. The complaint seeks an accounting and
damages for alleged improper accounting practices resulting in an underpayment
of substantial amounts to the producer. It is not possible to assess the
ultimate damages, if any, at this time.
The accompanying consolidated financial statements have been prepared
assuming that the Company will continue as a going concern. As more fully
discussed in Notes 6 and 12 of notes to consolidated financial statements, the
Company has certain Mandatory Minimum amounts (as defined in Note 6 of notes to
consolidated financial statements ("Note 6")), that are due within the next year
under the terms of its Indentures (as defined in Note 6). Based upon current
estimates of available cash flow, the Company does not believe it will have
sufficient cash to make these payments as they become due. In order to meet such
obligations, the Company must obtain a waiver, refinance its existing
Indentures, or obtain additional sources of financing. This condition raises
substantial doubt about the Company's ability to continue as a going concern.
Management's plans in regard to these matters are also described in Note 12 of
notes to consolidated financial statements. The consolidated financial
statements do not include any adjustments that might result from the outcome of
this uncertainty.
As discussed in Note 8 of notes to the consolidated financial statements,
the Company adopted the provisions of the Financial Accounting Standards Board's
Statement of Financial Accounting Standard No. 109. "Accounting for Income
Taxes" in fiscal 1994.
KPMG PEAT MARWICK LLP
Los Angeles, CA
April 12, 1995
F-2
<PAGE>
ORION PICTURES CORPORATION
(Debtor-in-Possession from December 11, 1991 to November 5, 1992--Note 1)
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER-SHARE AMOUNTS)
<TABLE><CAPTION>
FISCAL YEARS ENDED IN FEBRUARY,
---------------------------------
1995 1994 1993
-------- --------- --------
<S> <C> <C> <C>
Revenues..................................................... $191,244 $ 175,662 $222,318
Cost of rentals.............................................. 187,477 243,030 214,812
-------- --------- --------
Gross profit (loss).......................................... 3,767 (67,368) 7,506
Other costs and expenses:
Selling, general and administrative........................ 22,045 21,639 30,454
Interest expense, net (contractual interest of $52,952 for
the fiscal year ended in February 1993).................. 29,082 32,296 23,533
-------- --------- --------
Loss before chapter 11 reorganization items and provision for
income taxes............................................... (47,360) (121,303) (46,481)
Chapter 11 reorganization items.............................. 1,610 1,793 20,792
-------- --------- --------
Loss before provision for income taxes....................... (48,970) (123,096) (67,273)
Provision for income taxes................................... 1,300 2,100 5,700
-------- --------- --------
Loss before extraordinary gains recognized upon emergence
from chapter 11............................................ (50,270) (125,196) (72,973)
Extraordinary gains recognized upon emergence from chapter
11, net of income taxes.................................... -- -- 323,213
-------- --------- --------
-------- --------- --------
Net income (loss)............................................ $(50,270) $(125,196) $250,240
-------- --------- --------
-------- --------- --------
Income (loss) per common share:
Loss before extraordinary gains............................ $ (2.51) $ (6.26) $ (11.29)
-------- --------- --------
-------- --------- --------
Net income (loss).......................................... $ (2.51) $ (6.26) $ 38.70
-------- --------- --------
-------- --------- --------
</TABLE>
See accompanying notes to consolidated financial statements.
F-3
<PAGE>
ORION PICTURES CORPORATION
(Debtor-in-Possession from December 11, 1991 to November 5, 1992--Note 1)
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
<TABLE><CAPTION>
FEBRUARY 28, FEBRUARY 28,
1995 1994
------------ ------------
<S> <C> <C>
ASSETS:
Cash and cash equivalents (Notes 2 and 6)........................... $ 26,190 $ 37,114
Accounts receivable, net............................................ 59,710 81,981
Film inventories.................................................... 249,674 367,152
Other assets........................................................ 16,014 21,767
------------ ------------
$351,588 $508,014
------------ ------------
------------ ------------
LIABILITIES AND SHAREHOLDERS' EQUITY (CAPITAL DEFICIENCY):
Accounts payable.................................................... $ 1,107 $ 1,681
Accrued expenses.................................................... 32,455 40,906
Participations and residuals........................................ 45,927 50,595
Notes and subordinated debt (including $19,544 due majority
shareholder at February 28, 1995)................................. 212,079 274,501
Deferred revenues................................................... 68,487 98,528
Commitments and contingencies (Note 11)
Liquidity (Note 12)
Shareholders' equity (capital deficiency):
Common Stock, $.25 par value, authorized 100,000,000 shares,
issued and outstanding 20,000,000 shares........................ 5,000 5,000
Paid-in surplus................................................... 265,811 265,811
Accumulated deficit............................................... (279,278) (229,008)
------------ ------------
Total shareholders' equity (capital deficiency)................. (8,467) 41,803
------------ ------------
$351,588 $508,014
------------ ------------
------------ ------------
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
<PAGE>
ORION PICTURES CORPORATION
(Debtor-in-Possession from December 11, 1991 to November 5, 1992--Note 1)
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE><CAPTION>
FISCAL YEARS ENDED IN FEBRUARY,
---------------------------------
1995 1994 1993
-------- --------- --------
<S> <C> <C> <C>
Operations:
Loss before chapter 11 reorganization items and provision
for income taxes........................................ $(47,360) $(121,303) $(46,481)
Provision for income taxes................................ 1,300 2,100 5,700
-------- --------- --------
Loss exclusive of chapter 11 reorganization items......... (48,660) (123,403) (52,181)
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.............................. 140,318 199,219 161,173
Amortization of bank guarantee.......................... 4,951 5,625 2,243
Amortization of debt discounts and costs................ 12,153 12,314 7,345
Depreciation and amortization........................... 767 708 1,511
Decrease in accounts receivable......................... 22,271 15,718 49,796
Decrease in accounts payable............................ (574) (2,418) (2,168)
Decrease in accrued expenses............................ (5,476) (5,291) (23,115)
Accrual of participations and residuals................. 25,628 17,392 28,871
Payments of participations and residuals................ (32,353) (27,306) (14,340)
Decrease in deferred revenues........................... (30,041) (2,476) (6,551)
-------- --------- --------
Cash provided by operations exclusive of chapter 11
reorganization items................................ 88,984 90,082 152,584
Payments of chapter 11 reorganization items........... (1,610) (1,793) (23,438)
-------- --------- --------
Cash provided by operations........................... 87,374 88,289 129,146
-------- --------- --------
Investment activities:
Investment in film inventories............................ (22,840) (67,481) (7,348)
Additions to property and equipment....................... (1,198) (785) (177)
Decrease in other assets.................................. 1,233 4,263 3,046
-------- --------- --------
Cash used in investment activities.................... (22,805) (64,003) (4,479)
-------- --------- --------
Financing activities:
Additions to notes and subordinated debt.................. 19,544 -- --
Payments on notes and subordinated debt................... (95,037) (64,711) (83,688)
Sale of common stock to majority shareholder.............. -- -- 15,000
-------- --------- --------
Cash used in financing activities..................... (75,493) (64,711) (68,688)
-------- --------- --------
Net increase (decrease) in cash............................. (10,924) (40,425) 55,979
Cash and cash equivalents at beginning of year.............. 37,114 77,539 21,560
-------- --------- --------
Cash and cash equivalents at end of year.................... $ 26,190 $ 37,114 $ 77,539
-------- --------- --------
-------- --------- --------
</TABLE>
See accompanying notes to consolidated financial statements
F-5
<PAGE>
ORION PICTURES CORPORATION
(Debtor-in-Possession from December 11, 1991 to November 5, 1992--Note 1)
CONSOLIDATED STATEMENTS OF COMMON STOCK, PAID-IN SURPLUS
AND ACCUMULATED DEFICIT
(IN THOUSANDS)
<TABLE><CAPTION>
THREE YEARS ENDED FEBRUARY 28, 1995
--------------------------------------------------
COMMON STOCK
-----------------------
NUMBER OF PAID-IN ACCUMULATED
SHARES AMOUNT SURPLUS DEFICIT
------------ ------- -------- -----------
<S> <C> <C> <C> <C>
Balances, February 29, 1992................... 22,508,600 $ 5,627 $185,101 $ (354,052)
Net income.................................... -- -- -- 250,240
Emergence from chapter 11:
Redemption of previously outstanding Common
Stock..................................... (22,508,600) (5,627) -- --
Issuances of Common Stock:
To holders of previously outstanding
preferred and Common Stock.............. 180,000 45 5,656 --
To holders of previously outstanding
subordinated debt....................... 9,800,000 2,450 23,030 --
To majority shareholder................... 10,020,000 2,505 23,547 --
Benefit of exchange with majority
shareholder............................... -- -- 28,477 --
------------ ------- -------- -----------
Balances, February 28, 1993................... 20,000,000 5,000 265,811 (103,812)
Net loss...................................... -- -- -- (125,196)
------------ ------- -------- -----------
Balances, February 28, 1994................... 20,000,000 5,000 265,811 (229,008)
Net loss...................................... -- -- -- (50,270)
------------ ------- -------- -----------
Balances, February 28, 1995................... 20,000,000 $ 5,000 $265,811 $ (279,278)
------------ ------- -------- -----------
------------ ------- -------- -----------
</TABLE>
See accompanying notes to consolidated financial statements.
F-6
<PAGE>
ORION PICTURES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION, DESCRIPTION OF THE BUSINESS AND SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES
BASIS OF PRESENTATION
On December 11 and 12, 1991 (the "Filing Date"), Orion Pictures Corporation
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."
The Company's consolidated financial statements were prepared on a going
concern basis during the Bankruptcy Period, which contemplates the realization
of assets and the satisfaction of liabilities in the normal course of business.
See Note 2 for a description of significant adjustments that were recorded
during the year ended February 28, 1993 to reflect the Company's emergence from
chapter 11 in accordance with the terms of the Plan.
DESCRIPTION OF THE BUSINESS
The business activities of the Company constitute a single business segment,
filmed entertainment, which, included the financing, production and distribution
of theatrical motion pictures. The terms of the Plan severely limit the
Company's ability to finance and produce additional theatrical motion pictures.
Therefore, the Company's primary activity is the ongoing distribution of its
present library of theatrical motion pictures and television programming. The
Company believes the lack of a continuing flow of newly produced theatrical
product has adversely affected the marketability of its library.
Theatrical motion pictures were produced initially for exhibition in
theaters. Initial theatrical release generally occurs in the United States and
Canada. Foreign theatrical exhibition generally begins within the first year
after initial release. Home video distribution in all territories usually begins
six to twelve months after theatrical release in that territory, with pay
television exploitation beginning generally six months after initial home video
release. Exhibition of the Company's product on network and on other free
television outlets begins generally three to five years from the initial
theatrical release date in each territory.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation
The consolidated financial statements include the accounts of the Company
and its domestic and foreign subsidiaries, most of which are wholly owned. All
significant intercompany transactions and accounts have been eliminated. The
consolidated financial statements for the years ended February 28,
F-7
<PAGE>
ORION PICTURES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
1. BASIS OF PRESENTATION, DESCRIPTION OF THE BUSINESS AND SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES--(CONTINUED)
1994 and February 28, 1993 ("fiscal 1994" and "fiscal 1993", respectively),
contain certain reclassifications to conform to the presentation for the year
ended February 28, 1995 ("fiscal 1995").
Cash and Cash Equivalents
Cash equivalents consists of highly liquid instruments with original
maturities of one month or less.
Revenue Recognition
Revenue from the theatrical distribution of films is recognized as the films
are exhibited. Distribution of the Company's films to the home video market in
the United States and Canada is effected through Orion Home Video ("OHV"), a
division of Orion Home Entertainment Corporation, a wholly-owned subsidiary.
OHV's home video revenue, less a provision for returns, is recognized when the
video cassettes are shipped. Distribution of the Company's films to the home
video markets in foreign countries is generally effected through subdistributors
who control various aspects of distribution. When the terms of sale to such
subdistributors include the receipt of nonrefundable guaranteed amounts by the
Company, revenue is recognized when the film is available to the subdistributors
for exhibition or exploitation and other conditions of sale are met. When the
arrangements with such subdistributors call for distribution of the Company's
product without a minimum amount guaranteed to the Company, such sales are
recognized when the Company's share of the income from exhibition or
exploitation is earned.
Revenue from the licensing of the Company's product to networks, basic and
pay cable companies and independent television stations or groups of stations in
the United States and Canada as well as in foreign territories is recognized
when the license period begins and when certain other conditions are met. Such
conditions include the availability of such product for broadcast by the
licensee.
Film Inventories and Cost of Rentals
Theatrical and television program inventories consist of direct production
costs, production overhead and capitalized interest, print and exploitation
costs, less accumulated amortization. Film inventories are stated at the lower
of unamortized cost or estimated net realizable value. Selling costs and other
distribution costs are charged to expense as incurred.
Film inventories and estimated total costs of participations and residuals
are charged to Cost of rentals under the individual film forecast method in the
ratio that current period revenue recognized bears to management's estimate of
total gross revenue to be realized. Such estimates are re-evaluated quarterly in
connection with a comprehensive review of the Company's inventory of film
product, and estimated losses, if any, are provided for in full. Such losses
include provisions for estimated future distribution costs and fees as well as
participation and residual costs expected to be incurred.
Depreciation and Amortization
Depreciation and amortization of property and equipment (primarily
equipment) is provided using the straight line method over the estimated useful
lives of the assets. The guarantee of the Company's bank borrowings (Note 2) is
stated at its estimated fair value at the Effective Date, less accumulated
amortization. Amortization is being calculated on the effective interest method
over certain related cash flows estimated in the Plan.
F-8
<PAGE>
ORION PICTURES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
1. BASIS OF PRESENTATION, DESCRIPTION OF THE BUSINESS AND SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES--(CONTINUED)
Income (Loss) per Common Share
Pursuant to the Plan (Note 2), all 22,508,600 shares of the Company's
previously outstanding common stock and 7,237 shares of the Company's previously
outstanding preferred stock were canceled at the Effective Date and the holders
of such stock received 160,000 and 20,000 shares (0.8% and 0.1%), respectively,
of the reorganized Company's 20,000,000 newly issued common shares. All
outstanding options to purchase common stock pursuant to the Company's stock
option plans (Note 7) were also canceled.
Per-share amounts presented on the Company's consolidated statements of
operations are computed by dividing, Loss before extraordinary gains and Net
income (loss) each as reduced by preferred and preference dividends and, when
applicable, increased by pro-forma reductions in interest expense (net of tax)
resulting from the assumed exercise of stock options and warrants when such
securities were outstanding (Note 7) and the resulting assumed reduction of
outstanding indebtedness, by the weighted average number of common and dilutive
common equivalent shares outstanding during each period. Reported per-share
amounts are based on 20,000,000, 20,000,000 and 6,465,000 common and common
equivalent shares in fiscal 1995, 1994, and 1993, respectively.
Fully diluted per-share amounts are not presented because the dilutive
effect of the Company's other potentially dilutive securities (the Series B
Preferred Stock) was immaterial for all reported periods.
If the Plan had become effective on March 1, 1992, Loss per share for the
year ended February 28, 1993 would have been $4.54 per share. Such pro-forma
per-share amount is based on the assumption that the 20,000,000 shares of the
reorganized Company's common shares that have been issued pursuant to the Plan,
the 10% Subordinated Debentures, the Talent Notes, the Creditor Notes, the
payment obligation to Sony and the guarantee of bank borrowings (Notes 2 and 6)
had all been outstanding during the entire period.
Financial Instruments
The estimated fair values of cash, accounts receivable, accounts payable and
accrued expenses approximate their carrying values because of the short maturity
of these instruments. The carrying value of receivables with maturities greater
than one year have been discounted and if such receivables were discounted based
on current market rates, the fair value of these receivables would not be
materially different than their carrying value. Because the Company's bank debt
is a floating interest rate instrument, it is assumed that the carrying value
would approximate fair value. The remaining debt (i.e., 10% Subordinated
Debentures, Talent Notes, Creditor Notes and other obligations) does not have a
ready market. These debt instruments are shown on a discounted basis (see Note 2
and 6) using market rates applicable at the Effective Date. If such debt were
discounted based on current market rates, the fair value of this debt would not
be materially different than its carrying value.
2. FINANCIAL REPORTING UPON EMERGENCE FROM CHAPTER 11
The Plan contains certain provisions that resulted in the recording of
significant adjustments to the Company's consolidated financial statements upon
the Company's emergence from chapter 11. In accordance with the provisions of
Statement of Position 90-7, "Financial Reporting by Entities in
F-9
<PAGE>
ORION PICTURES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
2. FINANCIAL REPORTING UPON EMERGENCE FROM CHAPTER 11--(CONTINUED)
Reorganization Under the Bankruptcy Code", issued by the American Institute of
Certified Public Accountants ("SOP 90-7"), the Company did not adopt fresh-start
reporting upon consummation of the Plan. The Company did not qualify for
fresh-start reporting because even though the majority shareholder's former
ownership of approximately 68% of the Company's common stock was reduced to
under 1%, the majority shareholder and its affiliate purchased a majority of the
Company's common stock that was issued pursuant to the Plan (as described below)
and, thus, in excess of 50% of the Company's common stock is owned by the
majority shareholder and its affiliate both before and after the consummation of
the Plan.
The most significant adjustments that were recorded during the year ended
February 28, 1993 to reflect the Company's emergence from chapter 11 in
accordance with the terms of the Plan were: 1) to account for the exchange by
the Company's subordinated debtholders of all previously outstanding
subordinated debt of the Company for a 49% equity interest in the Company as
well as new $50,000,000 initial principal amount of 10% nine-year subordinated
debentures ("10% Subordinated Debentures"); 2) to account for the delivery by
the Company's majority shareholder and its affiliate of a guarantee of bank
borrowings, a contribution of the majority shareholder's interest in "MERMAIDS"
described below to the Company and the contribution by such affiliate of
$15,000,000 in cash in exchange for 50.1% of the equity interest in the Company;
and 3) to restate liabilities compromised by the Plan at the estimated present
value of amounts to be paid. These adjustments, which are described below, were
recorded based upon estimates of the fair values of: 1) the equity interests in
the Company distributed to the Company's majority shareholder and its affiliate
and holders of the Company's previously outstanding subordinated notes and
debentures and the holders of the previously outstanding common and preferred
stock; 2) the 10% Subordinated Debentures being issued to holders of the
Company's previously outstanding subordinated notes and debentures; 3) the
guarantee of bank borrowings received from the Company's majority shareholder
and its affiliate; 4) a non-interest bearing payment obligation of the Company
to a subsidiary of Sony Pictures Entertainment, Inc. ("Sony") pursuant to
revisions made in the Company's foreign home video licensing agreement with Sony
described below; and 5) the Talent Notes and the Creditor Notes (both as defined
in the Plan) being issued to certain creditors of the Company.
The recorded fair values of the equity interests were based upon the average
"when distributed" trading price on NASDAQ of the new common stock over a
three-week period after the Effective Date. The recorded fair value of the 10%
Subordinated Debentures was derived using an effective yield of 18% based on a
survey of similar subordinated securities of other companies. The recorded fair
value of the guarantee of bank borrowings was based upon a calculation of the
estimated net present value of the interest expected to be saved over the term
of the bank borrowings due to such guarantee and has been confirmed by an
independent valuation. The recorded fair value of the Sony payment obligation
was based upon a calculation of the estimated net present value of the payment
obligation, discounted at the rate of interest being paid on the Company's bank
debt. The recorded fair values of the Talent Notes and the Creditor Notes were
based upon a comparison of the characteristics of these securities with those of
the 10% Subordinated Debentures which resulted in the assumption that their
effective yields should be 14% and 16%, respectively.
All descriptions of new securities in the Notes to Consolidated Financial
Statements refer to securities issued and, in certain cases, estimated amounts
of such securities that are yet to be issued, unless the context indicates
otherwise. Securities yet to be issued relate to disputed claims.
F-10
<PAGE>
ORION PICTURES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
2. FINANCIAL REPORTING UPON EMERGENCE FROM CHAPTER 11--(CONTINUED)
SUBORDINATED DEBT EXCHANGE
On the Effective Date, the carrying amount for financial reporting purposes
of the Company's subordinated notes and debentures was $280,714,000. The Company
did not make any payments of principal or interest on these subordinated notes
and debentures during the Bankruptcy Period. Accrued expenses on the
Consolidated Balance Sheet at the Effective Date included approximately
$30,812,000 of accrued interest on the Company's subordinated notes and
debentures that was accrued to the Filing Date.
The Company ceased accruing interest on its subordinated notes and
debentures on the Filing Date and adjusted all debt discounts related to such
securities at the Filing Date so that the carrying amount of each security was
equivalent to the related estimated allowable claim pursuant to the Bankruptcy
Code. Contractual interest shown on the Consolidated Statements of Operations
for the year ended February 28, 1993 ($52,952,000) includes approximately
$27,400,000 of interest that would have been payable on the Company's
subordinated notes and debentures from March 1, 1992 until the Effective Date.
In accordance with the terms of the Plan, all of the Company's subordinated
notes and debentures were canceled . In satisfaction of the claims for such
subordinated notes and debentures and the related accrued and unaccrued unpaid
interest, the Company distributed, pursuant to allocations in the Plan, a 49%
equity interest in the Company and new $50,000,000 initial principal amount of
10% nine-year subordinated debentures ("10% Subordinated Debentures") (Note 6)
to holders of such securities. To record this transaction, the Company removed
the carrying amount of the subordinated notes and debentures ($280,714,000) and
related accrued interest ($30,812,000) from the accounts, recorded the estimated
fair value of the 49% equity interest in the Company received by the
subordinated debtholders in the form of common stock ($25,480,000) and the
estimated fair value of the 10% Subordinated Debentures issued to those
debtholders ($37,051,000, which is the $50,000,000 initial principal amount less
a $12,949,000 discount recorded to increase the effective interest rate on the
securities to 18%) and recognized an extraordinary gain of $248,995,000.
METROMEDIA EXCHANGE
On December 12, 1990, the Company executed an agreement with MetMermaids, a
joint venture between John W. Kluge (as Trustee) and Stuart Subotnick (the
"Joint Venture") pursuant to which an interest was granted in certain of the
proceeds of "MERMAIDS", a feature length motion picture released by the Company
on December 14, 1990, in return for an investment by the Joint Venture in the
picture of approximately $23,000,000. Messrs. Kluge and Subotnick, together and
through Metromedia Company, own a majority of the Common Stock of the Company.
Participations and residuals on the Consolidated Balance Sheet at the Effective
Date included approximately $20,800,000 of amounts due to MetMermaids that had
been accrued since "MERMAIDS" was released, including approximately $700,000
that was accrued during fiscal 1993.
Upon effectiveness of the Plan, the "MERMAIDS" obligation was contributed to
the Company by Metromedia along with $15,000,000 in cash by John W. Kluge and a
guarantee by Metromedia and Mr. Kluge of the Company's bank borrowings (Note 6)
in exchange for a 50.1% equity interest in the Company. To record this
transaction, the Company removed the carrying amount of the MetMermaids
liability ($20,824,000) and related accrued interest ($705,000) from the
accounts and recorded the receipt of $15,000,000 in cash, the estimated fair
value of the guarantee of bank borrowings received
F-11
<PAGE>
ORION PICTURES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
2. FINANCIAL REPORTING UPON EMERGENCE FROM CHAPTER 11--(CONTINUED)
($18,000,000) and the estimated fair value of the 50.1% equity interest in the
Company received by Metromedia and Mr. Kluge in the form of common stock
($26,052,000). The Company realized a benefit of $28,477,000 on the exchange
which was credited directly to Paid-in surplus as a contribution to capital. The
estimated fair value of the guarantee of bank borrowings, which is classified in
Other assets on the Consolidated Balance Sheets at February 28, 1995, 1994 and
1993, is being amortized as interest expense during the period that such bank
borrowings are being repaid (Note 6).
ADJUSTMENTS OF COMPROMISED LIABILITIES--SONY SETTLEMENT
In February 1990, the Company entered into an agreement with Sony which
granted certain foreign home video distribution rights to 50 current and future
motion pictures to Sony. Under the terms of the Sony agreement, the Company was
required to meet certain minimum delivery requirements. A letter of credit was
issued to Sony for $70,000,000 which generally secured a portion of Sony's
interests in the Company's performance under the agreement and which was
supported by a portion of the amounts otherwise available to the Company under
the Company's Second Amended and Restated Credit Agreement dated as of July 27,
1990 (the "Second Restated Credit Agreement"), which, at the Effective Date of
the Plan, was superseded by the Third Amended and Restated Credit Agreement
dated as of October 20, 1992 (the "Third Restated Credit Agreement") (Note 6).
The Company's chapter 11 filings (Note 1) constituted an event of default
under the Sony agreement. In connection therewith, the Company applied certain
provisions in the Sony agreement at February 29, 1992, resulting in the
reclassification at that date of approximately $110,000,000 of advance royalties
from Deferred revenues to Accrued expenses (liabilities subject to compromise)
which significantly reduced the remaining advance royalties available to be
earned by the pictures that have been or will be delivered under the agreement.
In accordance with the terms of the Plan, the Sony agreement was amended as
of the Effective Date. The most significant changes were: 1) to reduce the
number of motion pictures licensed under the agreement from 50 to 23; 2) to
convert the $70,000,000 letter of credit described above to a $70,000,000
non-interest bearing payment obligation to Sony (the "Sony Obligation"), which
is supported by a new $70,000,000 letter of credit; 3) to limit to $9,000,000
the additional amounts that may be due to Sony based upon the performance of the
23 pictures covered by the amended agreement; and 4) an amount equal to
$5,000,000 will be secured by the above described letter of credit for
additional amounts that may be due Sony under the Sony Theatrical Agreement.
To record this transaction, the Company removed the $110,288,000 Due to Sony
amount described above from the accounts, recorded the $70,000,000 non-interest
bearing payment obligation at its estimated net present value of $63,682,000,
increased Deferred revenues related to the 23 pictures that have been or will be
delivered under the agreement by approximately $31,743,000 and recognized an
extraordinary gain on the transaction of approximately $14,863,000. A portion of
the extraordinary gain ($6,318,000) resulted from recording the non-interest
bearing payment obligation at its estimated net present value. The remainder of
the extraordinary gain ($8,545,000) represented the Company's estimate of the
benefit received by the Company in the settlement process by virtue of the
negotiation of such settlement in a chapter 11 environment.
F-12
<PAGE>
ORION PICTURES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
2. FINANCIAL REPORTING UPON EMERGENCE FROM CHAPTER 11--(CONTINUED)
ADJUSTMENTS OF COMPROMISED LIABILITIES--OTHER CREDITORS
Under the Plan, holders of claims for certain participations and residuals
aggregating approximately $55,000,000 reduced their claims by 17%, in exchange
for approximately $46,400,000 aggregate principal amount of Talent Notes. The
Talent Notes, which are due March 1, 1999, bear interest at the same rate as the
Company pays under the Third Restated Credit Agreement described in Note 6. The
holders of other unsecured claims against the Company currently aggregating
approximately $65,000,000 received or will receive 100% of their claims in the
form of non-interest bearing Creditor Notes, which are due March 1, 1999, except
for a portion of such claimants who held claims under $5,000 and who elected to
receive a partial payment in cash in lieu of such Creditor Notes. The Plan
required the Company to issue Talent Notes and Creditor Notes to the extent the
amounts were not disputed. The Company recorded estimates of amounts of Talent
Notes and Creditor Notes to be issued upon final resolution of the disputed
claims. Accordingly, adjustments to the amounts described above have been made
and will continue to be required until all disputed claims have been resolved.
The Talent Notes and Creditor Notes are both secured obligations of the Company.
To the extent that the Company generates positive Net Cash Flow (as defined
in the Third Restated Credit Agreement) (the "Net Cash Flow"), for the immediate
preceding period, the Company is required to make payments with respect to
amounts outstanding under the Talent Notes and Creditor Notes, at least
quarterly after the Effective Date, in amounts generally approximating 8 1/2%
and 3 1/4%, respectively, of the Company's Net Cash Flow until all amounts due
to Sony as described above and due under the Third Restated Credit Agreement
described in Note 6 have been paid. Thereafter, amounts generally approximating
66 2/3% and 16 2/3% of the Company's Net Cash Flow will be used to make payments
with respect to the Company's obligations under the Talent Notes and Creditor
Notes, respectively, until interest and principal under the Talent Notes are
paid in full. Subsequent to the satisfaction of the Company's obligations under
the Talent Notes, 50% of the Company's Net Cash Flow will be used to retire the
remaining obligations under the Creditor Notes.
The Company made certain accounting adjustments to reflect the above
settlements in its consolidated financial statements for the year ended February
28, 1993. Participations and residuals, accounts payable and accrued expenses
were reduced by an aggregate of $127,153,000, the Company recorded the Talent
Notes and Creditor Notes at their estimated net present values of $31,396,000
and $30,472,000 respectively, and an extraordinary gain of $59,455,000 was
recognized. The discounts recorded on the Talent Notes and Creditor Notes result
in effective interest rates on these securities of 14% and 16%, respectively.
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
Consolidated Statements of Operations for fiscal 1995, 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.
F-13
<PAGE>
ORION PICTURES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
4. ACCOUNTS RECEIVABLE AND DEFERRED REVENUES
Accounts receivable consists primarily of trade receivables due from film
distribution, including theatrical, home video, basic cable and pay television,
network, television syndication, and other licensing sources which have payment
terms generally covered under contractual arrangements. Accounts receivable is
stated net of an allowance for doubtful accounts of $14,000,000 and $14,800,000
at February 28, 1995 and 1994, respectively.
The Company has entered into contracts for licensing of theatrical and
television product to the pay cable, home video and free television markets, for
which the revenue and the related accounts receivable will be recorded in future
periods when the films are available for broadcast or exploitation. These
contracts, net of advance payments received and recorded in Deferred revenues as
described below aggregated approximately $178,000,000 at February 28, 1995.
Included in this amount is $64,000,000 of license fees for which the revenue and
the related accounts receivable will be recorded only if the Company is able to
successfully produce or acquire product under the restrictions of the Plan.
Deferred revenues consists principally of advance payments received on pay
cable, home video and other television contracts for which the films are not yet
available for broadcast or exploitation.
5. FILM INVENTORIES
The following is an analysis of film inventories (in thousands):
FEBRUARY 28, FEBRUARY 28,
1995 1994
------------ ------------
Theatrical films:
Released...................................... $240,330 $305,560
Completed and unreleased...................... -- 50,204
Television programs:
Released...................................... 9,344 11,388
------------ ------------
$249,674 $367,152
------------ ------------
------------ ------------
In late December 1991, the Company received a notice from Showtime Networks
Inc. ("Showtime") that Showtime believed that 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, 1994 and 1995 (the "Key Man Dispute"). License fees under the Showtime
agreement for these 16 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.
F-14
<PAGE>
ORION PICTURES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
5. FILM INVENTORIES--(CONTINUED)
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 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 $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 reduces 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 are expected to be 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 shown
above have been adjusted to reflect this settlement.
The Company has made substantial writeoffs to its released and unreleased
product. As a result, approximately three-quarters of the film inventories shown
above at February 28, 1995 and 1994, are stated at 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
February 28, 1998. As of February 28, 1995, approximately 61% 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.
F-15
<PAGE>
ORION PICTURES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
6. NOTES AND SUBORDINATED DEBT
Notes and subordinated debt is comprised of the following (in thousands):
<TABLE><CAPTION>
FEBRUARY 28, FEBRUARY 28,
1995 1994
------------ ------------
<S> <C> <C>
Notes payable to banks under the Third Restated Credit Agreement.... $ 58,619 $122,862
Obligation to Metromedia under Reimbursement Agreement.............. 19,544 --
Talent Notes due 1999, net of unamortized discount of $8,488 and
$9,995............................................................ 26,057 29,349
Creditor Notes due 1999, net of unamortized discount of $21,745 and
$27,722........................................................... 40,630 34,820
Non-interest bearing payment obligation to Sony, net of unamortized
discount of $1,191 and $2,783..................................... 16,756 38,735
Other guarantees and contracts payable, net of unamortized discounts
of $2,943 and $3,634.............................................. 8,124 9,297
------------ ------------
Total notes payable................................................. 169,730 235,063
------------ ------------
10% Subordinated Debentures due 2001, net of unamortized discount of
$8,097 and $10,483................................................ 42,349 39,438
------------ ------------
Total notes and subordinated debt................................... $212,079 $274,501
------------ ------------
------------ ------------
</TABLE>
The Company's Third Restated Credit Agreement became effective upon the
Effective Date of the Plan (Note 1). Approximately $190,826,000 was outstanding
under The Company's Third Restated Credit Agreement on the Effective Date. Such
amount has been reduced through repayments to approximately $46,465,000 at March
31, 1995 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 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 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.
Interest is charged under the terms of the Third Restated Credit Agreement
at the agent bank's fluctuating reference rate plus 3/4% or at 1 3/4% above the
Eurodollar Rate, at the Company's option. The agent bank's fluctuating reference
rate at February 28, 1995 was 9%.
F-16
<PAGE>
ORION PICTURES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
6. NOTES AND SUBORDINATED DEBT--(CONTINUED)
The Third Restated Credit Agreement contains various restrictive covenants,
including, among others, limitations on the incurrence of additional
indebtedness, limitations on the investment in or acquisition of new product and
a prohibition on the payment of dividends. Borrowings under the Third Restated
Credit Agreement are secured by all of the Company's assets, including the
common stock of the Company's subsidiaries. No compensating balances are
required to be maintained.
As described in Note 2, the Company issued $50,000,000 initial principal
amount of 10% subordinated debentures due 2001 (the "10% Subordinated
Debentures") to former holders of its subordinated notes and debentures pursuant
to the terms of the Plan. The 10% Subordinated Debentures are subordinated to
all Senior Indebtedness, as defined in the indenture related to such 10%
Subordinated Debentures (the "Bond Indenture"), including all bank borrowings
and amounts outstanding to Sony, the Talent Notes and Creditor Notes described
in Note 2, as well as amounts that become payable to Metromedia and its
affiliate as Metromedia and its affiliate make payments pursuant to the
guarantee of bank borrowings.
Interest on the 10% Subordinated Debentures is payable semi-annually and the
debentures are due October 31, 2001. Payment of interest and repayment of
principal amounts outstanding under the 10% Subordinated Debentures are payable
out of Net Cash Flow. As provided in the Bond Indenture, interest on the 10%
Subordinated Debentures may be paid by issuance of additional 10% Subordinated
Debentures in certain circumstances. The Bond Indenture contains various
restrictive covenants which are generally consistent with the covenants
described above with respect to the Third Restated Credit Agreement.
In accordance with the terms of the Plan, as more fully described in Note 2,
the Company had a $70,000,000 non-interest bearing payment obligation to Sony at
the Effective Date. The obligation to Sony is payable pari passu with amounts
payable under the Third Restated Credit Agreement described above and is backed
by a letter of credit issued pursuant to the Third Restated Credit Agreement.
Such amount has been reduced through repayments to approximately $13,489,000 at
March 31, 1995 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 (Note 2), the Creditors Notes (Note 2)
F-17
<PAGE>
ORION PICTURES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
6. NOTES AND SUBORDINATED DEBT--(CONTINUED)
and the 10% Subordinated Debentures (the "Holders") in payment of their
respective principal and interest. As more fully described in Note 12 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 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 the guarantor under the Bank Guarantee are paid in
full. Thereafter, the Mandatory Minimums will be reduced by 100% of the Showtime
Shortfall.
Per Indentures
Estimated Adjusted Cumulative Minimum Amounts
(in thousands)
Fiscal Year Ended
February 28(29) May August November February
- --------------------------------- -------- -------- -------- --------
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
- --------------------------------- -------- -------- -------- --------
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 ten 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, and March 1995, 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
F-18
<PAGE>
ORION PICTURES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
6. NOTES AND SUBORDINATED DEBT--(CONTINUED)
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>
MAR. DEC. OCT. SEPT. JUN. MAR. FISCAL 11/5/92
1995 1994 1994 1994 1994 1994 1994 TO 2/28/93
------- ------ ------ ------- ------- ------- ------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Third Restated Credit Agreement........... $12,154 $5,597 $2,688 $11,500 $14,188 $16,229 $39,345 $ 28,619
Metromedia Obligation..................... -- -- -- -- -- -- -- --
Sony Obligation........................... 4,458 2,053 986 4,218 5,204 5,952 17,984 10,497
Talent Notes (principal and interest)..... 1,661 765 367 1,572 1,939 2,218 5,733 3,910
Creditor Notes............................ -- -- -- 164 -- -- 1,046 1,498
10% Subordinated Debentures due 2001...... -- -- -- -- -- -- -- 977
Interest on 10% Subordinated Debentures
due 2001................................ 1,270 585 281 1,037 1,483 1,697 3,339 519
------- ------ ------ ------- ------- ------- ------- ----------
$19,543 $9,000 $4,322 $18,491 $22,814 $26,096 $67,447 $ 46,020
------- ------ ------ ------- ------- ------- ------- ----------
------- ------ ------ ------- ------- ------- ------- ----------
<CAPTION>
TOTAL
--------
<S> <C>
Third Restated Credit Agreement........... $130,320
Metromedia Obligation..................... --
Sony Obligation........................... 51,352
Talent Notes (principal and interest)..... 18,165
Creditor Notes............................ 2,708
10% Subordinated Debentures due 2001...... 977
Interest on 10% Subordinated Debentures
due 2001................................ 10,211
--------
$213,733
--------
--------
</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 of the
portion of Net Cash Flow which would otherwise be payable to holders of Creditor
Notes for nine of the ten 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 $362,000, $525,000 and $898,000, respectively, of the interest due
April 1, 1995, April 1, 1994 and October 1, 1993 related to the 10% Subordinated
Debentures was paid by the issuance of additional debentures. Also, in
accordance with the Talent Note indenture, all of the interest due for the
three-month periods ended November 30, 1994, November 30, 1993 and August 31,
1993 on the Talent Notes was paid by the issuance of additional notes
(approximately $393,000, $426,000 and $405,000, respectively). The payments on
the Sony Obligation have reduced the outstanding amount on the letter of credit
supporting such obligation to $18,489,000 at March 31, 1995.
All descriptions of securities above refer to securities issued and in
certain cases, estimated amounts of such securities that are yet to be issued.
Accordingly, during the three-month period ended November 30, 1993,
approximately $6,000,000 of Participations and residuals payable was
reclassified to Talent Notes payable. Such amount is an estimate of the amount
of such securities that will be issued in connection with the resolution of
certain claims.
During fiscal 1995, 1994, and 1993, $31,280,000, $33,067,000, and
$26,037,000, respectively, of interest costs were incurred, exclusive of
contractual amounts unaccrued pursuant to SOP 90-7. Cash utilized for the
payment of interest during fiscal 1995, 1994, and 1993 was $12,461,000,
$14,585,000, and $12,813,000, respectively.
7. SHAREHOLDERS' EQUITY (CAPITAL DEFICIENCY)
PREFERRED STOCK
On the Effective Date, in accordance with the Plan, the Company authorized
10,000,000 shares of $1.00 par value preferred stock. No shares of preferred
stock have been issued.
F-19
<PAGE>
ORION PICTURES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
7. SHAREHOLDERS' EQUITY (CAPITAL DEFICIENCY)--(CONTINUED)
STOCK OPTION PLAN
Pursuant to the Plan, all outstanding options to purchase Common Stock under
the Company's stock option plans were canceled.
8. INCOME TAXES
The Provision for income taxes for fiscal 1995, 1994, and 1993, all of which is
current, consists of the following (in thousands):
FISCAL YEARS ENDED IN
FEBRUARY,
------------------------------
1995 1994 1993
------ ------ ------
Federal...................................... $ -- $ -- $ --
State and local.............................. 100 100 300
Foreign...................................... 1,200 2,000 5,500
------ ------ ------
Current...................................... $1,300 $2,100 $5,800
Deferred..................................... -- -- --
------ ------ ------
Total........................................ $1,300 $2,100 $5,800
------ ------ ------
------ ------ ------
Such provision has been allocated to operations before extraordinary items
and extraordinary items as follows (in thousands):
FISCAL YEARS ENDED IN
FEBRUARY,
----------------------------
1995 1994 1993
------ ------ ------
Operations before extraordinary items.......... $1,300 $2,100 $5,700
Extraordinary items............................ -- -- 100
------ ------ ------
$1,300 $2,100 $5,800
------ ------ ------
------ ------ ------
The federal income tax portion of the Provision for income taxes includes
the benefit of state income taxes provided. The Company recognizes investment
tax credits on the flow-through method.
State and local income tax expense in fiscal 1995, 1994, and 1993 includes
an estimate for franchise and other state tax levies required in jurisdictions
which do not permit the utilization of the Company's fiscal 1995, 1994 and 1993
operating losses to mitigate such taxes. Foreign tax expense in fiscal 1995,
1994, and 1993 reflects estimates of withholding and remittance taxes. Cash
utilized for the payment of income taxes during fiscal 1995, 1994, and 1993 was
$1,804,000, $2,934,000, and $5,997,000, respectively.
Effective March 1, 1993, the Company adopted Statement of Financial
Accounting Standards No. 109, "Accounting for Income Taxes" ("SFAS 109"). SFAS
109 requires a change to the "assets and liability method" of accounting for
income taxes from the "deferred method" of accounting for income taxes which was
required under Accounting Principles Board Opinion No. 11 ("APB 11"). Under SFAS
109, deferred tax assets and liabilities are recognized with respect to the tax
consequences attributable to differences between the financial statement
carrying values and the tax bases of existing assets and liabilities. Deferred
tax assets and liabilities are measured using enacted tax rates expected to
apply to the taxable income in the years in which these temporary differences
are expected to be
F-20
<PAGE>
ORION PICTURES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
8. INCOME TAXES--(CONTINUED)
recovered or settled. Further, the effect on deferred tax assets and liabilities
of a change in tax rates is recognized in income in the period that includes the
enactment date. Under the deferred method, deferred taxes were not adjusted for
subsequent changes in tax rates.
Pursuant to the deferred method of accounting for income taxes required by
APB 11, applicable in the years prior to the fiscal year ended February 28,
1994, deferred taxes were provided for timing differences between financial
statement and tax return recognition of income and expenses. Although timing
differences arose during periods prior to fiscal 1994, any future taxes payable
would have been offset by tax benefits resulting from the use of losses from
such years, and accordingly, no deferred taxes were provided. The principal
timing difference that arose during those periods relates to the recognition of
revenues from licensing agreements.
The Company's results of operations was not impacted by the change in method
of accounting for income taxes resulting from the adoption of SFAS 109 in the
current year. Deferred income taxes at February 28, 1995 and 1994 reflect the
impact of "temporary differences" between assets and liabilities for financial
reporting purposes and their carrying values as measured by tax laws. These
temporary differences are determined in accordance with SFAS 109 and are more
inclusive in nature than "timing differences" as determined under previously
applicable accounting principles.
The temporary differences and carryforwards which give rise to deferred tax
assets and (liabilities) for fiscal 1995 and 1994 are as follows (in thousand):
FISCAL YEARS ENDED IN
FEBRUARY,
---------------------
1995 1994
-------- --------
Net Operating loss carryforward...................... $175,731 $158,150
Deferred income...................................... 24,245 30,853
Investment credit carryforward....................... 28,000 30,000
Allowance for doubtful accounts...................... 5,600 5,897
Reserves............................................. 6,958 5,232
Other deferred tax assets............................ 11,935 25,866
Film costs........................................... (15,077) (21,608)
Shares payable....................................... 14,986 (4,017)
Other deferred tax liabilities....................... (14,863) (18,604)
Notes and debentures................................. (254) (22,038)
-------- --------
Subtotal before valuation allowance.................. 237,261 189,731
Valuation allowance.................................. (237,261) (189,731)
-------- --------
Deferred taxes....................................... $ 0 $ 0
-------- --------
-------- --------
The valuation allowance for deferred assets as of March 1, 1993 was
$186,296,000. The net change in the total valuation allowance for the year ended
February 28, 1994 was an increase in the allowance of $3,435,000.
The Company's Provision for income taxes for fiscal 1995, 1994, and 1993,
differs from the provision that would have resulted from applying the federal
statutory rates during those periods to
F-21
<PAGE>
ORION PICTURES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
8. INCOME TAXES--(CONTINUED)
Income (loss) before provision for income taxes. The reasons for these
differences are explained in the following table (in thousands):
FISCAL YEARS ENDED IN FEBRUARY,
-----------------------------------
1995 1994 1993
--------- --------- ---------
Provision (benefit) based upon federal
statutory rate of 35%, 35% and 34%
respectively........................... $ (17,140) $ (43,084) $ 87,054
State taxes, net of federal benefit...... 65 65 198
Foreign taxes in excess of federal
credit................................. 1,200 2,000 5,500
Non-deductible direct expenses of chapter
11 filing.............................. 214 596 5,709
Current year operating loss not
benefitted............................. 16,923 42,473 8,844
Extraordinary gain recognized upon
emergence from chapter 11.............. -- -- (108,877)
Reduction of operating loss from
discharge of indebtedness.............. -- -- 7,314
Other, net............................... 38 50 58
--------- --------- ---------
Provision for income taxes............... $ 1,300 $ 2,100 $ 5,800
--------- --------- ---------
--------- --------- ---------
At February 28, 1995, the Company had available net operating loss
carryforwards and unused investment tax credits of approximately $439,000,000,
and $28,000,000, respectively, which can reduce future federal income taxes. If
not utilized, these carryforwards and credits will begin to expire in 1997 and
1996, respectively.
9. REVENUE DATA
The sources of the Company's revenues from continuing operations by market
for each of the last three fiscal years 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. The following table sets
forth foreign revenues from continuing operations (excluding Canada) by major
geographic area for each of the last three fiscal years (in thousands):
FISCAL YEARS ENDED IN
FEBRUARY,
------------------------------
1995 1994 1993
------- ------- --------
Europe....................................... $36,532 $62,107 $ 80,152
Mexico and South America..................... 4,586 5,782 8,108
Asia and Australia........................... 13,820 23,876 37,522
------- ------- --------
$54,938 $91,765 $125,782
------- ------- --------
------- ------- --------
Showtime has been a significant customer of the Company. During fiscal
1995,the Company recorded $45,514,000 of revenues under its pay cable agreement
with Showtime. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and Note 5 for descriptions of certain disputes with
Showtime that have affected the amount and timing of revenues recognized under
the Showtime agreement.
F-22
<PAGE>
ORION PICTURES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
10. COMMITMENTS AND CONTINGENT LIABILITIES
The Company is obligated under various operating leases, including leases
for two office premises. Total rent expense amounted to $1,432,000, $1,489,000,
and $4,773,000, in fiscal 1995, 1994, and 1993, respectively.
Minimum rental commitments under noncancellable operating leases is set
forth in the following table (in thousands):
FISCAL YEAR AMOUNT
- ----------------------------------------- ------
1996..................................... $1,071
1997..................................... 820
1998..................................... 142
------
Total minimum rental commitments......... $2,033
------
------
The Company and certain of its subsidiaries have employment contracts with
various officers with remaining terms of less than one year at amounts
approximating their current levels of compensation. The Company's remaining
aggregate commitment at February 28, 1995 under such contracts is approximately
$1,485,000.
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 the 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 contingencies and other disputed amounts. Based upon
management's review of the underlying facts and 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 on
October 12, 1990, the plaintiff, 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".
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 has been adjourned in the Bankruptcy Court
until May 22, 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.
F-23
<PAGE>
ORION PICTURES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
11. MERGER AGREEMENT
On April 12, 1995, the Company entered into a Merger Agreement (the "Merger
Agreement") with The Actava Group Inc. ("Actava"), MCEG Sterling Incorporated
("Sterling") and Metromedia International Telecommunications ("MITI"), an
affiliate of Metromedia, which with an affiliate, beneficially owns a majority
of the Company's common stock. The Merger Agreement provides that at the
effective time of the mergers, each of the Company, Sterling and MITI will merge
with and into Actava, with Actava, renamed "Metromedia International Group,
Inc.," being the surviving corporation of the mergers. The Merger Agreement
provides that each share of the Company's outstanding common stock will be
converted as follows: (i) if the average of the last sale price for Actava's
common stock on the NYSE for the 20 consecutive trading days ending on the
business day immediately preceding the Effective Time of the mergers (the
"Average Closing Price") is greater than or equal to $10.50, each share of the
Company's outstanding common stock will be converted into a number of shares of
Actava common stock equal to a fraction, the numerator of which is 11,428,572
and the denominator of which is the number of shares of the Company's common
stock outstanding on the business day immediately preceding the Effective Time
of the mergers or (ii) if the Average Closing Price is less than $10.50, each
share of the Company's outstanding common stock will be converted into a number
of shares of Actava's common stock which can be determined by solving for "Y" in
the following formula and dividing "Y" by the number of shares of the Company's
common stock outstanding on the business day immediately preceding the Effective
Time of the mergers:
120,000,000
"Y" = ---------------------
Average Closing Price
Assuming that the effective time of the mergers was April 12, 1995, the
Company's stockholders would have exchanged each share of the Company's common
stock for .6103 shares of Actava common stock and collectively the Company's
stockholders would have been entitled to receive approximately 30.3% of the
surviving corporation's common stock. The Actava common stock to be issued to
the Company's, Sterling's and MITI's stockholders in connection with the mergers
will be identical to the shares of Actava common stock currently outstanding.
Immediately following the mergers, Metromedia and certain of its affiliates will
exchange their shares of Actava common stock received in the mergers and may
convert certain non-recourse amounts owed by the Company and its subsidiaries
and MITI and its subsidiary to affiliates of Metromedia for shares of Class A
common stock of the surviving corporation. The shares of Class A common stock
will be entitled to three votes per share on all matters voted upon by the
surviving corporation's stockholders (other than the election of directors) and
will vote as a separate class to elect 6 of the 10 members of the surviving
corporation's board of directors. 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 described above.
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 and John D. Phillips, President and Chief Executive Officer of Actava,
as President and Chief Executive Officer of the surviving corporation.
On March 2, 1995, the Company's Board of Directors formed a special
committee (the "Special Committee") to consider the terms of the Merger
Agreement and make a recommendation to the full Board of Directors of the
Company regarding the Merger Agreement. The Special Committee was formed because
the Company's Board of Directors is composed of a majority of persons who are
affiliated with Metromedia and because of the Board of Director's view that in
light of the share
F-24
<PAGE>
ORION PICTURES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
11. MERGER AGREEMENT--(CONTINUED)
exchanges described above and the simultaneous merger of MITI into Actava, the
members of the Board of Directors affiliated with Metromedia could be viewed as
having an interest in the transactions contemplated by the Merger Agreement in
addition to the interests of the Company's stockholders. The members of the
Special Committee are Michael I. Sovern, Joel R. Packer and Raymond L. Steele,
each of whom the Company considers an independent director. The Special
Committee was also authorized and did engage the services of an independent law
firm and an independent investment banking firm to offer advice and in the case
of the investment banking firm, to render a fairness opinion to the Special
Committee. The Special Committee expects to make its recommendation as to the
Merger Agreement to the full Board of Directors shortly and the full Board of
Directors intends to meet to consider the Merger Agreement promptly after
receiving the Special Committee's recommendation. The approval of the Merger
Agreement by the Company's full Board of Directors on or prior to June 30, 1995
is a condition to the consummation of the mergers contemplated by the Merger
Agreement.
The closing of each merger contemplated by the Merger Agreement is also
contingent upon the closing of the other mergers contemplated by the Merger
Agreement. In addition, the consummation of the mergers contemplated by the
Merger Agreement is subject, among other things, to approval by the Boards of
Directors and shareholders of the Company and the stockholders of Actava,
Sterling and MITI, the receipt of all required consents, the successful
refinancing of the currently outstanding amounts owed to the Company's senior
secured creditors (the Banks and Sony), and holders of Plan Debt, to the Average
Closing Price not being less than $8.25, that no material adverse change in the
business, assets, prospects, condition or results of operations of the Company,
Actava, MITI or Sterling shall have occurred since the date of the Merger
Agreement, that the shares of Actava's common stock currently outstanding and to
be issued to the stockholders of the Company, MITI and Sterling pursuant to the
Mergers shall have been accepted for listing on the New York Stock Exchange, the
American Stock Exchange or accepted for quotation on NASDAQ/NMS, the successful
completion by Actava and its due diligence of MITI, the receipt of certain
fairness opinions with respect to the mergers, and the receipt of all required
regulatory approvals, including approval with respect to the Hart-Scott-Rodino
Antitrust Improvement Act of 1976, as amended. There can be no assurance that
this proposed refinancing or the mergers contemplated by the Merger Agreement
will be consummated.
Metromedia and its affiliates will control Metromedia International Group,
Inc. after the Mergers. Accordingly, the merger of the Company with and into
Actava and the merger of Sterling with and into Actava will be accounted for as
a reverse acquisition of Actava and a purchase of Sterling under the purchase
method of accounting. The common control merger of the Company and MITI will be
accounted for on a basis similar to a pooling of interests. For accounting
purposes, the Company will be deemed the surviving corporation of each of the
mergers.
The Company has been named a defendant in two separate shareholder lawsuits
which are attempting to enjoin the mergers contemplated by the Merger Agreement.
12. LIQUIDITY
As described in Note 6 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
its holders of its Talent Notes, Creditor Notes and 10% Subordinated Debentures
(the "Plan Debt") 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
F-25
<PAGE>
ORION PICTURES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
12. LIQUIDITY--(CONTINUED)
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 6 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 6, 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 6, 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, respectively, and accordingly, the Guarantors under the Bank
Guarantee made certain payments to such parties. In addition, 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 6, 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.
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
F-26
<PAGE>
ORION PICTURES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
12. LIQUIDITY--(CONTINUED)
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 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
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 11, the Company has entered into the Merger
Agreement to combine the Company with Actava, Sterling and MITI. A condition to
consummation of the mergers 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 mergers 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 mergers contemplated
by the Merger Agreement will be consummated.
As previously discussed herein, the Company anticipates net losses for
financial reporting purposes for fiscal 1996, as well as insufficient liquidity
to meet its obligations in fiscal 1996 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
F-27
<PAGE>
ORION PICTURES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
12. LIQUIDITY--(CONTINUED)
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 mergers 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.
13. SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
Selected financial information for the quarterly periods in fiscal 1995 and
1994 is presented below (in thousands, except per-share amounts):
<TABLE><CAPTION>
FIRST QUARTER SECOND QUARTER
OF FISCAL YEAR OF FISCAL YEAR
----------------------- -----------------------
1995 1994 1995 1994
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Revenues...................................... $ 83,757(b) $ 39,591 $ 29,487 $ 30,632
Gross profit (loss)........................... $ 1,666 $ (1,803) $ (3,357)(c) $ (15,916)(a)
Selling, general and administrative
expenses.................................... $ 6,049 $ 5,188 $ 5,134 $ 5,367
Interest expense, net......................... $ 7,155 $ 8,336 $ 7,266 $ 8,231
Chapter 11 reorganization items............... $ 266 $ 822 $ 123 $ 391
Loss before provision for income taxes........ $ (11,804) $ (16,149) $ (15,880) $ (29,905)
Net income (loss)............................. $ (12,104) $ (16,849) $ (16,280) $ (30,205)
--------- --------- --------- ---------
Loss per common share:
Primary:
Before extraordinary gains................. $ (.61) $ (.84) $ (.81) $ (1.51)
Net income (loss).......................... $ (.61) $ (.84) $ (.81) $ (1.51)
--------- --------- --------- ---------
--------- --------- --------- ---------
</TABLE>
F-28
<PAGE>
ORION PICTURES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
13. SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)--(CONTINUED)
<TABLE><CAPTION>
THIRD QUARTER FOURTH QUARTER
OF FISCAL YEAR OF FISCAL YEAR
----------------------- -----------------------
1995 1994 1995 1994
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Revenues...................................... $ 44,265 $ 70,729 $ 33,735 $ 34,710
Gross profit (loss)........................... $ 7,574 $ 8,409 $ (2,116)(e) $ (58,058)(d)
Selling, general and administrative
expenses.................................... $ 5,480 $ 5,250 $ 5,382 $ 5,834
Interest expense, net......................... $ 6,604 $ 8,107 $ 8,057 $ 7,622
Chapter 11 reorganization items (Note 3)...... $ 135 $ 193 $ 1,086 $ 387
Loss before provision for income taxes........ $ (4,645) $ (5,141) $ (16,641) $ (71,901)
Net income (loss)............................. $ (4,845) $ (5,441) $ (17,041) $ (72,701)
--------- --------- --------- ---------
Income (loss) per common share:
Primary:
Before extraordinary gains................. $ (.24) $ (.27) $ (.85) $ (3.64)
Net income (loss).......................... $ (.24) $ (.27) $ (.85) $ (3.64)
--------- --------- --------- ---------
--------- --------- --------- ---------
</TABLE>
- ------------
<TABLE>
<C> <S>
(a) Gross profit (loss) for the second quarter of fiscal 1994 includes an aggregate of
$6,900,000 of writedowns to estimated net realizable value of theatrical product
unreleased at that time and $5,100,000 of writedowns due to disappointing domestic home
video sales results.
(b) As more fully described in "Management's Discussion and Analysis of Financial Condition
and Results of Operations" significant revenues ($40,000,000) were recognized in
conjunction with the Showtime Settlement in the first quarter of fiscal 1995.
(c) Gross profit (loss) for the second quarter of fiscal 1995 includes writedowns to
estimated net realizable value of an aggregate of $2,600,000 of writedowns of
theatrical product unreleased at that time and $5,300,000 of writedowns to previously
released product.
(d) As is more fully described in "Management's Discussion and Analysis of Financial
Condition and Results of Operations", gross profit for the fourth quarter of fiscal
1994 was impacted by writedowns to estimated net realizable value on certain product
and by reductions in gross profit rates on certain other product due in part to
adjustments made to the Company's estimates of the future revenue-generating potential
of that product during that quarter including the impact of the Showtime Settlement.
Gross profit for the fourth quarter of fiscal 1994 was also impacted by a $27,000,000
additional writedown to estimated net realizable value of theatrical product released
in that quarter and all unreleased titles at that time.
(e) Gross profit for the fourth quarter of fiscal 1995 includes $8,100,000 of writedowns to
previously released product.
</TABLE>
F-29
<PAGE>
ORION PICTURES CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER-SHARE AMOUNTS)
(UNAUDITED)
<TABLE><CAPTION>
THREE MONTHS ENDED
MAY 31,
-------------------
1995 1994
------- --------
<S> <C> <C>
Revenues................................................................ $42,232 $ 83,757
Cost of rentals......................................................... 38,901 82,091
------- --------
Gross profit (loss)..................................................... 3,331 1,666
Other costs and expenses:
Selling, general and administrative................................... 5,965 6,315
Interest, net......................................................... 6,927 7,155
------- --------
Loss before provision for income taxes.................................. (9,561) (11,804)
Provision for income taxes.............................................. 200 300
------- --------
Net loss................................................................ $(9,761) $(12,104)
------- --------
------- --------
Loss per common share:.................................................. $ (.49) $ (.61)
------- --------
------- --------
Average shares outstanding.............................................. 20,000 20,000
------- --------
------- --------
</TABLE>
See accompanying Notes to Condensed Consolidated Financial Statements
F-30
<PAGE>
ORION PICTURES CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
(UNAUDITED)
<TABLE><CAPTION>
MAY 31, FEBRUARY 28,
1995 1995
-------- ------------
<S> <C> <C>
ASSETS:
Cash and cash equivalents............................................ $ 14,188 $ 26,190
Accounts receivable, net............................................. 69,630 59,710
Film inventories..................................................... 223,975 249,674
Other assets......................................................... 15,491 16,014
-------- ------------
$323,284 $351,588
-------- ------------
-------- ------------
LIABILITIES AND SHAREHOLDERS' EQUITY:
Accounts payable..................................................... $ 1,824 $ 1,107
Accrued expenses..................................................... 30,788 32,455
Participations and residuals......................................... 44,893 45,927
Notes and subordinated debt (including $19,929 and $19,544 due to
majority shareholder, respectively).................................. 198,150 212,079
Deferred revenues.................................................... 65,857 68,487
Shareholders' equity:
Common stock....................................................... 5,000 5,000
Paid-in surplus.................................................... 265,811 265,811
Accumulated deficit................................................ (289,039) (279,278)
-------- ------------
Total shareholders' equity......................................... (18,228) (8,467)
-------- ------------
$323,284 $351,588
-------- ------------
-------- ------------
</TABLE>
See accompanying Notes to Condensed Consolidated Financial Statements
F-31
<PAGE>
ORION PICTURES CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
<TABLE><CAPTION>
THREE MONTHS ENDED
MAY 31,
--------------------
1995 1994
-------- --------
<S> <C> <C>
Operations:
Net loss............................................................. $ (9,761) $(12,104)
Adjustments to reconcile net loss to cash provided by operations:
Amortization of film costs......................................... 26,828 66,637
Increase in accounts receivable.................................... (9,920) (8,282)
Decrease in accounts payable and accrued expenses.................. (203) (4,972)
Accrual of participations and residuals............................ 5,693 10,631
Payments of participations and residuals........................... (6,728) (10,176)
Decrease in deferred revenues...................................... (2,630) (17,179)
Other, net......................................................... 3,700 4,490
-------- --------
Cash provided by operations.......................................... 6,979 29,045
Investment activities:
Investment in film inventories....................................... (1,129) (13,292)
Other................................................................ (331) 1,001
-------- --------
Cash used in investment activities................................. (1,460) (12,291)
Financing activities:
Payments on notes and subordinated debt.............................. (17,521) (24,329)
-------- --------
Cash used in financing activities.................................. (17,521) (24,329)
Net decrease in cash................................................... (12,002) (7,575)
Cash and cash equivalents at beginning of period....................... 26,190 37,114
-------- --------
Cash and cash equivalents at end of period............................. $ 14,188 $ 29,539
-------- --------
-------- --------
</TABLE>
See accompanying Notes to Condensed Consolidated Financial Statements
F-32
<PAGE>
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 ANNUAL REPORT ON FORM
10-K, AS AMENDED, FOR THE FISCAL YEAR ENDED FEBRUARY 28, 1995 (THE "1995 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 MAY 31, 1995, THE RESULTS OF ITS OPERATIONS FOR THE THREE-MONTH
PERIODS ENDED MAY 31, 1995 AND 1994 AND ITS CASH FLOWS FOR THE THREE-MONTH
PERIODS ENDED MAY 31, 1995 AND 1994 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
currently exceed and in future periods are likely to exceed gross profit
recognized in each period, which results in the reporting of net losses for
financial reporting purposes.
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"). 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 8).
F-33
<PAGE>
ORION PICTURES CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--CONTINUED)
(UNAUDITED)
3. FILM INVENTORIES
THE FOLLOWING IS AN ANALYSIS OF FILM INVENTORIES (IN THOUSANDS):
<TABLE><CAPTION>
MAY 31, FEBRUARY 28,
1995 1995
-------- ------------
<S> <C> <C>
Theatrical films: Released........................................... $215,155 $240,330
Television programs: Released........................................ 8,820 9,344
-------- ------------
$223,975 $249,674
-------- ------------
-------- ------------
</TABLE>
The Company has made substantial writeoffs to its released and unreleased
product. As a result, approximately two-thirds of the film inventories shown
above at May 31, 1995 are stated at 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 93% 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
May 31, 1998. As of May 31, 1995, approximately 60% 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.
4. NOTES AND SUBORDINATED DEBT
Notes and subordinated debt is comprised of the following (in thousands):
<TABLE><CAPTION>
MAY 31, FEBRUARY 28,
1995 1995
-------- ------------
<S> <C> <C>
Notes payable to banks pursuant to the Third Amended and Restated
Credit Agreement ("Third Restated Credit Agreement")............... $ 46,465 $ 58,619
Obligation to Metromedia under Reimbursement Agreement............... 19,929 19,544
Talent Notes due 1999, net of unamortized discounts of $8,333 and
$8,488............................................................. 25,417 26,057
Creditor Notes due 1999, net of unamortized discounts of $20,105 and
$21,745............................................................ 42,270 40,630
Non-interest bearing payment obligation to Sony, net of unamortized
discounts of $984 and $1,191....................................... 12,505 16,756
Other guarantees and contracts payable, net of unamortized discounts
of $2,774 and $2,943............................................... 8,179 8,124
-------- ------------
Total notes payable.................................................. $154,765 $169,730
-------- ------------
-------- ------------
10% Subordinated Debentures due 2001, net of unamortized discounts of
$7,422 and $8,097.................................................. 43,385 42,349
-------- ------------
Total notes and subordinated debt.................................... $198,150 $212,079
-------- ------------
-------- ------------
</TABLE>
Approximately $190,826,000 was outstanding under the Company's Third
Restated Credit Agreement on the Effective Date of the Plan. Such amount has
been reduced through repayments by the Company and its majority shareholder as
described below, to approximately $42,074,000 at June 30, 1995 which amount
matures in full on October 20, 1995.
F-34
<PAGE>
ORION PICTURES CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--CONTINUED)
(UNAUDITED)
4. NOTES AND SUBORDINATED DEBT--(CONTINUED)
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 majority shareholder, and
an affiliate of Metromedia 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 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 consummation of the Plan, upon payments by the guarantors
under the Bank Guarantee they become subrogated to the rights of the banks and,
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 (on October 20, 1995) and Sony (on
November 5, 1995). In accordance with the terms of the Reimbursement Agreement
approximately $385,000 and $344,000, respectively, of interest due April 21,
1995 and January 21, 1995, related to amounts owed to Metromedia, was accrued
and compounded, thereby increasing the principal amount due.
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
obligation to Sony is payable pari passu with amounts payable under the Third
Restated Credit Agreement described above and is backed by a letter of credit
issued pursuant to the Third Restated Credit Agreement. Such amount has been
reduced through repayments to approximately $11,878,000 at June 30, 1995 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
F-35
<PAGE>
ORION PICTURES CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--CONTINUED)
(UNAUDITED)
4. NOTES AND SUBORDINATED DEBT--(CONTINUED)
("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 1995 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.
As more fully discussed in Note 10 below, utilizing the literal language set
forth in the Indentures instead of the Company's Interpretation, the Company did
not generate enough Net Cash Flow through the fiscal quarter ended May 31, 1995,
to satisfy the Mandatory Minimums. Accordingly, as also more fully described in
Note 10, it is possible that the Trustee under the Indenture or the Holders of
Talent Notes or Creditor Notes could assert that an Event of Default should have
occurred under each such Indenture at May 31, 1995.
PER INDENTURES
<TABLE><CAPTION>
ESTIMATED ADJUSTED CUMULATIVE MINIMUM
AMOUNTS
FISCAL YEAR ENDED --------------------------------------------
FEBRUARY 28(29) MAY AUGUST NOVEMBER FEBRUARY
- ------------------------------------------------- -------- -------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
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
</TABLE>
PER INTERPRETATION
<TABLE><CAPTION>
ESTIMATED ADJUSTED CUMULATIVE MINIMUM
AMOUNTS
FISCAL YEAR ENDED --------------------------------------------
FEBRUARY 28(29) MAY AUGUST NOVEMBER FEBRUARY
- ------------------------------------------------- -------- -------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
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
</TABLE>
F-36
<PAGE>
ORION PICTURES CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--CONTINUED)
(UNAUDITED)
4. NOTES AND SUBORDINATED DEBT--(CONTINUED)
The Company has made eleven 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, December
1994, March 1995, and June 1995, 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>
JUNE MAR. FISCAL FISCAL 11/5/92
1995 1995 1995 1994 TO 2/28/93 TOTAL
------ ------- ------- ------- ---------- --------
<S> <C> <C> <C> <C> <C> <C>
Third Restated Credit Agreement................ $4,391 $12,154 $50,202 $39,345 $ 28,619 $134,711
Metromedia Obligation.......................... -- -- -- -- -- --
Sony Obligation................................ 1,611 4,458 18,413 17,984 10,497 52,963
Talent Notes (principal and interest).......... 600 1,661 6,861 5,733 3,910 18,765
Creditor Notes................................. -- -- 164 1,046 1,498 2,708
10% Subordinated Debentures due 2001........... -- -- -- -- 977 977
Interest on 10% Subordinated Debentures due
2001......................................... 459 1,270 5,083 3,339 519 10,670
------ ------- ------- ------- ---------- --------
$7,061 $19,543 $80,723 $67,447 $ 46,020 $220,794
------ ------- ------- ------- ---------- --------
------ ------- ------- ------- ---------- --------
</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 of the
portion of Net Cash Flow which would otherwise be payable to holders of Creditor
Notes for ten of the eleven 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 $362,000, $525,000 and $898,000, respectively, of the interest due
April 1, 1995, April 1, 1994 and October 1, 1993 related to the 10% Subordinated
Debentures was paid by the issuance of additional debentures. Also, in
accordance with the Talent Note indenture, all of the interest due for the
three-month periods ended May 31, 1995, November 30, 1994, November 30, 1993 and
August 31, 1993 on the Talent Notes was paid by the issuance of additional notes
(approximately $212,000, $393,000, $410,000 and $405,000, respectively). The
payments on the Sony Obligation have reduced the outstanding amount on the
letter of credit supporting such obligation to $16,878,000 at June 30, 1995.
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.
F-37
<PAGE>
ORION PICTURES CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--CONTINUED)
(UNAUDITED)
5. INCOME TAXES
The provision for income taxes for the three months ended May 31, 1995 and
1994 consists of the following (in thousands):
THREE MONTHS
ENDED
MAY 31,
------------
1995 1994
---- ----
Federal...................................................... $-- $--
State and local.............................................. 100 100
Foreign...................................................... 100 200
---- ----
$200 $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.
6. 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 common shares outstanding during each period.
7. REVENUE INFORMATION
The sources of the Company's revenues from operations by market for the
three months ended May 31, 1995 and 1994 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 May 31, 1995 and 1994, the Company generated revenues of
$11,028,000 and $15,421,000, respectively, from foreign distribution of such
product.
8. 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 contingencies and other disputed amounts. Based upon management's
review of the underlying facts and 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.
F-38
<PAGE>
ORION PICTURES CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--CONTINUED)
(UNAUDITED)
8. CONTINGENT LIABILITIES--(CONTINUED)
As previously disclosed in the Registrant's Annual Reports on Form 10-K for
the fiscal years ended February 28, 1995, February 28, 1994, and February 28,
1993 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 July 24, 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.
9. MERGER AGREEMENT
On April 12, 1995, the Company entered into a Merger Agreement (the "Merger
Agreement") with The Actava Group Inc. ("Actava"), MCEG Sterling Incorporated
("Sterling") and Metromedia International Telecommunications ("MITI"), an
affiliate of Metromedia, which with an affiliate, beneficially owns a majority
of the Company's common stock. The Merger Agreement provides that at the
effective time of the mergers, each of the Company, Sterling and MITI will merge
with and into Actava, with Actava, renamed "Metromedia International Group,
Inc.," being the surviving corporation of the mergers. The Merger Agreement
provides that each share of the Company's outstanding common stock will be
converted as follows: (i) if the average of the last sale price for Actava's
common stock on the NYSE for the 20 consecutive trading days ending on the
business day immediately preceding the Effective Time of the mergers (the
"Average Closing Price") is greater than or equal to $10.50, each share of the
Company's outstanding common stock will be converted into a number of shares of
Actava common stock equal to a fraction, the numerator of which is 11,428,572
and the denominator of which is the number of shares of the Company's common
stock outstanding on the business day immediately preceding the Effective Time
of the mergers or (ii) if the Average Closing Price is less than $10.50, each
share of the Company's outstanding common stock will be converted into a number
of shares of Actava's common stock which can be determined by solving for "Y" in
the following formula and dividing "Y" by the number of shares of the Company's
common stock outstanding on the business day immediately preceding the Effective
Time of the mergers:
120,000,000
"Y" = ---------------------
Average Closing Price
Assuming that the effective time of the merger was July 12, 1995, the
Company's stockholders would have exchanged each share of the Company's common
stock for .5714 shares of Actava common stock and collectively the Company's
stockholders would have been entitled to receive approximately
F-39
<PAGE>
ORION PICTURES CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--CONTINUED)
(UNAUDITED)
9. MERGER AGREEMENT--(CONTINUED)
31.1% of the surviving corporation's common stock. The Actava common stock to be
issued to the Company's, Sterling's and MITI's stockholders in connection with
the mergers will be identical to the shares of Actava common stock currently
outstanding. Immediately following the mergers, Metromedia and certain of its
affiliates will exchange their shares of Actava common stock received in the
mergers and may convert certain nonrecourse amounts owed by the Company and its
subsidiaries and by MITI and its subsidiary to affiliates of Metromedia for
shares of Class A common stock of the surviving corporation. The shares of Class
A common stock will be entitled to three votes per share on all matters voted
upon by the surviving corporation's stockholders (other than the election of
directors) and will vote as a separate class to elect 6 of the 10 members of the
surviving corporation's board of directors. 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 described above.
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 and Chief Executive Officer of the surviving
corporation.
On March 2, 1995, the Company's Board of Directors formed a special
committee (the "Special Committee") to consider the terms of the Merger
Agreement and make a recommendation to the full Board of Directors of the
Company regarding the Merger Agreement. The Special Committee was formed because
the Company's Board of Directors is composed of a majority of persons who are
affiliated with Metromedia and because of the Board of Director's view that in
light of the share exchanges described above and the simultaneous merger of MITI
into Actava, the members of the Board of Directors affiliated with Metromedia
could be viewed as having an interest in the transactions contemplated by the
Merger Agreement in addition to the interests of the Company stockholders. The
members of the Special Committee are Michael I. Sovern, Joel R. Packer and
Raymond L. Steele, each of whom the Company considers an independent director.
The Special Committee was also authorized and did engage the services of an
independent law firm and an independent investment banking firm to offer advice
and in the case of the investment banking firm, to render a fairness opinion to
the Special Committee. At a May 17, 1995 meeting of the Board of Directors, the
Special Committee made its unanimous recommendation that the full Board of
Directors approve the Merger Agreement and the full Board of Directors by
unanimous vote approved the Merger Agreement on such date.
The closing of each merger contemplated by the Merger Agreement is also
contingent upon the closing of the other mergers contemplated by the Merger
Agreement. In addition, the consummation of the mergers contemplated by the
Merger Agreement is subject, among other things, to approval by the Boards of
Directors and shareholders of the Company and the stockholders of Actava,
Sterling and MITI, the receipt of all required consents, the successful
refinancing of the currently outstanding amounts owed to the Company's senior
secured creditors (the Banks and Sony), and holders of Plan Debt, to Actava's
Average Closing Price not being less than $8.25, that no material adverse change
in the business, assets, prospects, condition or results of operations of the
Company, Actava, MITI or Sterling shall have occurred since the date of the
Merger Agreement, that the shares of Actava's common stock currently outstanding
and to be issued to the stockholders of the Company, MITI and Sterling pursuant
to the Mergers shall have been accepted for listing on the New York Stock
Exchange,
F-40
<PAGE>
ORION PICTURES CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--CONTINUED)
(UNAUDITED)
9. MERGER AGREEMENT--(CONTINUED)
the American Stock Exchange or accepted for quotation on NASDAQ/NMS, the
successful completion by Actava and its due diligence review of MITI, the
receipt of certain fairness opinions with respect to the mergers, and the
receipt of all required regulatory approvals, including approval with respect to
the Hart-Scott-Rodino Antitrust Improvement Act of 1976, as amended. There can
be no assurance that this proposed refinancing or the mergers contemplated by
the Merger Agreement will be consummated.
Metromedia and its affiliates will control Metromedia International Group,
Inc. after the mergers. Accordingly, the merger of the Company with and into
Actava and the merger of Sterling with and into Actava will be accounted for as
a reverse acquisition of Actava and a purchase of Sterling under the purchase
method of accounting. The common control merger of the Company and MITI will be
accounted for on a basis similar to a pooling of interests. For accounting
purposes, the Company will be deemed the surviving corporation of each of the
mergers.
As discussed below, the Company has been named a defendant in three separate
shareholder lawsuits which are attempting to enjoin the mergers contemplated by
the Merger Agreement.
10. LIQUIDITY
As described in Note 4 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
its holders of its Talent Notes, Creditor Notes and 10% Subordinated Debentures
(the "Plan Debt") 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 4 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 4, such events had an adverse effect on the Company's ability
to meet its obligations under the Third Restated Credit Agreement and to Sony,
as 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, as discussed below, in the fiscal year ended February 29, 1996
("fiscal 1996").
As described in Note 4, 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, respectively, and accordingly, the Guarantors under the Bank
Guarantee made certain payments to such parties. In addition, 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
F-41
<PAGE>
ORION PICTURES CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--CONTINUED)
(UNAUDITED)
10. LIQUIDITY--(CONTINUED)
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 4, 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.
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, which the Company believes reflects the agreement of the
parties, the Company did not generate sufficient Net Cash Flow to satisfy the
Mandatory Minimum threshold specified in the Indentures for the quarter ended
May 31, 1995. Accordingly, it is possible that the Trustee under the Indentures
or the Holders of Talent Notes or Creditor Notes could assert that an Event of
Default should have occurred 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. To date the Company has not received any
notification from such Trustee or the Holders of Talent Notes or Creditor Notes
that an Event of Default has occurred under either Indentures and no such
acceleration has occurred. Should such acceleration under the Indentures occur,
the Company,
F-42
<PAGE>
ORION PICTURES CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--CONTINUED)
(UNAUDITED)
10. LIQUIDITY--(CONTINUED)
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 has occurred for the quarter ended May 31, 1995 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 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 the quarterly Mandatory Minimum thresholds for each fiscal quarter, as
specified in Note 4 above, the Company generated sufficient Net Cash Flow to
satisfy the Mandatory Minimums for the fiscal quarter ended May 31, 1995. The
Company nevertheless currently believes 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 prevent 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 9, the Company
has entered into the Merger Agreement to combine the Company with Actava,
Sterling and MITI. A condition to consummation of the mergers 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 mergers
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
mergers contemplated by the Merger Agreement will be consummated.
As previously discussed herein, the Company anticipates net losses for
financial reporting purposes for fiscal 1996, as well as insufficient liquidity
to meet its obligations in fiscal 1996 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. To date such activities have not resulted in the receipt of
material amounts by the Company. In addition to the mergers 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.
F-43
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders
METROMEDIA INTERNATIONAL TELECOMMUNICATIONS, INC.:
We have audited the accompanying consolidated balance sheets of Metromedia
International Telecommunications, Inc. and Subsidiaries as of December 31, 1994
and 1993, and the related consolidated statements of operations, stockholders'
equity (deficit), and cash flows for the years then ended. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Metromedia
International Telecommunications, Inc. and subsidiaries as of December 31, 1994
and 1993, and the results of their operations and their cash flows for the years
then ended in conformity with generally accepted accounting principles.
As discussed in note 2 to the consolidated financial statements, the Company
changed its policy of accounting for investments in joint ventures in 1994.
The accompanying consolidated financial statements have been prepared
assuming that the Company will continue as a going concern. As discussed in note
1 to the consolidated financial statements, the Company has suffered significant
recurring losses and negative operating and investing cash flows as a result of
its investments in joint ventures which have either not commenced operations or
have only recently commenced operations and are experiencing losses that raise a
substantial doubt about its ability to continue as a going concern. Management's
plans in regard to these matters are also described in note 1. The financial
statements do not include any adjustments that might result from the outcome of
this uncertainty.
KPMG PEAT MARWICK LLP
New York, New York
April 12, 1995
F-44
<PAGE>
INDEPENDENT AUDITORS' REPORT
To METROMEDIA INTERNATIONAL TELECOMMUNICATIONS, INC:
We have audited the combined balance sheet (not presented herein) of
International Telcell, Inc. and International Telcell Group Limited Partnership
(predecessor entities to Metromedia International Telecommunications, Inc., see
note 1) as of December 31, 1992, and the related statements of operations,
stockholders' equity (deficit), and cash flows for the year then ended. These
financial statements are the responsibility of the Companies' management. Our
responsibility is to express an opinion on these financial statements based on
our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the combined financial statements referred to above present
fairly, in all material respects, the financial position of International
Telcell, Inc. and International Telcell Group Limited Partnership as of December
31, 1992, and the results of their operations and their cash flows for the year
then ended in conformity with generally accepted accounting principles.
The accompanying combined financial statements have been prepared assuming
that the combined Companies will continue as going concerns. As discussed in
note 1 to the Metromedia International Telecommunications Inc. and subsidiaries
financial statements, the Companies have suffered significant recurring losses
and negative operating and investing cash flows that raise a substantial doubt
about their ability to continue as going concerns. Management's plans in regard
to these matters are also described in note 1. The financial statements do not
include any adjustments that might result from the outcome of this uncertainty.
ARTHUR ANDERSEN LLP
Stamford, Connecticut
April 12, 1995
F-45
<PAGE>
METROMEDIA INTERNATIONAL TELECOMMUNICATIONS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1994 AND 1993
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<TABLE><CAPTION>
1994 1993
------- -------
ASSETS
<S> <C> <C>
Current Assets
Cash................................................................... $ 1,232 $ 105
Trade accounts receivable, less allowance for doubtful accounts of $223
in 1994.............................................................. 1,073 168
Prepaid expenses....................................................... 302 528
Other current assets................................................... 448 12
------- -------
Total Current Assets............................................... 3,055 813
------- -------
Investments in and advances to Joint Ventures (note 3)................... 24,311 9,712
Property, plant, & equipment, net (note 6)............................... 2,496 1,094
Intangible assets, less accumulated amortization (note 7)................ 9,697 461
Other assets............................................................. 723 557
------- -------
Total Assets....................................................... $40,282 $12,637
------- -------
------- -------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Notes payable (note 9)................................................. $23,723 $ 9,999
Trade accounts payable................................................. 2,526 1,079
Accrued expenses....................................................... 7,487 1,322
Current portion of long term debt (note 8)............................. 459 --
------- -------
Total Current Liabilities.......................................... 34,195 12,400
------- -------
Long term debt, excluding current portion (note 8)....................... 766 --
Minority interest........................................................ 201 422
Commitments and contingencies
Stockholders' equity
Common stock, $0.001 par value; 2,500,000 shares authorized; issued and
outstanding shares--1,713,041 in 1994 and 1,037,921 in 1993.......... 2 1
Additional paid-in capital............................................. 35,794 11,533
Accumulated deficit.................................................... (30,860) (11,719)
Cumulative foreign currency translation adjustment..................... 184 --
------- -------
Total Stockholders' Equity (Deficit)............................... 5,120 (185)
------- -------
Total Liabilities and Stockholders' Equity......................... $40,282 $12,637
------- -------
------- -------
</TABLE>
See accompanying notes to the consolidated financial statements
F-46
<PAGE>
METROMEDIA INTERNATIONAL TELECOMMUNICATIONS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1994, 1993 AND 1992
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE><CAPTION>
1994 1993 1992
------- ------- ------
<S> <C> <C> <C>
Revenues......................................................... $ 3,545 $ 51 $ 24
------- ------- ------
Costs and expenses:
Selling, general and administrative............................ 19,312 6,108 2,392
Depreciation and amortization.................................. 1,149 174 22
Equity in losses of Joint Ventures............................. 2,257 777 269
Interest income................................................ (896) -- (7)
Interest expense............................................... 1,109 348 218
Other (income) loss, net....................................... (24) 12 --
Minority interest................................................ (221) (34) --
------- ------- ------
Net loss......................................................... $(19,141) $(7,334) $(2,870)
------- ------- ------
------- ------- ------
Loss per share................................................... ($12.05) ($12.96) N/A
------- ------- ------
------- ------- ------
</TABLE>
See accompanying notes to the consolidated financial statements
F-47
<PAGE>
METROMEDIA INTERNATIONAL TELECOMMUNICATIONS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
YEARS ENDED DECEMBER 31, 1994, 1993 AND 1992
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<TABLE><CAPTION>
PREDECESSOR ADDITIONAL FOREIGN TOTAL
NUMBER COMMON ENTITIES PAID IN ACCUMULATED CURRENCY STOCKHOLDERS
OF SHARES STOCK CAPITAL CAPITAL DEFICIT TRANSLATION EQUITY (DEFICIT)
--------- ------ ----------- ---------- ----------- ----------- ----------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1991... -- $-- $ 660 $ -- $ -- $-- $ 660
--------- ------ ----------- ---------- ----------- ----- -------
Capital Contributions to
Predecessor Entities.......... 1,755 1,755
Net loss....................... (2,870) (2,870)
--------- ------ ----------- ---------- ----------- ----- -------
Balance at December 31, 1992... -- $-- $ (455) $ -- $ -- $-- $ (455)
--------- ------ ----------- ---------- ----------- ----- -------
Conversion of Predecessor
Entities to Corporation....... 395,783 -- 455 3,930 (4,385) --
Issuance of Common Stock....... 642,138 1 7,603 7,604
Net Loss....................... (7,334) (7,334)
--------- ------ ----------- ---------- ----------- ----- -------
Balance at December 31, 1993... 1,037,921 $ 1 $-- $ 11,533 $ (11,719) $-- $ (185)
--------- ------ ----------- ---------- ----------- ----- -------
Issuance of Common Stock....... 673,116 1 24,189 24,190
Grant of Common Stock to
employee...................... 2,004 -- 72 72
Foreign currency translation... 184 184
Net loss....................... (19,141) (19,141)
--------- ------ ----------- ---------- ----------- ----- -------
Balance at December 31, 1994... 1,713,041 $ 2 $-- $ 35,794 $ (30,860) $ 184 $ 5,120
--------- ------ ----------- ---------- ----------- ----- -------
--------- ------ ----------- ---------- ----------- ----- -------
</TABLE>
See accompanying notes to the consolidated financial statements
F-48
<PAGE>
METROMEDIA INTERNATIONAL TELECOMMUNICATIONS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1994, 1993 AND 1992
(IN THOUSANDS)
<TABLE><CAPTION>
1994 1993 1992
-------- ------- -------
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss..................................................... $(19,141) $(7,334) $(2,870)
Adjustments to reconcile net income to net cash used in
operating activities:
Equity in losses of Joint Ventures......................... 2,257 777 269
Depreciation and amortization.............................. 1,149 174 22
Non-cash employee compensation............................. 3,638 -- --
Provision for bad debts.................................... 64 -- --
Write down of advances to Joint Ventures................... -- 502 --
Changes in operating assets and liabilities net of effects
of purchase of East News Channel Trading and Services,
Kft.:
(Increase) in accounts receivable........................ (696) (71) (91)
(Increase) decrease in prepaid expenses.................. 232 (422) (124)
Increase in accounts payable and accrued expenses........ 2,890 1,130 854
Increase in other assets................................. (166) (552) (98)
(Increase) decrease in other current assets.............. (435) 3 --
Minority interest........................................ (221) 422 --
-------- ------- -------
Net cash used in operating activities.................... (10,429) (5,371) (2,038)
-------- ------- -------
Cash flows from investing activities:
Investments in and advances to Joint Ventures.............. (16,409) (4,715) (4,535)
Cash paid for East News Channel Trading and Services,
Kft...................................................... (7,033) (1,055) --
Capital expenditures....................................... (3,610) (1,423) (159)
-------- ------- -------
Net cash used in investing activities.................... (27,052) (7,193) (4,694)
-------- ------- -------
Cash flows from financing activities:
Proceeds from issuances of notes payable..................... 20,105 4,732 5,267
Proceeds from long term debt................................. 629 -- --
Proceeds from issuances of common stock and capital
contributions to predecessor entities...................... 17,690 7,604 1,755
-------- ------- -------
Net cash provided by financing activities................ 38,424 12,336 7,022
Effects of exchange rate changes on cash................. 184 -- --
-------- ------- -------
Net increase (decrease) in cash.......................... 1,127 (228) 290
Cash at beginning of year................................ 105 333 43
-------- ------- -------
Cash at end of year...................................... $ 1,232 $ 105 $ 333
-------- ------- -------
-------- ------- -------
Supplementary data:
Cash paid for interest................................... $ 647 $ 322 $ 218
-------- ------- -------
-------- ------- -------
Non-cash transactions:
</TABLE>
During 1994, the Company converted $6,500 of notes payable into common
stock.
See accompanying notes to the consolidated financial statements
F-49
<PAGE>
METROMEDIA INTERNATIONAL TELECOMMUNICATIONS, INC.
AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
(1) ORGANIZATION AND BUSINESS
National Telcell, Inc., was incorporated in the State of Delaware on August
1, 1989. Effective January 22, 1990, National Telcell, Inc.'s name was changed
to International Telcell, Inc. (ITI). On November 21, 1990, ITI became the
general partner of International Telcell Group Limited Partnership (ITGLP), a
Delaware limited partnership. ITGLP was formed to develop, operate and expand
the business of wireless communications in Eastern Europe, primarily through
establishing Joint Ventures. ITI and ITGLP (the Predecessor Entities) were
merged on December 31, 1993.
In August 1994, ITI and Metromedia International Inc. (MII) combined with
Metromedia International Telecommunications, Inc. (MITI or the Company) as part
of a corporate reorganization. The shareholders of ITI and MII exchanged their
shares in the respective companies for shares in MITI. As of that date, ITI and
MII were owned, directly and indirectly, 54% and 75%, respectively, by John W.
Kluge and Stuart Subotnick. Additionally, as of that date, ITI held a 15%
ownership interest in MII. The reorganization was accounted for as a combination
of interests under common control. Under this method of accounting, the entities
were combined in a manner similar to a pooling-of interests.
MITI and subsidiaries are the owners of various interests in joint ventures
that are currently in operation or planning to commence operations in certain
republics of the Commonwealth of Independent States (formerly the Union of
Soviet Socialist Republics) and other Eastern European countries (the Joint
Ventures).
The Joint Ventures currently offer wireless cable television, paging
services, international long distance services, radio broadcasting, and wireless
local loop telephony. Joint Ventures are principally entered into with
governmental agencies or ministries under the existing laws of the respective
countries.
The Joint Venture agreements generally provide for the initial contribution
of assets or cash, and for the creation of a line of credit agreement to be
entered into between the Joint Venture and MITI. Under a typical arrangement,
MITI's venture partner, ordinarily a governmental agency or ministry,
contributes the necessary licenses or permits under which the Joint Venture will
conduct its business, studio or office space, transmitting tower rights and
other equipment. MITI's contribution is generally cash and equipment but may
consist of other specific assets as required by the Joint Venture agreement. The
line of credit agreement generally specifies a commitment amount, interest rates
and repayment terms.
The accompanying financial statements have been prepared on the basis that
the Company will continue as a going concern. Since inception, the Company has
invested in its Joint Ventures and has utilized cash for operating expenses. The
Company incurs expenses in identifying and pursuing opportunities before an
acquisition decision is made. The Company is experiencing significant recurring
losses and negative cash flows during the construction and start-up phase of its
subsidiaries and Joint Venture investees.
The Company has relied on certain shareholders for funding, in the form of
both debt and equity, of its operating and capital requirements. The Company's
investments in the Joint Ventures are not expected to become profitable or
generate significant positive cash flows in the near future.
F-50
<PAGE>
METROMEDIA INTERNATIONAL TELECOMMUNICATIONS, INC.
AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
(1) ORGANIZATION AND BUSINESS--(CONTINUED)
MITI's consolidated and unconsolidated Joint Ventures' ability to generate
positive operating results are dependent upon the sale of commercial advertising
time, the ability to attract subscribers to their systems and the ability to
control operating expenses. MITI's current plans with respect to the Joint
Ventures is to increase subscriber and advertiser bases and thereby their
operating revenues by developing a broader band of programming packages for
wireless cable service providers and radio broadcasting and offering additional
services and options for paging. By offering the large local populations of the
countries in which the Joint Ventures operate desired services at attractive
prices, management believes that the Joint Ventures can increase their
subscriber bases, generate positive operating cash flows, and reduce their
dependence on the Company for funding. Additionally, MITI management believes
that advances in wireless subscriber equipment technology will reduce capital
requirements per subscriber. Continued initiatives to develop its Joint Ventures
into profitable operations include reducing operating costs as a percentage of
revenue while developing management information systems and automated customer
care and service systems.
The ability of the Company and its Joint Ventures to establish profitable
operations is also subject to special political, economic and social risks
inherent in doing business in Eastern Europe and the former Soviet Republics.
These include matters arising out of government policies, economic conditions,
imposition of or changes to taxes or other similar charges by governmental
bodies, foreign exchange fluctuations and controls, civil disturbances,
deprivation or unenforceability of contractual rights, and taking of property
without fair compensation (See notes 3 and 11).
The Company has obtained political risk insurance policies from the Overseas
Private Investment Corporation ("OPIC") for certain of its Joint Ventures. The
policies cover loss of investment and losses due to business interruption caused
by political violence or expropriation.
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts and results of
operations of MITI and its majority owned and controlled Joint Venture, CNM
Paging, and its subsidiary, East News Channel Trading and Service, KFT. Since
their respective dates of acquisition. Joint Ventures which are not majority
owned, or in which MITI does not have control, but exercises significant
influence, are accounted for using the equity method.
MITI reflects its net investments in the Joint Ventures under the caption
investment in and advances to Joint Ventures. Equity in the losses of the Joint
Ventures are allocated according to the percentage ownership in each Joint
Venture until MITI's Joint Venture partner's contributed capital has been fully
depleted. Subsequently, the Company recognizes the full amount of losses
generated by the Joint Venture since the Company is generally the sole funding
source for the Joint Ventures.
During 1994, the Company changed its policy of accounting for the Joint
Ventures by recording its equity in their losses based upon a three month lag.
As a result, the 1994 Statement of Operations reflects nine months of operations
through September 30, 1994 for the Joint Ventures compared to twelve months for
1993. Had the Company applied this method from October 1, 1993, the effect on
F-51
<PAGE>
METROMEDIA INTERNATIONAL TELECOMMUNICATIONS, INC.
AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--(CONTINUED)
reported 1994 operating results would not have been material. Future years will
reflect twelve months of activity based upon a September 30 reporting period for
the Joint Ventures.
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment is stated at cost, net of accumulated
depreciation. Depreciation is provided over the estimated useful lives of the
respective assets under the straight line method for financial statement
reporting purposes.
INTANGIBLE ASSETS
Intangible assets are stated at historical cost, net of accumulated
amortization. Intangibles such as broadcasting licenses or frequency rights are
being amortized over a period of 20-25 years.
Management continuously monitors and evaluates the realizability of recorded
intangibles to determine whether their carrying values have been impaired. In
evaluating the value and future benefits of the intangible assets, their
carrying value would be reduced by the excess, if any, of their carrying value
over management's best estimate of undiscounted future cash flows over the
remaining amortization period. The Company believes that recorded intangibles
amounts are not impaired.
INCOME TAXES
MITI accounts for income taxes under Statement of Financial Accounting
Standards (SFAS) No. 109, Accounting for Income Taxes. SFAS 109 requires the use
of the liability method of accounting for deferred taxes. Under the liability
method deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases. Deferred tax assets and liabilities are measured using rates expected to
be in effect when those assets and liabilities are recovered or settled. Under
SFAS 109, the effect on deferred tax assets and liabilities of a change in tax
rates is recognized in income in the period that includes the enactment date.
During 1993 and 1992, certain Predecessor Companies operated as a
partnership and an S corporation. As a result, the taxable income or loss for
these entities was included in the tax returns of the partners or shareholders.
CASH EQUIVALENTS
For the purposes of the statements of cash flows, MITI considers all highly
liquid investments purchased with maturities of three months or less to be cash
equivalents.
REVENUE RECOGNITION
The Company's and its Joint Ventures' cable, paging and telephony operations
recognize revenues in the period the service is provided. Installation fees are
recognized as revenues upon subscriber hook-up to the extent installation costs
are incurred. Installation fees in excess of installation costs are
F-52
<PAGE>
METROMEDIA INTERNATIONAL TELECOMMUNICATIONS, INC.
AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--(CONTINUED)
deferred and recognized over the length of the related individual contract. The
Company's and its Joint Ventures' radio operations recognize advertising revenue
when commercials are broadcast.
BARTER TRANSACTIONS
The Company trades commercial air time for goods and services used
principally for promotional, sales and other business activities. An asset and a
liability are recorded at the fair market value of the good or services
received. Barter revenue is recorded and the liability is relieved when
commercials are broadcast and barter expense is recorded and the assets are
relieved when the goods or services are received or used.
FOREIGN CURRENCY TRANSLATION
The statutory accounts of the Company's consolidated subsidiaries and Joint
Ventures are maintained in accordance with local accounting regulations and are
stated in local currencies. Local statements are translated into U.S. generally
accepted accounting principles and U.S. dollars in accordance with Statement of
Financial Accounting Standards No. 52, Accounting for Foreign Currency
Translation.
Foreign currency assets and liabilities are translated using the exchange
rates in effect at the balance sheet date. Results of operations are translated
using the average exchange rates prevailing throughout the year. The effects of
exchange rate fluctuations on translating foreign currency assets and
liabilities into U.S. dollars are accumulated as part of the foreign currency
translation adjustment in stockholders' equity. Gains and losses from foreign
currency transactions are included in net income in the period in which they
occur.
The financial statements of foreign entities in highly inflationary
economies are remeasured in all cases using the U.S. dollar as the functional
currency. U.S. dollar transactions are shown at their historical value. Monetary
assets and liabilities denominated in local currencies are translated into U.S.
dollars at the prevailing period end exchange rate. All other assets and
liabilities are translated at historical exchange rates. Results of operations
have been translated using the monthly average exchange rates. Translation
differences resulting from the use of these different rates are included in the
statement of operations.
LOSS PER SHARE
Loss per share is calculated using the weighted average number of shares
outstanding. The effect of stock options has been excluded since they are
anti-dilutive.
(3) INVESTMENTS IN AND ADVANCES TO JOINT VENTURES
MITI has recorded its investments in Joint Ventures at cost, net of its
equity in earnings or losses. Advances to the Joint Ventures under the line of
credit agreements are reflected based on amounts recoverable under the credit
agreement, plus accrued interest.
F-53
<PAGE>
METROMEDIA INTERNATIONAL TELECOMMUNICATIONS, INC.
AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
(3) INVESTMENTS IN AND ADVANCES TO JOINT VENTURES--(CONTINUED)
Advances are made to Joint Ventures in the form of cash, for working capital
purposes and for payment of expenses or capital expenditures, or in the form of
equipment purchased on behalf of the Joint Venture. Interest rates charged to
the Joint Ventures range from prime rate to prime rate plus 2%. The credit
agreements generally provide for the payment of principal and interest from 90%
of the Joint Ventures' available cash flow, as defined, prior to any substantial
distributions of dividends to the Joint Venture partners. MITI has entered into
credit agreements with its Joint Ventures to provide up to $43,000 in funding of
which $24,044 remains available. MITI funding commitments are contingent on its
approval of the Joint Ventures' business plans.
As of December 31, 1994 and 1993, MITI investments in the Joint Ventures
were as follows:
<TABLE><CAPTION>
INVESTMENTS IN AND
ADVANCES TO
JOINT VENTURE
------------------- YEAR VENTURE DATE OPERATIONS
NAME 1994 1993 OWNERSHIP % FORMED COMMENCED
- ---------------------------------- ------- ------ ----------- ------------ ----------------
<S> <C> <C> <C> <C> <C>
Kosmos TV, Moscow, Russia......... $ 5,822 $3,293 50% 1991 May, 1992
Baltcom TV, Riga Latvia........... 4,741 1,940 50% 1991 June, 1992
Ayety TV, Tbilisi, Georgia........ 1,935 1,147 49% 1991 September, 1993
Kamalak, Tashkent, Uzbekistan..... 1,535 743 50% 1992 September, 1993
Baltcom Paging, Tallin, Estonia... 1,829 1,445 39% 1992 December, 1993
SAC-Radio, Moscow, Russia......... 1,256 -- 51% 1994 January, 1994
Sun TV, Kishinev, Moldova......... 690 86 50% 1993 October, 1994
Raduga Paging, Nizhny Novgorod.... 450 -- 45% 1993 October, 1994
Alma-TV, Almaty, Kazakstan........ 774 -- 50% 1994 Pre-Operational
Telecom Georgia, Tibilisi,
Georgia......................... 1,485 -- 30% 1994 September, 1994
Raduga TV, Nizhny Novgorod........ 222 -- 50% 1994 Pre-Operational
Baltcom Plus, Riga, Latvia........ 331 -- 50% 1994 April, 1995
Romsat TV, Bucharest, Romania..... 706 -- 99% 1993 Pre-Operational
Minsk Cable, Minsk, Belarus....... 733 -- 50% 1993 Pre-Operational
Tbilisi Paging, Tbilisi,
Georgia........................... 342 -- 45% 1993 November, 1994
Other............................. 1,460 1,058
------- ------
$24,311 $9,712
------- ------
------- ------
</TABLE>
F-54
<PAGE>
METROMEDIA INTERNATIONAL TELECOMMUNICATIONS, INC.
AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
(3) INVESTMENTS IN AND ADVANCES TO JOINT VENTURES--(CONTINUED)
Summarized combined financial information of Joint Ventures accounted for
under the equity method that have commenced operations as of September 30, 1994,
is as follows for the nine months ended September 30, 1994 and the years ended
December 31, 1993 and 1992 (operating data only).
BALANCE SHEETS
<TABLE><CAPTION>
SEPTEMBER 30, DECEMBER 31,
1994 1993
------------- ------------
<S> <C> <C>
ASSETS
Current assets..................................................... $ 1,588 $ 841
Investments in wireless systems and equipment, net................. 17,040 10,758
Other assets....................................................... 895 28
------------- ------------
Total Assets................................................. $19,523 $ 11,627
------------- ------------
------------- ------------
LIABILITIES AND CAPITAL
Current liabilities................................................ $ 2,637 $ 1,022
Amount payable under MITI credit facility.......................... 11,327 6,635
Other long-term liabilities........................................ 1,513 74
------------- ------------
15,477 7,731
------------- ------------
Joint Venture's Capital............................................ 4,046 3,896
------------- ------------
Total Liabilities and Joint Venture's Capital................ $19,523 $ 11,627
------------- ------------
------------- ------------
</TABLE>
STATEMENTS OF OPERATIONS
<TABLE><CAPTION>
NINE MONTHS
ENDED YEAR ENDED YEAR ENDED
SEPTEMBER 30, DECEMBER 31, DECEMBER 31,
1994 1993 1992
------------------- ------------ ------------
<S> <C> <C> <C>
Revenues......................................... $ 3,280 $ 1,452 $ 246
------- ------------ ------
Expenses
Cost of Service................................ 2,026 969 133
Selling, General and Administrative............ 2,411 973 265
Depreciation and Amortization.................. 1,684 911 274
Other.......................................... 203 67 147
------- ------------ ------
Total Expenses............................. 6,324 2,920 819
------- ------------ ------
Operating Loss................................... (3,044) (1,468) (573)
Interest Expense................................. (632) (64) --
Other Income (Loss).............................. 47 2 --
Foreign Currency Translation..................... 15 (91) (3)
------- ------------ ------
Net Loss................................... $(3,614) $ (1,621) $ (576)
------- ------------ ------
------- ------------ ------
</TABLE>
Financial information for Joint Ventures which are not yet operational is
not included in the above summary. MITI's investment in and advances to those
Joint Ventures at September 30, 1994 and December 31, 1993 amounted to
approximately $5,708 and $89, respectively.
During January 1994, the Company acquired a 51% interest in SAC-Radio 7
(Radio 7), a company which operates a radio station in Moscow, Russia, for a
purchase price of approximately
F-55
<PAGE>
METROMEDIA INTERNATIONAL TELECOMMUNICATIONS, INC.
AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
(3) INVESTMENTS IN AND ADVANCES TO JOINT VENTURES--(CONTINUED)
$700,000. The difference between the cost of the Company's investment and the
underlying equity in the net assets of Radio 7 of approximately $600,000 is
being amortized over a period of 25 years.
(4) ACQUISITIONS
On December 31, 1993, the Company entered into an agreement to acquire 25%
of East News Channel Trading and Services, Kft. (ENC), a Hungarian company which
is the owner of 3 radio stations for approximately $1.1 million. Under the terms
of the agreement, the Company also obtained the right to purchase the remaining
75% for a specified price. In May 1994, the Company exercised its option to
purchase an additional 51% of ENC for approximately $5.3 million, and in
November 1994, the remaining 24% of ENC was acquired for approximately $1.7
million.
The transaction was recorded as a step acquisition under the purchase method
of accounting and, accordingly, the purchase price has been allocated to the
fair values of assets acquired as of the dates of acquisition. The results of
operations of ENC have been included in the consolidated statement of income for
1994 as though it had been acquired at the beginning of the period. Under the
acquisition agreement, the prior owners were not responsible for any losses
subsequent to December 31, 1993. As a result, the Company has recorded 100% of
the results of operations and no amount has been recognized as a credit for
minority interest for 1994.
The purchase price has been allocated to the fair values of the assets
acquired as follows:
Current assets........................................... $ 279
Property and equipment................................... 100
Broadcast license and frequency rights................... 9,407
Goodwill................................................. 172
Current liabilities...................................... (1,733)
Other.................................................... (137)
-------
$ 8,088
-------
-------
The following unaudited pro forma financial information presents the
combined results of operations for the year ended December 31, 1993 of the
Company and ENC as if the acquisition had occurred on January 1, 1993. The
unaudited pro forma financial information does not necessarily reflect the
results of operations that would have occurred had the Company and ENC
constituted a single entity during such period.
Revenues................................................. $ 1,201
-------
-------
Net Loss................................................. $(8,866)
-------
-------
Loss per Share........................................... $(15.67)
-------
-------
On August 21, 1992, the Company entered into an agreement to form
Comunicatii Nationale Mobile (CNM), a paging company, as a joint stock company
under the laws of Romania. Under this
F-56
<PAGE>
METROMEDIA INTERNATIONAL TELECOMMUNICATIONS, INC.
AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
(4) ACQUISITIONS--(CONTINUED)
agreement, the Company contributed $490 in exchange for an approximate 54%
interest in CNM. CNM commenced operations in February 1994.
(5) SEGMENT INFORMATION OF SIGNIFICANT JOINT VENTURES
The Company and its consolidated and unconsolidated Joint Ventures operate
in four primary industry segments: wireless cable television, paging, radio
broadcasting and telephony.
The following represents summary financial information by segment as of and
for the years ended December 31, 1994 and 1993 of the Company and its
consolidated and unconsolidated Joint Ventures which had commenced operations
prior to September 30, 1994. Financial information of the Company's
unconsolidated Joint Ventures for 1994 is as of and for the nine months ended
September 30, 1994, in accordance with the change in policy discussed in note 1.
<TABLE><CAPTION>
WIRELESS WIDE AREA RADIO
1994 CABLE TV PAGING BROADCASTING TELEPHONY
- -------------------------------------------------- -------- --------- ------------ ---------
<S> <C> <C> <C> <C>
Revenues $ 3,088 $ 446 $ 3,236 $ 55
Assets............................................ 15,794 2,986 10,991 2,547
Depreciation and amortization..................... 1,975 101 234 9
Capital Expenditures.............................. 5,072 815 105 2,487
Operating Income before Taxes..................... (2,931) (958) (1,023) (578)
-------- --------- ------------ ---------
-------- --------- ------------ ---------
MITI Equity in losses of unconsolidated
investees......................................... $ (1,838) $ (147) $ (99) $ (173)
-------- --------- ------------ ---------
-------- --------- ------------ ---------
<CAPTION>
1993
- --------------------------------------------------
<S> <C> <C> <C> <C>
Revenues.......................................... $ 1,503 $ -- -- --
Assets............................................ 10,776 2,176 -- --
Depreciation and amortization..................... 1,019 2 -- --
Capital Expenditures.............................. 3,411 798 -- --
Operating Income before Taxes..................... (1,840) (165) -- --
-------- --------- ------------ ---------
-------- --------- ------------ ---------
MITI Equity in losses of unconsolidated
Investees......................................... $ (752) $ (25) -- --
-------- --------- ------------ ---------
-------- --------- ------------ ---------
</TABLE>
The Company operated only in the wireless cable TV segment during 1992.
More than 90% of the Company's assets are located in and substantially all
of the Company's operations are derived from Republics in the Commonwealth of
Independent States or Eastern Europe.
F-57
<PAGE>
METROMEDIA INTERNATIONAL TELECOMMUNICATIONS, INC.
AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
(6) PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment at December 31, 1994 and 1993, is comprised of
the following:
1994 1993
------ ------
Office furniture and equipment............................ $2,571 $1,032
Automobiles............................................... 95 87
Leasehold improvements.................................... 56 50
------ ------
2,722 1,169
Less: Accumulated depreciation and amortization........... 226 75
------ ------
$2,496 $1,094
------ ------
------ ------
Depreciation of office furniture and equipment and automobiles is provided
for under the straight line method over their estimated useful lives of 3 to 5
years. Leasehold improvements are amortized using the straight line method over
the life of the improvements or the life of the lease, whichever is shorter.
(7) INTANGIBLE ASSETS
Intangible assets are comprised of the following at December 31, 1994 and
1993:
1994 1993
------ -----
Broadcast License and Frequency Rights..................... $9,407 $--
Film Rights................................................ 769 255
Other...................................................... 336 336
------ -----
10,512 591
Less: accumulated amortization............................. (815) (130)
------ -----
$9,697 $ 461
------ -----
------ -----
(8) LONG TERM DEBT
Long term debt at December 31, 1994 is comprised of the following:
Hungarian Foreign Trade Bank...................................... $1,057
Other............................................................. 168
------
1,225
Less: current portion............................................. (459)
------
$ 766
------
------
The loan from the Hungarian Foreign Trade Bank is due on September 14, 1997
and is repayable in three annual installments with an interest rate of 30%. The
loan is a Hungarian Forint based loan and is secured by a letter of credit
issued by MITI in the amount of $1,200.
F-58
<PAGE>
METROMEDIA INTERNATIONAL TELECOMMUNICATIONS, INC.
AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
(8) LONG TERM DEBT--(CONTINUED)
Other loans are also Forint based, have interest rates which range from
26.5% to 38.5% and are secured by certain assets of a subsidiary. Certain of
those loans have minimum balance requirements to which the subsidiary is
subject.
(9) NOTES PAYABLE
Notes payable are comprised of the following at December 31, 1994 and 1993:
1994 1993
------- ------
Demand notes payable..................................... $ 5,529 $5,499
Notes payable to Metromedia Company...................... 18,194 4,500
------- ------
$23,723 $9,999
------- ------
------- ------
The demand notes payable bear interest at the prime rate and are guaranteed
by several shareholders through September 30, 1995. A shareholder which
guarantees $750,000 of these notes has indicated its intention to withdraw its
guarantee effective September 30, 1995.
Notes payable to Metromedia Company bear interest at rates between the prime
rate and the prime rate plus 2% as published by Chemical Bank and are due within
one year from date of the notes.
(10) SHAREHOLDER'S EQUITY
MITI is authorized to issue up to 2,500,000 of common stock with a par value
of $.001. Each share entitles the holder to one vote per share. Upon formation
of MITI, all capital stock and additional paid-in capital amounts were restated
to reflect the changes in the organizational structure discussed in note 1.
During 1992, MITI's predecessor companies received $1.8 million of equity
contributions through cash calls on previously sold limited partnership units.
During 1993, these predecessor companies received an additional $7.6 million of
equity contributions. In connection with the corporate reorganization described
in note 1, all equity contributions prior to December 31, 1993 were converted
into 1,037,921 shares of common stock of MITI.
During 1994, MITI received total equity contributions of $24.2 million.
Approximately $22.8 million of this was a result of common stock issued to
certain related parties, affiliates and others in a private offering. MITI
issued 633,170 shares of common stock at an issuance price of $36 per share. As
part of this issuance, $6,500 of notes payable to an affiliate and a previously
unrelated party were converted into common stock. In connection with this
offering, 6,944 shares of common stock were issued to underwriters and attorneys
in lieu of fees of $250. The remaining $1.4 million of equity contributions was
the result of the issuance of 33,002 shares of common stock to an affiliate.
During 1994, an employee of MITI was granted 2,004 shares of common stock.
The fair market value of the stock at the date of grant was estimated to be $36
per share. In connection with this grant, MITI has recorded compensation expense
of approximately $72 and a corresponding increase in common stock and additional
paid-in-capital.
F-59
<PAGE>
METROMEDIA INTERNATIONAL TELECOMMUNICATIONS, INC.
AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
(11) COMMITMENTS AND CONTINGENCIES
COMMITMENTS
Future minimum lease payments under non-cancelable operating leases as of
December 31, 1994 were approximately as follows:
Years Ended December 31
- -----------------------
1995........................................................ $ 536
1996........................................................ 451
1997........................................................ 391
1998........................................................ 379
1999........................................................ 231
------
$1,988
------
------
The Company has entered into a purchase agreement for equipment amounting to
approximately $1,000. Such equipment will ultimately be transferred to its Joint
Ventures as an investment or an advance under the credit line.
Total rent expense under non-cancellable operating leases was approximately
$615 and $140 for the years ended December 31, 1994 and 1993, respectively.
CONTINGENCIES
Russian legislators have produced a draft law which contains a provision
that would limit the ownership interest of foreign investors of commercial
broadcast license holdings entities to 35%. This draft law passed the lower
house of the Russian Federation legislature, the Duma, in February 1995, but was
later rejected by the upper house of the Russian Federation, the Federal
Council. It is not yet known whether a revised draft will be adopted by both
houses of legislature and be signed into law by the President of the Russian
Federation.
It is also not yet known whether this law will be upheld as constitutional
and consistent with Russian Federation treaty obligations or how it would be
interpreted and applied by Russian Federation regulators to existing license
holders. However, if the legistlature passes a law restricting foreign ownership
of broadcast license holding entities and such a law is found to be
constitutional and fails to contain a grandfathering clause to protect existing
companies, it could require MITI to reduce its ownership interests in Russian
Joint Ventures. However, it is unclear how such reductions would be effected.
MITI is contingently liable for outstanding letters of credit amounting to
$1,200.
(12) PROPOSED MERGER
MITI is a party to a proposed merger agreement with Orion Pictures
Corporation (Orion), The Actava Group Inc. (Actava) and MCEG Sterling
Corporation (the Merger) whereby the ownership interests of the companies will
be combined in a stock-for-stock transaction.
F-60
<PAGE>
METROMEDIA INTERNATIONAL TELECOMMUNICATIONS, INC.
AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
(12) PROPOSED MERGER--(CONTINUED)
Under the terms of the Merger, shareholders of the Company will receive
common stock of Actava which will be the surviving entity. It is currently
anticipated that Metromedia Company and its affiliates would control in excess
of 50% of the voting power of the surviving entity as a result of the stock
exchanges.
Orion is 56% owned, directly and indirectly by John W. Kluge and Stuart
Subotnick.
The Company has been named as a defendant in a lawsuit which is attempting
to enjoin the proposed merger.
(13) INCOME TAXES
The statutory Federal tax rates for the years ended December 31, 1994 and
1993 were 35%. The effective tax rates were zero for the years ended December
31, 1994 and 1993 due to the Company incurring net operating losses.
For Federal income tax purposes, the Company has unused loss carryforwards
of approximately $6,042 expiring in 2009. The availability of the net operating
loss carryforwards to offset income in future years may be restricted if the
Company undergoes an ownership change, which may occur as a result of future
sales of Company stock and other events, including the merger (see note 12).
The tax effect of temporary differences that give rise to significant
portions of the deferred tax assets are as follows:
1994 1993
------- -----
Start up costs............................................ $ 186 $ 234
Accrual to cash/section 481 adjustment.................... 164 221
Stock Options............................................. 1,293 --
Net operating loss carryforwards.......................... 2,115 --
------- -----
Total gross deferred tax assets........................... 3,758 455
Less valuation allowance.................................. (3,758) (455)
------- -----
Net deferred tax assets................................... $ -- $--
------- -----
------- -----
A deferred tax asset for the excess of the tax basis over the financial
statement carrying amount of the investments in Joint Ventures has not been
recognized in accordance with paragraph 34 of SFAS 109 since it is not apparent
that the deductible temporary difference will reverse in the foreseeable future.
In assessing the realizability of deferred tax assets, management considers
whether it is more likely than not that some portion or all of the deferred tax
assets will not be realized. The ultimate realization of deferred tax assets is
dependent upon the generation of future taxable income during the periods in
which those temporary differences became deductible. Management considers the
scheduled reversal of deferred tax liabilities, projected future taxable income,
and tax planning in making these assessments. During 1994 and 1993, the
valuation allowance increased by $3,303 and $455, respectively.
F-61
<PAGE>
METROMEDIA INTERNATIONAL TELECOMMUNICATIONS, INC.
AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
(14) EMPLOYEE STOCK PLANS
On September 28, 1994, the board of directors approved the Metromedia
International Telecommunications, Inc. 1994 Stock Option Plan (the Plan). Under
the Plan, awards of the Company's common stock may be granted to eligible
employees, agents, directors and consultants in the form of either incentive
stock options qualified under the Internal Revenue Code or non-qualified stock
options at the discretion of the Board.
The Plan provides for a maximum 107,000 shares of common stock to be
reserved for which options may be granted, subject to adjustment under certain
conditions.
A following summary of shares subject to option under the Plan reflects the
options granted during the periods. There were no options granted or outstanding
prior to January 1, 1994.
<TABLE><CAPTION>
SHARES SUBJECT AVERAGE OPTION PRICE
TO OPTION PER SHARE
-------------- --------------------
<S> <C> <C>
Balance at Dec. 31, 1993
Options Granted............................. 51 $30.00
Options Exercised --
--
Balance at Dec. 31, 1994.................... 51
--
--
Options exercisable at end of year.......... 11 $30.00
--
--
</TABLE>
On September 30, 1994 the Board of Directors of the Company granted to
MITI's Chief Executive Officer (the Executive) an option not pursuant to any
plan to purchase 118,557 shares of common stock (the Options) at a purchase
price of $6.00 per share. The Options expire on September 30, 2004 or earlier if
the Executive's employment is terminated. Included in 1994 is $3,566 of
compensation expense in connection with these Options.
(15) EMPLOYEE BENEFIT PLAN
Effective January 1, 1993, the Company established a 401-K salary deferral
plan (the "Plan") on behalf of its employees. The Plan is a qualified defined
contribution plan and allows participating employees to defer receipt of up to
25% of their compensation, subject to certain limitations. The Company has the
discretion to match up to 50% of the amounts contributed by the employee.
F-62
<PAGE>
METROMEDIA INTERNATIONAL TELECOMMUNICATIONS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
JUNE 30, 1995
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
<S> <C>
ASSETS
Current assets:
Cash........................................................................... $ 1,840
Trade accounts receivable, net of allowance for doubtful accounts of $345...... 1,439
Prepaid expenses............................................................... 348
Other current assets........................................................... 62
--------
Total current assets....................................................... 3,689
Investments in and advances to Joint Ventures (note 3)........................... 33,133
Property, plant, and equipment, net of accumulated depreciation of $663.......... 2,891
Intangible assets, net of accumulated amortization of $1,085..................... 9,507
Other assets..................................................................... 1,453
--------
Total assets............................................................... $ 50,673
--------
--------
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities:
Notes payable (note 4)......................................................... 45,930
Trade accounts payable......................................................... 3,269
Accrued expenses............................................................... 8,056
Current portion of long-term debt.............................................. 364
--------
Total current liabilities.................................................. 57,619
--------
Long-term debt, excluding current portion........................................ 628
Minority interest................................................................ 160
Commitments and contingencies
Stockholders' deficit:
Common stock, $0.001 par value; 2,500,000 shares authorized; issued and
outstanding shares--1,716,198................................................ 2
Additional paid-in capital..................................................... 35,794
Accumulated deficit............................................................ (43,982)
Cumulative foreign currency translation adjustment............................. 452
--------
Total stockholders' deficit................................................ (7,734)
--------
Total liabilities and stockholders' deficit................................ $ 50,673
--------
--------
</TABLE>
See accompanying notes to the interim consolidated financial statements.
F-63
<PAGE>
METROMEDIA INTERNATIONAL TELECOMMUNICATIONS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
SIX MONTHS ENDED JUNE 30, 1995 AND 1994
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
(UNAUDITED)
<TABLE><CAPTION>
SIX MONTHS ENDED
JUNE 30
-------------------
1995 1994
-------- -------
<S> <C> <C>
Revenues................................................................ $ 3,316 $ 1,495
-------- -------
Costs and expenses:
Selling, general and administrative................................... 12,635 5,976
Depreciation and amortization......................................... 725 516
Equity in losses of Joint Ventures.................................... 2,221 362
Interest income....................................................... (1,085) (321)
Interest expense...................................................... 2,011 160
Other (income) loss, net.............................................. (28) 20
Minority interest..................................................... (41) (62)
-------- -------
Net loss................................................................ $(13,122) $(5,156)
-------- -------
-------- -------
Loss per share.......................................................... $ (7.65) $ (3.52)
-------- -------
-------- -------
</TABLE>
See accompanying notes to the interim consolidated financial statements.
F-64
<PAGE>
METROMEDIA INTERNATIONAL TELECOMMUNICATIONS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
SIX MONTHS ENDED JUNE 30, 1995 AND 1994
(IN THOUSANDS)
(UNAUDITED)
<TABLE><CAPTION>
1995 1994
-------- --------
<S> <C> <C>
Cash flows from operating activities:
Net loss............................................................. $(13,122) $ (5,156)
Adjustments to reconcile net loss to net cash used in operating
activities:
Equity in losses of joint ventures................................. 2,221 362
Depreciation and amortization...................................... 725 516
Noncash employee compensation...................................... 36 --
Provision for bad debts............................................ 122 32
Changes in operating assets and liabilities net of effects of
purchase of East News Channel Trading and Services, Kft.:
Increase in accounts receivable.................................. (488) (540)
(Increase) decrease in prepaid expenses.......................... (47) 105
Decrease (increase) in other current assets...................... 386 12
Increase in other assets......................................... (730) (483)
Increase in accounts payable and accrued expenses................ 1,276 288
Decrease in minority interest.................................... (41) (62)
-------- --------
Net cash used in operating activities............................ (9,662) (4,926)
-------- --------
Cash flows from investing activities:
Investments in and advances to joint ventures...................... (11,043) (7,160)
Cash paid for East News Channel Trading and Services, Kft.......... -- (5,219)
Capital expenditures............................................... (929) (816)
-------- --------
Net cash used in investing activities............................ (11,972) (13,195)
-------- --------
Cash flows from financing activities:
Proceeds from issuances of notes payable............................. 22,207 7,706
Repayments of notes payable.......................................... -- (6,076)
Proceeds from long-term debt......................................... -- 57
Repayments of long-term debt......................................... (233) --
Proceeds from issuance of common stock and capital contributions to
predecessor entities............................................... -- 16,700
-------- --------
Net cash provided by financing activities........................ 21,974 18,387
-------- --------
Effects of exchange rate changes on cash............................... 268 51
-------- --------
Net increase in cash............................................. 608 317
Cash at beginning of period............................................ 1,232 105
-------- --------
Cash at end of period.................................................. $ 1,840 $ 422
-------- --------
-------- --------
Supplementary data:
Cash paid during the period for interest......................... $ 1,207 $ 186
-------- --------
-------- --------
Noncash transactions:
During the six month period ended June 30, 1994, the Company converted $6,500 of notes
payable into common stock.
</TABLE>
See accompanying notes to the interim consolidated financial statements.
F-65
<PAGE>
METROMEDIA INTERNATIONAL TELECOMMUNICATIONS, INC.
AND SUBSIDIARIES
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
SIX MONTHS ENDED JUNE 30, 1995 AND 1994
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
(UNAUDITED)
(1) ORGANIZATION AND BUSINESS
Metromedia International Telecommunications, Inc. and subsidiaries (MITI) is
the owner of various interests in joint ventures that are currently in operation
or planning to commence operations in certain republics of the Commonwealth of
Independent States (formerly the Union of Soviet Socialist Republics) and other
Eastern European countries (the Joint Ventures).
The Joint Ventures currently offer wireless cable television, radio paging
services, international long distance services, radio broadcasting, and wireless
local loop telephony. Joint Ventures are principally entered into with
governmental agencies or ministries under the existing laws of the respective
countries.
The accompanying interim consolidated financial statements have been
prepared on the basis that the Company will continue as a going concern. Since
inception, the Company has invested in its Joint Ventures and has utilized cash
for operating expenses and for expenses in identifying and pursuing
opportunities before an acquisition decision is made. The Company is
experiencing significant recurring losses and negative operating and investing
cash flows during the construction and start-up phase of its subsidiaries and
Joint Venture investees.
The Company has relied on certain stockholders for funding, in the form of
both debt and equity, of its operating and capital requirements. The Company's
investments in the Joint Ventures are not expected to become profitable or
generate significant positive cash flows in the near future.
MITI's consolidated and unconsolidated Joint Ventures' ability to generate
positive operating results are dependent upon the sale of commercial advertising
time, the ability to attract subscribers to their systems and the ability to
control operating expenses. MITI's current plans with respect to the Joint
Ventures are to increase subscriber and advertiser bases and thereby their
operating revenues by developing a broader band of programming packages for
wireless cable service providers and radio broadcasting and offering additional
services and options for paging. By offering the large local populations of the
countries in which the Joint Ventures operate desired services at attractive
prices, management believes that the Joint Ventures can increase their
subscriber bases, generate positive operating cash flows, and reduce their
dependence on the Company for funding. Additionally, MITI management believes
that advances in wireless subscriber equipment technology will reduce capital
requirements per subscriber. Continued initiatives to develop its Joint Ventures
into profitable operations include reducing operating costs as a percentage of
revenue while developing management information systems and automated customer
care and service systems.
The ability of the Company and its Joint Ventures to establish profitable
operations is also subject to special political, economic and social risks
inherent in doing business in Eastern Europe and the Commonwealth of Independent
States. These include matters arising out of government policies, economic
conditions, imposition of or changes to taxes or other similar charges by
governmental bodies, foreign exchange fluctuations and controls, civil
disturbances, deprivation or unenforceability of contractual rights, and taking
of property without fair compensation (see notes 3 and 8).
F-66
<PAGE>
METROMEDIA INTERNATIONAL TELECOMMUNICATIONS, INC.
AND SUBSIDIARIES
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
SIX MONTHS ENDED JUNE 30, 1995 AND 1994
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
(UNAUDITED)
(1) ORGANIZATION AND BUSINESS--(CONTINUED)
The Company has obtained political risk insurance policies from the Overseas
Private Investment Corporation ("OPIC") for certain of its Joint Ventures. The
policies cover loss of investment and losses due to business interruption caused
by political violence or expropriation.
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
The accompanying consolidated financial statements included herein have been
prepared by the management of MITI without audit. Certain information and
footnote disclosures normally included in consolidated financial statements
prepared in accordance with generally accepted accounting principles have been
condensed or omitted. In the opinion of Company management, the accompanying
consolidated financial statements as of June 30, 1995 and for the six-month
periods ended June 30, 1995 and 1994, include all adjustments considered
necessary for a fair presentation.
These interim consolidated financial statements should be read in
conjunction with the December 31, 1994 consolidated financial statements and
related notes thereto.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts and results of
operations of MITI and its majority owned and controlled Joint Venture, CNM
Paging, and its wholly owned subsidiary, East News Channel Trading and Services,
Kft. Joint Ventures which are not majority owned, or in which MITI does not have
control, but exercises significant influence, are accounted for using the equity
method.
MITI reflects its net investments in the Joint Ventures under the caption,
investment in and advances to Joint Ventures. Equity in the losses of the Joint
Ventures are allocated according to the percentage ownership in each Joint
Venture until MITI's Joint Venture partner's contributed capital has been fully
depleted. Subsequently, the Company recognizes the full amount of losses
generated by the Joint Venture since the Company is generally the sole funding
source for the Joint Ventures.
On January 1, 1994, the Company changed its policy of accounting for the
Joint Ventures by recording its equity in their losses based upon a three-month
lag. As a result, the consolidated statement of operations for the six-month
period ended June 30, 1995 reflects equity in losses of the Joint Ventures for
the period from October 1, 1994 to March 31, 1995. The consolidated statement of
operations for the six-months ended June 30, 1994 reflects equity in losses of
the Joint Ventures for the period from January 1, 1994 to March 31, 1994. Had
the Company applied this method from October 1, 1993, the effect on reported
operating results for the six-months ended June 30, 1994 would not have been
material.
F-67
<PAGE>
METROMEDIA INTERNATIONAL TELECOMMUNICATIONS, INC.
AND SUBSIDIARIES
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
SIX MONTHS ENDED JUNE 30, 1995 AND 1994
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
(UNAUDITED)
(3) INVESTMENTS IN AND ADVANCES TO JOINT VENTURES
MITI has recorded its investments in Joint Ventures at cost, net of its
equity in earnings or losses. Advances to the Joint Ventures under the line of
credit agreements are reflected based on amounts recoverable under the credit
agreement, plus accrued interest.
Advances are made to Joint Ventures in the form of cash, for working capital
purposes and for payment of expenses or capital expenditures, or in the form of
equipment purchased on their behalf. Interest rates charged to the Joint
Ventures range from the prime rate to the prime rate plus 2%. The credit
agreements generally provide for the payment of principal and interest from 90%
of the Joint Ventures' available cash flow, as defined, prior to any substantial
distributions of dividends to the Joint Venture partners. MITI has entered into
credit agreements with its Joint Ventures to provide up to $46,625 in funding of
which $24,711 remains available. MITI funding commitments are contingent on its
approval of the Joint Ventures' business plans.
As of June 30, 1995, MITI's investments in and advances to the Joint
Ventures were as follows:
<TABLE><CAPTION>
INVESTMENTS
IN AND
ADVANCES TO
JOINT OWNERSHIP YEAR VENTURE DATE OPERATIONS
NAME VENTURES % FORMED COMMENCED
- ------------------------------------------- ----------- --------- ------------ ----------------
<S> <C> <C> <C> <C>
Kosmos TV, Moscow, Russia.................. $ 5,555 50% 1991 May, 1992
Baltcom TV, Riga Latvia.................... 6,355 50% 1991 June, 1992
Ayety TV, Tbilisi, Georgia................. 2,680 49% 1991 September, 1993
Kamalak, Tashkent, Uzbekistan.............. 2,775 50% 1992 September, 1993
Baltcom Paging, Tallin, Estonia............ 2,059 39% 1992 December, 1993
SAC-Radio, Moscow, Russia.................. 1,496 51% 1994 January, 1994
Sun TV, Kishinev, Moldova.................. 1,156 50% 1993 October, 1994
Raduga Paging, Nizhny Novgorod............. 479 45% 1993 October, 1994
Alma-TV, Almaty, Kazakstan................. 951 50% 1994 Pre-Operational
Telecom Georgia, Tibilisi, Georgia......... 2,447 30% 1994 September, 1994
Raduga TV, Nizhny Novgorod................. 177 50% 1994 Pre-Operational
Baltcom Plus, Riga, Latvia................. 758 50% 1994 April, 1995
Romsat TV, Bucharest, Romania.............. 1,029 99% 1993 Pre-Operational
Minsk Cable, Minsk, Belarus................ 803 50% 1993 Pre-Operational
Tbilisi Paging, Tbilisi, Georgia........... 608 45% 1993 November, 1994
Other...................................... 3,805
-----------
$33,133
-----------
-----------
</TABLE>
F-68
<PAGE>
METROMEDIA INTERNATIONAL TELECOMMUNICATIONS, INC.
AND SUBSIDIARIES
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
SIX MONTHS ENDED JUNE 30, 1995 AND 1994
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
(UNAUDITED)
(3) INVESTMENTS IN AND ADVANCES TO JOINT VENTURES--(CONTINUED)
Summarized combined financial information of Joint Ventures accounted for
under the equity method is presented below as of and for the six-month period
ended March 31, 1995. The combined information presented below includes Joint
Ventures which had commenced operations as of March 31, 1995:
BALANCE SHEET
<TABLE><CAPTION>
1995
------------
<S> <C>
ASSETS
Current assets................................................................. $ 4,035
Investments in wireless systems and equipment, net............................. 32,767
Other assets................................................................... 701
------------
Total assets............................................................. $ 37,503
------------
------------
LIABILITIES AND CAPITAL
Current liabilities............................................................ 6,367
Amount payable under MITI credit facility...................................... 20,118
Other long-term liabilities.................................................... 8,579
------------
Total liabilities........................................................ 35,064
------------
Joint ventures' capital........................................................ 2,439
------------
Total liabilities and joint ventures' capital............................ $ 37,503
------------
------------
</TABLE>
STATEMENT OF OPERATIONS
<TABLE><CAPTION>
SIX-MONTH
PERIOD ENDED
MARCH 31,
1995
------------
<S> <C>
Revenues....................................................................... $ 6,966
------------
Expenses:
Cost of service.............................................................. 3,696
Selling, general and administrative.......................................... 3,693
Depreciation and amortization................................................ 1,962
Other........................................................................ 323
------------
Total expenses................................................................. 9,674
------------
Operating loss................................................................. (2,708)
Interest expense............................................................... 695
Other (loss)................................................................... (19)
Foreign currency translation................................................... 21
------------
Net loss................................................................. $ (3,401)
------------
------------
</TABLE>
F-69
<PAGE>
METROMEDIA INTERNATIONAL TELECOMMUNICATIONS, INC.
AND SUBSIDIARIES
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
SIX MONTHS ENDED JUNE 30, 1995 AND 1994
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
(UNAUDITED)
(3) INVESTMENTS IN AND ADVANCES TO JOINT VENTURES--(CONTINUED)
Financial information for Joint Ventures which are not yet operational is
not included in the above summary. MITI's investment in and advances to those
Joint Ventures at June 30, 1995 amounted to approximately $6,767.
(4) NOTES PAYABLE
Notes payable are comprised of the following at June 30, 1995:
Notes payable to Metromedia Company...................... $40,430
Demand notes payable..................................... 5,500
-------
$45,930
-------
-------
The demand notes payable bear interest at the prime rate and are guaranteed
by several stockholders through September 30, 1995. A stockholder which
guarantees $750,000 of these notes has indicated its intention to withdraw its
guarantee effective September 30, 1995.
Notes payable to Metromedia Company includes notes payable to Metromedia
Company and affiliates of Metromedia Company and bear interest at rates between
the prime rate and the prime rate plus 2% as published by Chemical Bank. These
notes are due within one year from date of the notes.
(5) CONTINGENCIES
Russian legislators have produced a draft law which contains a provision
that would limit the ownership interest of foreign investors of commercial
broadcast license holdings entities to 35%. This draft law passed the lower
house of the Russian Federation legislature, the Duma, in February 1995, but was
later rejected by the upper house of the Russian Federation, the Federal
Council. It is not yet known whether a revised draft will be adopted by both
houses of legislature and be signed into law by the President of the Russian
Federation.
It is also not yet known whether this law will be upheld as constitutional
and consistent with Russian Federation treaty obligations or how it would be
interpreted and applied by Russian Federation regulators to existing license
holders. However, if the legislature passes a law restricting foreign ownership
of broadcast license holding entities and such a law is found to be
constitutional and fails to contain a grandfathering clause to protect existing
companies, it could require MITI to reduce its ownership interests in Russian
Joint Ventures. However, it is unclear how such reductions would be effected.
Legislation has recently been passed in the Republic of Latvia which would
limit to 20% the interest which a foreign person is permitted to own in entities
engaged in certain communications businesses such as radio, cable television and
other systems of transmission. This legislation could require MITI, within one
year of the enactment of this legislation, to reduce to 20% its existing
F-70
<PAGE>
METROMEDIA INTERNATIONAL TELECOMMUNICATIONS, INC.
AND SUBSIDIARIES
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
SIX MONTHS ENDED JUNE 30, 1995 AND 1994
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
(UNAUDITED)
(5) CONTINGENCIES--(CONTINUED)
ownership interests in joint ventures which operate a wireless cable television
system, paging system and FM radio station in Riga, Latvia.
(6) PROPOSED MERGER
MITI is a party to a proposed merger agreement with Orion Pictures
Corporation (Orion), The Actava Group, Inc. (Actava) and MCEG Sterling
Corporation (the Merger) whereby the ownership interests of the companies will
be combined in a stock-for-stock transaction.
Under the terms of the Merger, stockholders of the Company will receive
common stock of Actava which will be the surviving entity. It is currently
anticipated that Metromedia Company and its affiliates would control the Board
of Directors of the surviving entity as a result of the stock exchanges.
Orion is 56% owned, directly and indirectly, by John W. Kluge and Stuart
Subotnick.
The Company has been named as a defendant in a lawsuit which is attempting
to enjoin the proposed merger.
(7) INCOME TAXES
The statutory Federal tax rates for the six-month periods ended June 30,
1995 and 1994 were 35%. The effective tax rates were zero for the six-month
periods ended June 30, 1995 and 1994 due to the Company incurring net operating
losses.
(8) COMMITMENTS
During April, 1995, MITI entered into a commitment letter with OPIC whereby
OPIC has agreed to provide loan guarantees enabling MITI's affiliates, ITI and
ITISPS to borrow up to $29.9 million, such loan guarantees to be secured by
MITI's indirect ownership interests in five wireless cable television Joint
Ventures, and to be subject to the satisfaction of certain terms and conditions
which include a transfer of the ownership interests in such joint ventures from
ITI to ITISPS. These conditions are expected to be complied with by the end of
1995 at which time the funds will be available to ITI and ITISPS. The commitment
letter with OPIC specifies that interest will be at a rate to be determined
which is acceptable to OPIC and that guaranty fees and other fees will be
imposed.
F-71
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors KOSMOS TV:
We have audited the accompanying balance sheets of Kosmos TV as of December
31, 1993 and September 30, 1994, and the related statements of operations,
partners' capital, and cash flows for the year ended December 31, 1993 and the
nine months ended September 30, 1994. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Kosmos TV as of December 31,
1993 and September 30, 1994, and the results of its operations and its cash
flows for the year ended December 31, 1994 and the nine months ended September
30, 1994, in conformity with generally accepted accounting principles.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 1 to the
financial statements, the Company has suffered recurring losses from operations
and has a net capital deficiency that raise substantial doubt about its ability
to continue as a going concern. Management's plan in regard to these matters are
also described in Note 1. The financial statements do not include any
adjustments that might result from the outcome of this uncertainty.
KPMG
Moscow, Russia
March 24, 1995
F-72
<PAGE>
KOSMOS TV
BALANCE SHEETS
DECEMBER 31, 1993 AND SEPTEMBER 30, 1994
<TABLE><CAPTION>
1993 1994
---------- -----------
<S> <C> <C>
ASSETS
Cash.............................................................. $ 152,285 $ 447,047
Subscriber receivables, net of allowance for doubtful accounts of
$10,000 in 1993 and $86,234 in 1994............................. 91,162 114,351
Other assets...................................................... 20,934 94,854
Investment in wireless system and equipment, at cost, net of
accumulated depreciation and amortization....................... 3,534,000 5,114,363
Intangible assets, net of accumulated amortization of $54,646 in
1993 and $79,237 in 1994........................................ 765,026 740,435
---------- -----------
Total assets................................................ $4,563,407 $ 6,511,050
---------- -----------
---------- -----------
LIABILITIES AND PARTNERS' CAPITAL
Liabilities:
Accounts payable................................................ $ 124,370 $ 461,885
Accrued liabilities............................................. 82,059 113,284
Advance payments received from customers........................ 287,094 391,740
Customer deposits............................................... 316,101 594,362
Interest payable to related party............................... -- 339,295
Related party credit agreement.................................. 3,210,378 5,719,148
---------- -----------
Total liabilities........................................... 4,020,002 7,619,714
Partners' capital (deficit)....................................... 543,405 (1,108,664)
---------- -----------
Total liabilities and partners' capital..................... $4,563,407 $ 6,511,050
---------- -----------
---------- -----------
</TABLE>
The accompanying notes to financial statements are an integral part of these
financial statements.
F-73
<PAGE>
KOSMOS TV
STATEMENTS OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1993 AND
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1994
<TABLE><CAPTION>
1993 1994
---------- -----------
<S> <C> <C>
Operating revenues................................................ $1,110,455 $ 1,407,258
Operating expenses:
Programming and service costs................................... 745,982 842,053
Selling, general and administrative............................. 738,198 1,059,539
Depreciation and amortization................................... 555,490 783,919
---------- -----------
Total costs and expenses.................................... 2,039,670 2,685,511
---------- -----------
Operating loss.............................................. (929,215) (1,278,253)
Interest expense.................................................. -- (339,295)
Foreign currency loss............................................. (62,318) (34,521)
---------- -----------
Net loss.................................................... $ (991,533) $(1,652,069)
---------- -----------
---------- -----------
</TABLE>
The accompanying notes to financial statements are an integral part of these
financial statements.
F-74
<PAGE>
KOSMOS TV
STATEMENTS OF PARTNERS' CAPITAL
FOR THE YEAR ENDED DECEMBER 31, 1993 AND
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1994
<TABLE><CAPTION>
ITI ORPS TOTAL
--------- --------- -----------
<S> <C> <C> <C>
Partner's capital, December 31, 1992.................... $ 767,469 $ 767,469 $ 1,534,938
Net loss................................................ (495,766) (495,767) (991,533)
--------- --------- -----------
Partner's capital, December 31, 1993.................... 271,703 271,702 543,405
Net loss................................................ (826,035) (826,034) (1,652,069)
--------- --------- -----------
Partner's deficit, September 30, 1994................... $(554,332) $(554,332) $(1,108,664)
--------- --------- -----------
--------- --------- -----------
</TABLE>
The accompanying notes to financial statements are an integral part of these
financial statements.
F-75
<PAGE>
KOSMOS TV
STATEMENTS OF CASH FLOWS
FOR THE YEAR ENDED DECEMBER 31, 1993 AND
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1994
<TABLE><CAPTION>
1993 1994
--------- -----------
<S> <C> <C>
Cash flows from operating activities
Net loss......................................................... $(991,533) $(1,652,069)
Adjustments to reconcile net loss to net cash (used in) provided
by operating activities:
Depreciation and amortization.................................. 555,490 783,919
Bad debt expense............................................... -- 76,234
Changes in assets and liabilities:
Increase in subscriber receivables........................... (55,758) (99,423)
Decrease (increase) in other assets.......................... 28,801 (73,920)
Increase in accounts payable and accrued liabilities......... 94,831 368,740
Increase in advance payments received from customers......... 122,633 104,646
Increase in customer deposits................................ 204,051 278,261
Increase in interest payable to related party................ -- 339,295
--------- -----------
Net cash (used in) provided by operating activities.............. (41,485) 125,683
Cash flows from investing activities--purchase of wireless system
and equipment.................................................... (158,472) (20,819)
Cash flows from financing activities--proceeds from related party
under credit agreement........................................... 190,797 189,898
--------- -----------
Net (decrease) increase in cash.............................. (9,160) 294,762
Cash, beginning of period.......................................... 161,445 152,285
--------- -----------
Cash, end of period................................................ $ 152,285 $ 447,047
--------- -----------
--------- -----------
</TABLE>
SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING AND FINANCING ACTIVITIES:
For the year ended December 31, 1993 and for the nine months ended September
30, 1994, $1,463,798 and $2,318,872, respectively, of investment in wireless
system and equipment was financed through credit agreements with a related
party.
The accompanying notes to financial statements are an integral part of these
financial statements.
F-76
<PAGE>
KOSMOS TV
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1993 AND SEPTEMBER 30, 1994
1. ORGANIZATION AND ACTIVITIES
Kosmos TV (the Company) was formed on March 1, 1991 and was registered as a
Soviet-American Joint Venture under the laws of the USSR on July 9, 1991. The
Company was formed by All-Union Radio and Television Transmitting Station of the
USSR Ministry of Communications (ORPS) and Integration Communication
International, Inc. (ICI) with each party agreeing to contribute 50 percent of
the Company's capital. On May 6, 1991, ICI assigned its interest in the Company
to International Telcell Group, Limited Partnership (ITG). International
Telcell, Inc. (ITI) has assumed all rights and obligations of ITG as its legal
successor. ITG was dissolved as a legal entity in December 1993.
The Company was formed for the purpose of providing cable television
programming in Moscow, Russia, through the use of "wireless cable" technology.
Wireless cable provides television programming by transmitting a signal via
microwave frequencies to antennas located at the subscribers premises.
The partners' capital contribution amounted to a total of 4 million Soviet
roubles which at the time the Company was established was US $2.2 million
equivalent at the commercial exchange rate in effect at that time. The
contribution consisted primarily of cash, frequency rights, broadcast tower and
studio space, subscriber equipment, transmitter equipment and earth station
satellite receiving equipment.
The Company began its commercial operations in May, 1992. Its primary
customers are hotels and foreign residents in Moscow, Russia.
Since the break-up of the USSR, companies that were registered as joint
ventures are now being re-registered as joint-stock companies under the laws of
the Russian Federation. The Company re-registered as a joint-stock company in
December, 1994.
The Company is in an early stage of development and there can be no
assurances that the Company will generate sufficient revenues from operations in
order to meet operating expenditures and capital requirements. In order to
finance operations and future capital requirements, the Company is dependent
upon the continued financial support of one of its partners, ITI. ITI management
plans to increase the subscriber base and thereby the Company's operating
revenue by developing a broader band of programming packages, which are
localized in language and, where possible, content. By offering the large local
population an attractively priced basic package of programming and by increasing
the existing level of service to foreign and commercial installations with pay
per view events and movies, the Company can sufficiently increase the subscriber
base to generate positive operating cash flow. To continue to develop the
Company, and to establish profitable operations and positive cash flows, ITI
management plans to reduce operating costs as a percentage of revenue and
implementing management information systems, and a computerized customer service
system. Management believes that advances in technology of wireless subscriber
equipment will reduce capital investment per subscriber. It is the opinion of
ITI management that segmented, target programming, and cost savings through
automation of administrative functions combined with reduced investment in
subscriber equipment will permit the Company to establish profitable operations
and to generate sufficient revenues to cover all expenditures, including
depreciation, such that a provision against permanent impairment in the value of
assets is not required.
The ability of the Company to establish profitable operations is also
subject to special political and social risks inherent in doing business in
Russia. These include matters arising out of policies of the Russian government,
the economic conditions, imposition of or changes to taxes or other similar
charges
F-77
<PAGE>
KOSMOS TV
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1993 AND SEPTEMBER 30, 1994
1. ORGANIZATION AND ACTIVITIES--(CONTINUED)
by governmental bodies, foreign exchange fluctuations and controls, civil
disturbances, deprivation or unenforceability of contract rights, and the taking
of property without fair compensation.
2. SIGNIFICANT ACCOUNTING POLICIES
Principles of accounting
The statutory accounts of the Company are maintained in accordance with
Russian accounting regulations and are stated in Russian roubles. The
accompanying financial statements have been prepared in accordance with US
generally accepted accounting principles (US GAAP) and have been translated to
US dollars (USD) in accordance with the Statement on Financial Accounting
Standards No. 52 (SFAS 52), "Accounting for Foreign Currency Translation". The
Company's functional currency is the US dollar as virtually all equipment
expenditures are made in USD and revenue is collected in USD equivalents. For US
GAAP purposes only, in 1994 the Company changed its fiscal year end from
December 31 to September 30.
USD transactions are shown at their historical value. Foreign currency
(Russian rouble) denominated accounts are converted into USD in accordance with
accounting for highly inflationary economies under SFAS 52. Under this method,
monetary assets and liabilities denominated in roubles are translated into USD
at the prevailing period end exchange rate. All other assets and liabilities are
translated at historic exchange rates. Revenues, expenses and cash flows have
been translated, where practicable, at historic rates as of the date of the
transaction. Otherwise, revenues, expenses and cash flows have been translated
using monthly average rates. Foreign currency gains and losses resulting from
the use of these different rates are included in the statement of operations.
Rouble to USD exchange rates used at December 31, 1993 and September 30, 1994
were 1,247 and 2,596 roubles to 1 USD, respectively.
Intangible Assets
Included as intangible assets as of December 31, 1993 and September 30, 1994
are frequency rights valued at $491,804 and rights to transmit from the
Ostankino television tower and studio space valued at $327,868. The Company is
entitled to the rights and studio space. Amounts are being amortized over 25
years. Amortization expense on these amounts recorded in 1993 and 1994 amounted
to $32,787 and $24,591, respectively. Amortization began in May 1992 when the
rights were in place and operations began. The rights and studio space, together
with cash and tangible assets, contributed by ORPS were valued at an amount
equivalent to the historic costs of tangible assets contributed by ITG.
Revenue Recognition
Subscription revenues are recognized in the period of service. Installation
fees are recognized as revenue upon subscriber hook-up as direct selling costs
exceed installation fees.
F-78
<PAGE>
KOSMOS TV
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1993 AND SEPTEMBER 30, 1994
3. INVESTMENT IN WIRELESS SYSTEM AND EQUIPMENT
The investment in wireless system and equipment is as follows:
1993 1994
---------- -----------
Uninstalled subscriber equipment.................. $ 451,775 $ 569,722
Property and equipment............................ 3,768,855 5,990,599
---------- -----------
4,220,630 6,560,321
Less: Accumulated depreciation and amortization... (686,630) (1,445,958)
---------- -----------
$3,534,000 $ 5,114,363
---------- -----------
---------- -----------
Depreciation and amortization is calculated on a straight-line basis over
the following useful lives:
Satellite reception and decoding equipment.......... 15 years
Transmitter equipment............................... 15 years
Studio and installed subscriber equipment........... 5 years
Computers and software.............................. 5 years
Vehicles............................................ 3 years
Other............................................... 2 to 3 years
4. RELATED PARTY TRANSACTIONS
The majority of the Company's equipment was contributed as part of the
capital contribution or purchased from ITI under the credit agreement (note 6).
Equipment purchases from ITI for the year ended December 31, 1993 and for the
nine months ended September 30, 1994 amounted to $1,463,798 and $2,318,872
respectively. Cash contributions from ITI for the year ended December 31, 1993
and for the nine months ended September 30, 1994 amounted to $190,797 and
$189,898, respectively. ITI also funds working capital and pays for certain
costs on behalf of the Company which are financed through the cash advances
under on the credit agreement.
In addition, the Company received programming from ITI in the amount of
$48,543 and $99,956 for 1993 and 1994, respectively. Amounts due to ITI,
included in accounts payable, are $48,543 and $148,499 for 1993 and 1994,
respectively.
5. MAJOR CUSTOMERS
During 1993, a major hotel and the US embassy in Moscow accounted for 14%
and 5% of the Company's revenues, respectively. During 1994, a major hotel and
an apartment complex in Moscow accounted for 7% and 6% percent of the Company's
revenues, respectively.
6. CREDIT AGREEMENT
On October 31, 1993, the Company signed an amended agreement (the Agreement)
with ITI to establish a credit line of $10 million. This amended agreement
included all funds transferred to the Company or spent for the benefit of the
Company from inception to the extent such funds were in excess of those applied
to ITG's capital contribution. The Agreement provides that all borrowings under
the credit line are secured by the investment in wireless system and equipment
and accounts receivable of
F-79
<PAGE>
KOSMOS TV
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1993 AND SEPTEMBER 30, 1994
6. CREDIT AGREEMENT--(CONTINUED)
the Company. Borrowings under the Agreement amounted to $3,210,378 and
$5,719,148 as of December 31, 1993 and September 30, 1994, respectively.
Interest on borrowings commenced on January 1, 1994 and will continue to
accrue on unpaid borrowings at the prime rate announced by Morgan Guaranty Trust
Company. The interest rate at September 30, 1994 was 7.75%. Interest payments
are payable, in arrears, on the last day of each quarter. Mandatory principal
payments are payable within 60 days after the end of each quarter and shall be
equal to 90 percent of net available income, as defined by the agreement, for
that quarter. The Company may at any time prepay without premium or penalty. All
payments will first be applied to any unpaid interest and then to the
outstanding principal balance. A 10 percent penalty is imposed on any amounts
which become overdue. All borrowings under the Agreement must first be submitted
to ITI for approval prior to funding. The Agreement may be terminated at the
option of the Company or ITI on May 29, 2000, however if the Agreement is not
terminated at this time it will be automatically renewed for two more years. No
dividends can be paid while the credit line is outstanding. As the Company has
not generated net available income, as defined above, no payments were made
during 1993 or 1994.
7. TAXES
Certain non-deductible expenses under Russian accounting rules will cause
differences between income determined under Russian profits tax rules and income
before taxes computed under GAAP. Further, temporary differences will arise due
to variations in depreciation rates required under Russian accounting rules and
those used in GAAP reporting. Due to the uncertainty regarding future tax rules
and regulations, no provision for deferred taxes has been made for the year
ended December 31, 1993 or for the nine months ended September 30, 1994.
8. DRAFT LEGISLATION
Russian legislators have produced a draft law which contains a provision
that would limit the ownership interest of foreign investors of commercial
broadcast license holding entities to 35%. This draft law passed the lower house
of the Russian Federation legislation, the Duma, in February 1995, but was later
rejected by the upper house of the Russian Federation, the Federal Council. It
is not yet known whether a revised draft will be adopted by the President of the
Russian Federation. It is also not yet known whether this law will be upheld as
constitutional and consistent with Russian Federation treaty obligations or how
it would be interpreted and applied by Russian Federation regulators to existing
license holders. However, if the legislature passes a law restricting foreign
ownership of broadcast license holding entities and such a law is found to be
constitutional and fails to contain a grandfathering clause to protect existing
companies, it could require ITI to divest themselves of a portion of their
ownership interests in the Company.
F-80
<PAGE>
KOSMOS TV
BALANCE SHEET
MARCH 31, 1995
(UNAUDITED)
<TABLE><CAPTION>
ASSETS: 1995
-----------
<S> <C>
Cash.......................................................................... $ 1,051,381
Subscriber receivables, net of allowance for doubtful accounts $178,711 in
1995........................................................................ 268,067
Other assets.................................................................. 255,255
Investment in wireless system and equipment, at cost, net of accumulated
depreciation and amortization............................................... 5,787,814
Intangible assets, net of accumulated amortization of $95,631................. 724,041
-----------
Total assets.............................................................. $ 8,086,558
-----------
LIABILITIES & STOCKHOLDERS' EQUITY:
Liabilities:
Accounts payable............................................................ $ 225,085
Accrued liabilities......................................................... 650,659
Advance payments received from customers.................................... 619,474
Customer deposits........................................................... 899,754
Interest payable to related party........................................... 700,000
Related party credit agreement.............................................. 7,055,829
-----------
Total liabilities......................................................... 10,150,801
Stockholders' equity (deficit)................................................ (2,064,243)
-----------
Total liabilities and stockholders' equity................................ $ 8,086,558
-----------
-----------
</TABLE>
The accompanying notes to financial statements are an integral part of these
financial statements.
F-81
<PAGE>
KOSMOS TV
STATEMENT OF OPERATIONS
FOR THE SIX MONTHS ENDED MARCH 31, 1995
AND THE THREE MONTHS ENDED MARCH 31, 1994
(UNAUDITED)
<TABLE><CAPTION>
SIX MONTHS THREE MONTHS
ENDED ENDED
MARCH 31, 1995 MARCH 31, 1994
-------------- --------------
<S> <C> <C>
Operating revenues............................................. $1,584,024 $ 333,639
Operating expenses:
Programming and service costs................................ 970,652 246,420
Selling, general and administrative.......................... 484,660 219,061
Depreciation and amortization................................ 704,549 239,797
-------------- --------------
Total costs and expenses................................... 2,159,861 705,278
-------------- --------------
Operating loss............................................. (575,837) (371,639)
Interest expense............................................... (360,705) (74,724)
Foreign currency gain (loss)................................... (19,037) (5,117)
-------------- --------------
Net loss................................................... $ (955,579) $ (451,480)
-------------- --------------
-------------- --------------
</TABLE>
The accompanying notes to financial statements are an integral part of these
financial statements.
F-82
<PAGE>
KOSMOS TV
STATEMENT OF CASH FLOWS
FOR THE SIX MONTHS ENDED MARCH 31, 1995
AND THE THREE MONTHS ENDED MARCH 31, 1994
(UNAUDITED)
<TABLE><CAPTION>
SIX MONTHS THREE MONTHS
ENDED ENDED
MARCH 31, 1995 MARCH 31, 1994
-------------- --------------
<S> <C> <C>
Cash flows from operating activities
Net loss..................................................... $ (955,579) $ (451,480)
Adjustments to reconcile net loss to net cash provided by
operating activities:
Depreciation and amortization.............................. 704,549 239,797
Changes in assets and liabilities:
(Increase) decrease in subscriber receivables............ (153,716) 32,980
Increase in other assets................................. (160,401) (7,726)
Increase (decrease) in accounts payable and accrued
liabilities............................................ 300,575 (43,036)
Increase in advance payments received from customers..... 227,734 71,045
Increase in customer deposits............................ 305,392 104,945
Increase in interest payable to related party............ 360,705 74,724
-------------- --------------
Net cash provided by operating activities.................... 629,259 21,249
Cash flows from investing activities--purchase of wireless
system and equipment......................................... (24,925) (40,567)
Cash flows from financing activities--proceeds from related
party under credit agreement................................. -- --
-------------- --------------
Net increase (decrease) in each.............................. 604,334 (19,318)
Cash, beginning of period...................................... 447,047 152,285
-------------- --------------
Cash, end of period............................................ $1,051,381 $ 132,967
-------------- --------------
-------------- --------------
</TABLE>
SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING AND FINANCING ACTIVITIES:
For the six months ended March 31, 1995 and three months ended March 31,
1994, $1,336,681 and $1,034,731, respectively, of investment in wireless system
and equipment was financed through credit agreements with a related party.
The accompanying notes to financial statements are an integral part of these
financial statements.
F-83
<PAGE>
KOSMOS TV
NOTES TO FINANCIAL STATEMENTS
MARCH 31, 1995
(UNAUDITED)
1. ORGANIZATION AND ACTIVITIES
Kosmos TV (the Company) was formed on March 1, 1991 and was registered as a
Soviet-American Joint Venture under the laws of the USSR on July 9, 1991. The
partners of the Company are All-Union Radio and Television Transmitting Station
of the USSR Ministry of Communications (ORPS) and International Telcell, Inc.
(ITI), each with a 50 percent interest in the Company.
The Company was formed for the purpose of providing cable television
programming in Moscow, Russia, through the use of "wireless cable" technology.
Wireless cable provides television programming by transmitting a signal via
microwave frequencies to antennas located at the subscribers' premises.
The partners' capital contribution amounted to a total of 4 million Soviet
roubles which at the time the Company was established was US $2.2 million
equivalent at the commercial exchange rate in effect at that time. The
contribution consisted primarily of cash, frequency rights, broadcast tower and
studio space, subscriber equipment, transmitter equipment and earth station
satellite receiving equipment.
The Company began its commercial operations in May 1992. Its primary
customers are hotels and foreign residents in Moscow, Russia.
Since the break-up of the USSR, companies that were registered as joint
ventures are now being re-registered as joint-stock companies under the laws of
the Russian Federation. The Company re-registered as a closed-type joint-stock
company in March 1994.
The Company is in an early stage of development and there can be no
assurances that the Company will generate sufficient revenues from operations in
order to meet operating expenditures and capital requirements. In order to
finance operations and future capital requirements, the Company is dependent
upon the continued financial support of one of its partners, ITI. Management
plans to increase the subscriber base and thereby the Company's operating
revenue by developing a broader band of programming packages, which are
localized in language and, where possible, content. By offering the large local
population an attractively priced basic package of programming and by increasing
the existing level of service to foreign and commercial installations with
pay-per-view events and movies, the Company believes it can sufficiently
increase the subscriber base to generate positive operating cash flow. To
continue to develop the Company, and to establish profitable operations and
positive cash flows, management plans to reduce operating costs as a percentage
of revenue by implementing management information systems and a computerized
customer service system. Capital investment per subscriber will be reduced by
substituting lower cost subscriber equipment where practicable and by increasing
the leverage of existing delivery systems. It is the opinion of management that
segmented, targeted programming, and cost savings through automation of
administrative functions combined with reduced investment in subscriber
equipment will permit the Company to establish profitable operations and to
generate sufficient revenues to cover all expenditures, including depreciation,
such that a provision against permanent impairment in the value of assets is not
required.
The ability of the Company to establish profitable operations is also
subject to special political and social risks inherent in doing business in
Russia. These include matters arising out of the policies of the Russian
government, the economic conditions, imposition of or changes to taxes or other
similar charges by government bodies, foreign exchange fluctuations and
controls, civil disturbances, deprivation or unenforceability of contract rights
and the taking of property without fair compensation.
F-84
<PAGE>
KOSMOS TV
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
MARCH 31, 1995
(UNAUDITED)
2. SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF ACCOUNTING
The statutory accounts of the Company are maintained in accordance with
Russian accounting regulations and are stated in Russian roubles. The
accompanying financial statements have been prepared in accordance with US
generally accepted accounting principles (US GAAP) and have been translated to
US dollars (USD) in accordance with the Statement on Financial Accounting
Standards No. 52 (SFAS 52), "Accounting for Foreign Currency Translation". The
Company's functional currency is the US dollar as virtually all equipment
expenditures are made in USD and revenue is collected in USD equivalents. For US
GAAP purposes only, in 1994 the Company changed its fiscal year end from
December 31 to September 30.
USD transactions are shown at their historical value. Foreign currency
(Russian rouble) denominated accounts are converted into USD in accordance with
accounting for highly inflationary economies under SFAS 52. Under this method,
monetary assets and liabilities denominated in roubles are translated into USD
at the prevailing period end exchange rate. All other assets and liabilities are
translated at historic exchange rates. Revenues, expenses and cash flows have
been translated, where practicable, at historic rates as of the date of the
transaction. Otherwise, revenues, expenses and cash flows have been translated
using monthly average rates. Foreign currency gains and losses resulting from
the use of these different rates are included in the statement of operations.
Rouble to USD exchange rates used at March 31, 1995 were 4,897 roubles to 1 USD.
INTANGIBLE ASSETS
Included as intangible assets as of March 31, 1995 are frequency rights
valued at $491,804 and rights to transmit from the Ostankino television tower
and studio space valued at $327,868. The Company is entitled to the rights and
studio space. Amounts are being amortized over 25 years. Amortization expense on
these amounts recorded for the six months ended March 31, 1995 and three months
ended March 31, 1994 amounted to $16,394 and $8,197, respectively. Amortization
began in May 1992 when the rights were in place and operations began. The rights
and studio space, together with cash and tangible assets, contributed by ORPS
were valued at an amount equivalent to the historic costs of tangible assets
contributed by ITI.
REVENUE RECOGNITION
Subscription revenues are recognized in the period of service. Installation
fees are recognized as revenue upon subscriber hook-up as direct selling costs
exceed installation fees.
BASIS OF PRESENTATION
The financial statements included herein have been prepared by the
management of the Company without audit. Certain information and footnote
disclosures normally included in financial statements prepared in accordance
with generally accepted accounting principles have been condensed or omitted. In
the opinion of Company management, the accompanying financial statements as of
March 31, 1995 and for the six months ended March 31, 1995 and three months
ended March 31, 1994 include all adjustments considered necessary for a fair
presentation. Results of operations for interim periods are not necessarily
indicative of a full year's operations.
F-85
<PAGE>
KOSMOS TV
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
MARCH 31, 1995
(UNAUDITED)
2. SIGNIFICANT ACCOUNTING POLICIES--(CONTINUED)
These financial statements should be read in conjunction with the September
30, 1994 financial statements and related notes thereto.
3. INVESTMENT IN WIRELESS SYSTEM AND EQUIPMENT
The investment in wireless system and equipment is as follows:
1995
Property and equipment........................................ $ 7,921,926
Less: Accumulated depreciation and amortization............... (2,134,112)
-----------
$ 5,787,814
-----------
Depreciation and amortization is calculated on a straight-line basis over
the following useful lives:
Satellite reception and decoding equipment.................. 15 years
Transmitter equipment....................................... 15 years
Studio and installed subscriber equipment................... 5 years
Computer and software....................................... 5 years
Vehicles.................................................... 3 years
Other....................................................... 2 to 3 years
4. RELATED PARTY TRANSACTIONS
The majority of the Company's equipment was contributed as part of the
capital contribution or purchased from ITI under the credit agreement (note 6).
Equipment purchases from ITI for the six months ended March 31, 1995 and the
three months ended March 31, 1994 amounted to $1,336,681 and $1,034,731,
respectively. No cash contributions were made for the six months ended March 31,
1995 and the three months ended March 31, 1994. ITI also funds working capital
and pays for certain costs on behalf of the Company which are financed through
the cash advances under on the credit agreement.
In addition, the Company received programming from ITI in the amount of
$130,684 and $16,181 for the six months ended March 31, 1995 and the three
months ended March 31, 1994, respectively. Amounts due to ITI included in
accounts payable are $279,183 at March 31, 1995.
5. MAJOR CUSTOMERS
During the six months ended March 31, 1995, a major hotel and an apartment
complex in Moscow accounted for 7% and 6% of the Company's revenues,
respectively. During the three months ended March 31, 1994, a major hotel and an
apartment complex in Moscow accounted for 8% and 7% of the Company's revenues,
respectively.
6. CREDIT AGREEMENT
On October 31, 1993, the Company signed an amended agreement (the Agreement)
with ITI to establish a credit line of $10 million. This amended agreement
included all funds transferred to the
F-86
<PAGE>
KOSMOS TV
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
MARCH 31, 1995
(UNAUDITED)
6. CREDIT AGREEMENT--(CONTINUED)
Company or spent for the benefit of the Company from inception to the extent
such funds were in excess of those applied to ITI's capital contributions. The
Agreement provides that all borrowings under the credit line are secured by the
investment in wireless system and equipment and accounts receivable of the
Company. Borrowings under the Agreement amounted to $7,055,829 as of March 31,
1995.
Interest on borrowings commenced on January 1, 1994 and will continue to
accrue on unpaid borrowings at the prime rate announced by Morgan Guaranty Trust
Company. Interest payments are payable, in arrears, on the last day of each
quarter. Mandatory principal payments are payable within 60 days after the end
of each quarter and shall be equal to 90 percent of net available income, as
defined by the agreement, for that quarter. The Company may at any time prepay
without premium or penalty. All payments will first be applied to any unpaid
interest and then to the outstanding principal balance. A 10 percent penalty is
imposed on any amounts which become overdue. All borrowings under the Agreement
must first be submitted to ITI for approval prior to funding. The Agreement may
be terminated at the option of the Company or ITI on May 29, 2000, however if
the Agreement is not terminated at this time it will be automatically renewed
for two more years. No dividends can be paid while the credit line is
outstanding. As the Company has not generated net available income, as defined
above, no payments were made during the six months ended March 31, 1995 and the
three months ended March 31, 1994.
7. TAXES
Certain non-deductible expenses under Russian accounting rules will cause
differences between income determined under Russian profits tax rules and income
before taxes computed under GAAP. Further, temporary differences will arise due
to variations in depreciation rates required under Russian accounting rules and
those used in GAAP reporting. Due to the uncertainty regarding future tax rules
and regulations, no provision for deferred taxes has been made for the quarter
ended March 31, 1995.
8. DRAFT LEGISLATION
Russian legislators have produced a draft law which contains a provision
that would limit the ownership interest of foreign investors of commercial
broadcast license holding entities to 35%. This draft law passed the lower house
of the Russian Federation legislation, the Duma, in February 1995, but was later
rejected by the upper house of the Russian Federation, the Federal Council. It
is not yet known whether a revised draft will be adopted by both houses of
legislature and be signed into law by the President of the Russian Federation.
It is also not yet known whether this law will be upheld as constitutional and
consistent with Russian Federation treaty obligations or how it would be
interpreted and applied by Russian Federation regulators to existing license
holders. However, if the legislature passes a law restricting foreign ownership
of broadcast license holding entities and such a law is found to be
constitutional and fails to contain a grandfathering clause to protect existing
companies, it could require ITI to divest themselves of a portion of their
ownership interests in the Company.
F-87
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To MCEG STERLING INCORPORATED:
We have audited the accompanying consolidated balance sheets of MCEG
Sterling Incorporated and subsidiaries as of March 31, 1995 and 1994 and the
related consolidated statements of income, stockholders' equity and cash flows
for each of the three years in the period ended March 31, 1995. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of MCEG
Sterling Incorporated and subsidiaries as of March 31, 1995 and 1994, and the
results of their operations and their cash flows for each of the three years in
the period ended March 31, 1995 in conformity with generally accepted accounting
principles.
/s/ ARTHUR ANDERSEN LLP
......................................
ARTHUR ANDERSEN LLP
Los Angeles, California
May 19, 1995
F-88
<PAGE>
MCEG STERLING INCORPORATED
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
<TABLE><CAPTION>
MARCH 31,
----------------
1995 1994
------ ------
<S> <C> <C>
ASSETS
Cash....................................................................... $ 382 $2,079
Receivables, net........................................................... 3,842 1,864
Film costs, net............................................................ 3,518 4,212
Other assets............................................................... 404 407
Investment in subsidiary held for disposition.............................. -- --
------ ------
$8,146 $8,562
------ ------
------ ------
LIABILITIES AND STOCKHOLDERS' EQUITY
Accounts payable........................................................... $ 556 $ 325
Accrued participations and residuals....................................... 2,174 1,467
Accrued production and other liabilities................................... 1,018 3,228
Note payable............................................................... 495 --
Deferred revenues.......................................................... 166 249
------ ------
4,409 5,269
------ ------
Commitments and contingencies
Stockholders' Equity
Preferred stock-- Par $.01, 1 million authorized,
None outstanding......................................... -- --
Common stock-- Par $.001, 25 million authorized
11.2 million and 11 million outstanding................... 11 11
Paid in capital............................................................ 1,989 1,972
Retained earnings.......................................................... 1,737 1,310
------ ------
3,737 3,293
------ ------
$8,146 $8,562
------ ------
------ ------
</TABLE>
The accompanying notes are an integral part of these consolidated balance
sheets.
F-89
<PAGE>
MCEG STERLING INCORPORATED
CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE><CAPTION>
YEARS ENDED MARCH 31,
---------------------------
1995 1994 1993
------ ------ -------
<S> <C> <C> <C>
REVENUES
Film distribution................................................ $5,966 $5,262 $ 4,652
Participations and consulting.................................... 2,477 2,577 2,485
------ ------ -------
8,443 7,839 7,137
------ ------ -------
EXPENSES
Costs of revenues................................................ 4,656 4,366 3,985
General and administrative....................................... 3,330 2,768 2,638
------ ------ -------
7,986 7,134 6,623
------ ------ -------
INCOME BEFORE PROVISION FOR INCOME TAXES AND EXTRAORDINARY
ITEM............................................................. 457 705 514
Provision for income taxes....................................... 198 305 230
------ ------ -------
INCOME BEFORE EXTRAORDINARY ITEM................................. 259 400 284
Extraordinary item--gain relating to reorganization
proceedings...................................................... -- 150 --
------ ------ -------
NET INCOME....................................................... $ 259 $ 550 $ 284
------ ------ -------
------ ------ -------
Income per common share
Income before extraordinary item............................... $ 0.02 $ 0.04 $ 0.03
Extraordinary item............................................. -- 0.01 --
------ ------ -------
Net income..................................................... $ 0.02 $ 0.05 $ 0.03
------ ------ -------
------ ------ -------
Average number of common shares outstanding...................... 11,160 10,714 9,935
------ ------ -------
------ ------ -------
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
F-90
<PAGE>
MCEG STERLING INCORPORATED
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(IN THOUSANDS)
<TABLE><CAPTION>
YEARS ENDED MARCH 31, 1995, 1994 AND 1993
----------------------------------------------------------------
COMMON STOCK TOTAL
PREFERRED --------------- PAID-IN RETAINED STOCKHOLDER'S
STOCKS SHARES AMOUNT CAPITAL EARNINGS EQUITY
--------- ------ ------ ------- -------- -------------
<S> <C> <C> <C> <C> <C> <C>
Balance at March 31, 1992................... $-- 10,000 $ 10 $ 1,943 $ -- $ 1,953
Net income.................................. -- -- -- -- 284 284
Reduction to taxes payable due to NOL....... -- -- -- -- 181 181
Stock repurchases........................... -- (130) -- (60) -- (60)
--------- ------ ------ ------- -------- -------------
Balance at March 31, 1993................... -- 9,870 10 1,883 465 2,358
Net income.................................. -- -- -- -- 550 550
Reduction to taxes payable due to NOL....... -- -- -- -- 295 295
Stock issued for services................... -- 1,125 1 89 -- 90
--------- ------ ------ ------- -------- -------------
Balance at March 31, 1994................... -- 10,995 11 1,972 1,310 3,293
Net income.................................. -- -- -- -- 259 259
Reduction to taxes payable due to NOL....... -- -- -- -- 168 168
Stock issued for services................... -- 220 -- 17 -- 17
--------- ------ ------ ------- -------- -------------
Balance at March 31, 1995................... $-- 11,215 $ 11 $ 1,989 $1,737 $ 3,737
--------- ------ ------ ------- -------- -------------
--------- ------ ------ ------- -------- -------------
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
F-91
<PAGE>
MCEG STERLING INCORPORATED
CONSOLIDATED STATEMENTS OF CASH FLOWS
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
(IN THOUSANDS)
<TABLE><CAPTION>
YEARS ENDED MARCH 31,
-----------------------------
1995 1994 1993
------- ------- -------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Income (Loss) before provision for income taxes and
extraordinary item............................................ $ 457 $ 705 $ 514
------- ------- -------
Charges to income not requiring cash outlays
Amortization of film costs.................................... 3,645 3,125 2,814
Depreciation.................................................. 90 72 40
Provision for doubtful accounts............................... 167 27 14
Changes in operating activities
Receivables................................................... (1,583) (308) 451
Film costs.................................................... (2,485) (3,440) (43)
Other assets.................................................. (68) 99 (9)
Accounts payable.............................................. 253 (18) 169
Accrued participations and residuals.......................... 171 171 (86)
Accrued production and other liabilities...................... (2,291) 1,368 (1,732)
Deferred revenues............................................. (83) (1,401) (62)
------- ------- -------
(2,184) (305) 1,556
------- ------- -------
Cash flows provided by (used in) operations before income
taxes......................................................... (1,727) 400 2,070
Income taxes paid, net........................................ (35) (14) (80)
------- ------- -------
Cash flows provided by (used in) operations..................... (1,762) 386 1,990
------- ------- -------
INVESTING ACTIVITIES
Acquisitions, net of cash acquired of $85..................... (411) -- --
Property and equipment........................................ (19) (198) (136)
------- ------- -------
(430) (198) (136)
------- ------- -------
FINANCING ACTIVITIES
Borrowings.................................................... 760 500 --
Reduction of borrowings....................................... (265) (500) --
Stock repurchases............................................. -- (40) (20)
------- ------- -------
495 (40) (20)
------- ------- -------
INCREASE (DECREASE) IN CASH..................................... (1,697) 148 1,834
Cash beginning of year.......................................... 2,079 1,931 97
------- ------- -------
CASH, END OF YEAR............................................... $ 382 $ 2,079 $ 1,931
------- ------- -------
------- ------- -------
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
F-92
<PAGE>
MCEG STERLING INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1995
(TABULAR DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
NOTE 1. DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Business
MCEG Sterling Incorporated and its subsidiaries (the "Company") operate in
one business segment, filmed entertainment. Business activities include the
distribution and exploitation in all media of its licensed and internally
produced film libraries to both domestic and foreign distributors and end users.
The Company produces motion pictures and other entertainment product after
considering all aspects of the creative and financial requirements, including
financial commitments from major third-party distributors or co-venturers which
limit the overall financial risk of producing films, television and other
programming. The Company also provides consulting assistance to financially
distressed entertainment companies. Services provided to consulting clients
include markets and products consistent with the Company's distribution and
exploitation activities.
The Company was formed on March 30, 1992 upon the effectiveness of a Plan of
Reorganization (the "Plan") which was approved by the United States Bankruptcy
Court in the Central District of California (the "Bankruptcy Court") on March
19, 1992. A summary of the principal provisions of the Plan is set forth in Note
12.
The following is a summary of the Company's significant accounting policies.
Principles of Consolidation and Basis of Presentation
All subsidiaries are wholly-owned. All intercompany accounts and
transactions have been eliminated. Certain previously reported amounts have been
reclassified to conform to the current year presentation.
As more fully described in Note 12, the consolidated financial statements
include the accounts of the predecessor company, except as follows: (i) Two
subsidiaries were not included in the Plan and are not consolidated with the
Company's accounts. The entities, which are still in Chapter 11 bankruptcy
proceedings and remain under the control of the Bankruptcy Court and the U.S.
Trustee, are Media Resources Credit Corporation ("MRCC") and Sterling
Entertainment Company ("Sterling"); and (ii) A third subsidiary, Badger
Holdings, Inc. ("Badger"), acquired in July 1993, is being held solely for
liquidation purposes and is not consolidated as part of the Company's continuing
operations. See Note 11 for further discussion regarding Badger.
Revenue Recognition
Revenues from domestic television and home video and foreign license
agreements, which include the receipt of non-refundable guaranteed advances by
the Company, are recognized when the license period begins, the film is
available for exhibition or exploitation and other conditions of sale are met.
Advances received prior to the availability of the film are classified as
Deferred Revenues in the accompanying consolidated balance sheets. If the
license agreements do not require payment of a minimum guarantee to the Company
or amounts are earned in excess of non-refundable guarantees, revenues are
recognized when the Company's share of the income from exhibition or
exploitation is reported by distributors.
Revenues and costs for films made under production service agreements and
for consulting services are recognized proportionately as the services are
rendered. The Company accounts for revenues
F-93
<PAGE>
MCEG STERLING INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
MARCH 31, 1995
(TABULAR DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
NOTE 1. DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES--(CONTINUED)
related to its long term consulting contracts, including its contract with the
former parent of Badger in connection with the liquidation of Badger (See Note
11), under the percentage-of-completion method pursuant to Statement of Position
81-1. The cumulative effect of revisions to estimated contract revenue is
recorded in the period in which the facts requiring the revisions become known.
Certain revenues relating to delivery and acceptance of television product are
deferred until all contingencies, including final acceptance by the foreign
distributor, have been resolved.
Film Costs
Film costs consist of acquisition costs of rights and direct production
costs, which include prints, advertising and other costs expected to benefit
future periods. Film costs, stated at lower of amortized cost or estimated net
realizable value, are amortized, and participation expense is accrued, in the
ratio that the current period's gross revenues bear to estimated total gross
revenues from all sources on an individual production or library basis. In
management's opinion, amortization of the library approximates amortization
under the individual film forecast method. Estimates of total gross revenues are
reviewed periodically and amortization is adjusted accordingly, based upon
management's appraisal of current market conditions. If management's estimate
indicates a loss, the full amount of the loss is charged against current
operations.
In certain instances, the Company acquires film rights whereby the producer
retains a participation in the profits, as defined. Such participations are
payable after the Company recovers its advance plus allowed costs.
Other Assets
Included in Other Assets are prepaids and property and equipment. Leasehold
improvments and office furniture and equipment are depreciated on a
straight-line basis using estimated service lives of five years.
Earnings per Common Share
Per share amounts are computed by dividing net income by the weighted
average number of common shares outstanding during the period. No options were
outstanding at March 31, 1995 and 1994 under the Company's Stock Awards Plan. A
total of 11,215,000 and 10,995,000 shares of Common Stock, par value $.001,
issued and to be issued pursuant to the Plan, were considered outstanding as of
March 31, 1995 and 1994, respectively.
Statement of Cash Flows
The Company prepares its statements of cash flows using the indirect method
as defined under statement of Financial Accounting Standards No. 95, "Statement
of Cash Flows." Required cash and non-cash transaction disclosures are as
follows:
During fiscal years 1995 and 1994, the Company made cash payments of
approximately $35,000 and $14,000 for income taxes, respectively.
F-94
<PAGE>
MCEG STERLING INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
MARCH 31, 1995
(TABULAR DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
NOTE 1. DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES--(CONTINUED)
The Consolidated Statements of Cash Flows does not include the Provision for
Income Taxes of $198,000, $305,000 and $230,000 for 1995, 1994, and 1993,
respectively, and the 1994 gain due to the reorganization of $150,000, which are
charges not requiring cash outlays.
The Company issued common stock, valued at its estimated market value at the
date of issuance of approximately $17,000 ($.08 per share) and $89,000 ($.08 per
share), for the years ended 1995 and 1994, respectively. These shares were
issued in accordance with the Company's 1994 Employee Incentive Bonus Plan.
NOTE 2. RECEIVABLES
1995 1994
------ ------
Foreign distribution agreements........................... $2,727 $1,738
Domestic distribution agreements.......................... 760 --
Participation and consulting agreements................... 636 219
Notes receivable and other................................ 242 263
------ ------
4,365 2,220
Less allowances for doubtful accounts..................... (523) (356)
------ ------
$3,842 $1,864
------ ------
------ ------
At March 31, 1995, receivables include $242,000 in secured notes from third
parties payable on demand with interest accruing at prime plus 2%.
The Company is currently consulting with a number of financially troubled
entertainment companies. The Company is administering its unreorganized
subsidiary, MRCC, for the benefit of MRCC's creditors, pursuant to a Bankruptcy
Court order in which the Company receives a fee of 20% of cash collections on
assets of MRCC, as well as reimbursement of certain distribution costs and
expenses. For the years ended March 31, 1995 and 1994, fees from MRCC aggregated
$300,000 and $73,000 respectively.
NOTE 3. FILM COSTS
1995 1994
------- -------
Completed and released.................................. $13,102 $10,038
Less accumulated amortization........................... (9,584) (5,939)
------- -------
3,518 4,099
In development.......................................... -- 113
------- -------
$ 3,518 $ 4,212
------- -------
------- -------
Based on management's total gross revenue estimates as of March 31, 1995,
approximately 85% of unamortized completed and released film costs will be
amortized during the next three years. In October 1994, the Company acquired two
film libraries having both domestic and international rights available on
approximately 100 titles for an aggregate purchase price of $495,000. Subsequent
to
F-95
<PAGE>
MCEG STERLING INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
MARCH 31, 1995
(TABULAR DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
NOTE 3. FILM COSTS--(CONTINUED)
March 31, 1995, the Company committed to acquire foreign rights for six films
for a minimum guarantee of approximately $9.5 million payable through December
1996.
Costs of revenues include amortization of film costs, direct royalty
expenses, and other direct distribution and consulting costs. Costs of revenues
in 1995 and 1994 include direct royalty distribution and consulting costs
attributable to a related party, Mr. Hyde, the Company's Chief Executive
Officer, aggregating $30,000 and $33,000, respectively. At March 31, 1995 and
1994, included in Accrued Participations and Residuals are $10,000 and $5,000,
respectively owed to an affiliate of Mr. Hyde for royalty expenses on certain
titles acquired for distribution in the Patriot Entertainment merger. No other
related party payables were outstanding at March 31, 1995 and 1994.
NOTE 4. ACCOUNTS PAYABLE
1995 1994
---- ----
Accounts payable............................................. $ 86 $126
Payroll and related liabilities.............................. 450 174
State income taxes payable................................... 20 25
---- ----
$556 $325
---- ----
---- ----
Included in Payroll and Related Liabilities is approximately $414,000 at
March 31, 1995 for estimated cash bonuses payable to all Company employees and
eligible consultants. See Note 9 regarding bonus commitments for 1995.
NOTE 5. ACCRUED PRODUCTION AND OTHER LIABILITIES
1995 1994
------ ------
Production liabilities.................................... $ 681 $2,620
Bankruptcy related liabilities, Note 12................... 270 579
Accrued lease obligation.................................. 67 29
------ ------
$1,018 $3,228
------ ------
------ ------
Included in Production Liabilities as of March 31, 1995 is $600,000 due to
NBC Productions for certain costs relating to the renewal of the television
series "Homicide", all of which was subsequently paid to NBC Productions in
April 1995. Under an agreement with NBC Productions, the Company earned
executive producer fees for the series totalling $214,000 in fiscal 1995.
NOTE 6. NOTE PAYABLE
1995 1994
---- ----
Note payable................................................. $495 $ --
---- ----
---- ----
F-96
<PAGE>
MCEG STERLING INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
MARCH 31, 1995
(TABULAR DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
NOTE 6. NOTE PAYABLE--(CONTINUED)
MCEG Sterling Computer Services, a wholly-owned subsidiary of the Company
("Sterling Computer"), and Metromedia company ("Metromedia"), entered into a
Credit Agreement and Pledge Agreement dated November 8, 1994 (the "Loan
Documents") pursuant to which Metromedia loaned to Sterling Computer $495,000
(the "Metromedia-Sterling Loan") to fund the acquisition of certain film library
assets by the Company. The Company and Metromedia entered into a letter
agreement dated as of November 8, 1994 pursuant to which the Company has
guaranteed all obligations of Sterling Computer under the Loan Documents. The
Metromedia-Sterling Loan matures not later than December 31, 1995 and accrues
interest at a rate per annum equal to Chemical Bank's then announced prime rate.
The Metromedia-Sterling Loan is secured by a pledge of the stock of a subsidiary
of the Company, which holds title to the film library assets acquired with the
proceeds of the Metromedia-Sterling Loan.
It is a condition to the consummation of the merger agreement (See Note 13.
Subsequent Events.) and the transactions contemplated thereby, that the
indebtedness of the Company and its affiliates to Metromedia and its affiliates
be refinanced or repaid in full at the Closing.
NOTE 7. DEFERRED REVENUES
1995 1994
---- ----
Domestic and foreign distribution contracts................ $166 $249
---- ----
---- ----
In 1988 and 1990, Viacom International was licensed pay and free television
rights to eleven of the Company's films, ten of which were internally produced.
The minimum guarantees paid were confirmed in a settlement approved by the
Bankruptcy Court. Based on availability, the Company recognized $1,362,000 in
revenues in 1994 under this agreement.
NOTE 8. INCOME TAXES
1995 1994 1993
---- ---- ----
Reconciliation of Statutory to Effective Income Tax
Provision:
Federal income taxes at statutory rate of 34%........ $155 $240 $175
State income taxes..................................... 20 43 31
Foreign taxes.......................................... 23 22 24
---- ---- ----
$198 $305 $230
---- ---- ----
---- ---- ----
The provisions consist of current taxes of $30,000, $10,000 and $49,000 in
1995, 1994 and 1993, respectively, and deferred taxes of $168,000 and $295,000
in 1995 and 1994 respectively.
On April 1, 1993, the Company adopted SFAS No. 109, "Accounting for Income
Taxes". SFAS No. 109 requires an asset and liability approach to accounting for
income taxes. Under this method, deferred income taxes are recognized, at
enacted rates, to reflect the future effects of tax loss and credit ("tax
attribute") carryforwards and temporary differences arising between the tax
bases of assets and liabilities and their financial reporting amounts each
year-end. Deferred tax assets and liabilities are
F-97
<PAGE>
MCEG STERLING INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
MARCH 31, 1995
(TABULAR DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
NOTE 8. INCOME TAXES--(CONTINUED)
adjusted for tax rate changes when they occur. The cumulative effect of adopting
SFAS No. 109 was not material.
The temporary differences and the tax attribute carryforwards which gave
rise to deferred tax assets and liabilities at March 31, 1995 and 1994 are shown
below.
1995 1994
------ -------
Deferred Tax Assets and Liabilities:
Net tax attribute carryforwards........................ $8,327 $ 7,215
Film production costs.................................. 597 1,283
Sales contract allowances.............................. 210 859
Other, net............................................. 189 134
------ -------
9,323 9,491
Valuation allowance.................................... (9,323) (9,491)
------ -------
$ -- $ --
------ -------
------ -------
In connection with adopting SFAS No. 109, the Company established a
valuation reserve against certain of its deferred tax assets. During the year,
the Company reassessed (under the criteria of SFAS No. 109) the realizability of
these deferred tax assets and adjusted the valuation allowance based on expected
utilization of $168,000 during the current period in connection with the
Company's net operating loss carryforwards.
Statutory provisions exist regarding bankruptcy reorganizations and
utilization of net operating losses (NOLs) and other tax attribute carryovers.
The benefit of $168,000, $295,000 and $181,000 in 1995, 1994 and 1993
respectively, resulting from the Company's utilization of NOLs which were
carried forward as of the effectiveness of the Plan, have been credited to
Stockholders' Equity in the appropriate year as required under fresh-start
reporting guidelines. At March 31, 1995, the Company had net operating loss
carryforwards of up to approximately $50,000,000 for Federal income tax
purposes, available to reduce future taxable income. Such net operating loss
carryforwards were based on existing Treasury Regulations as of the date the
income tax returns were filed. There can be no assurance that Treasury
Regulations issued in the future will not have an adverse affect on the
attributes of these tax carryforwards. To the extent not used, the Federal net
operating loss carryforwards expire in varying amounts beginning in the year
2001.
NOTE 9. COMMITMENTS AND CONTINGENCIES
Lease and Other Commitments
In 1993, the Company entered into a 115 month office lease through January
2003. Lease commitments by year are as follows: 1996--$179,300; 1997--$179,300;
1998--$191,500; 1999-- $252,400; 2000--$252,400; thereafter--$715,000.
The Company leases warehouse facilities under a three year operating lease
which expires in August 1996. Lease commitments by year are as follows:
1996--$39,000; and 1997--$16,000.
F-98
<PAGE>
MCEG STERLING INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
MARCH 31, 1995
(TABULAR DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
NOTE 9. COMMITMENTS AND CONTINGENCIES--(CONTINUED)
Operating lease expense was $274,000, $257,000 and $251,000 for the fiscal
years ending 1995, 1994 and 1993, respectively.
Bonuses
It is anticipated that in June 1995, under the Company's 1994 Incentive
Bonus Plan, bonuses awarded aggregating $414,000, will be paid in cash. The
awards were accrued as compensation expense as of March 31, 1995.
Consulting Agreement
The services of Mr. Hyde and Ms. Morris are being retained by the Company
pursuant to a non-exclusive consulting agreement terminable upon 60 days notice
by either party. In 1995, pursuant to the agreement, the Company paid fees
aggregating $8,770 per week, monthly car allowances, reimbursement of valid
business expenses and certain other benefits. Based on compensatory hours worked
in 1995 and under the provisions of the Bonus Plan, Mr. Hyde and Ms. Morris were
eligible to participate in the Company's Bonus Plan in 1995.
Litigation
The Company is subject to certain claims and legal proceedings in the
ordinary course of its business and believes that these matters will not have a
material adverse effect on its financial condition or results of operations.
Litigation Concerning Subsidiary Held for Disposition.
See Note 11 for further discussion of certain commitments and contingencies
with respect to Badger, which were acquired by the Company for the sole purpose
of liquidation. The Company believes that the ultimate resolution of such
matters will not have a material adverse effect on its financial condition or
results of operations.
Litigation Concerning the Merger Agreement.
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 PICTURES 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.
("Actava") against Actava and its directors as well as the Company. The
complaint alleges that the terms of the proposed mergers among Orion Pictures
("Orion"), Actava and Metromedia International Telecommunications, Inc. ("MITI")
constitute an overpayment by Actava for the assets of the Company, and seeks to
enjoin the proposed mergers. The complaint further alleges that the Company
knowingly aided, abetted and materially assisted Actava's directors in the
breach of their fiduciary duties to Actava's shareholders. The Company has
obtained a rolling extension of the time to answer the complaint; the extension
can be terminated by plaintiff upon 30 days notice. In the event that it is
compelled to respond, the Company intends to vigorously defend the Sweeney
litigation. The Company believes the lawsuit has little merit and the plaintiffs
will not
F-99
<PAGE>
MCEG STERLING INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
MARCH 31, 1995
(TABULAR DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
NOTE 9. COMMITMENTS AND CONTINGENCIES--(CONTINUED)
prevail; accordingly, management believes that the lawsuit will not have any
material adverse effect on the business operations or financial position of the
Company.
NOTE 10. CAPITAL STOCK
The Company is authorized to issue 1 million shares of $.01 par value
Preferred Stock, none of which were outstanding at March 31, 1995 and 1994.
The Company is authorized to issue 25 million shares of $.001 par value
Common Stock, of which 10 million shares were issued pursuant to the Plan.
Holders of old common stock, subordinated debentures and subordinated notes
received 2,100,000 shares of the New Common Stock, 21% of the total outstanding,
in 1993. A total of 1,440,000 shares, or 15%, was also issued in 1993 to former
stockholders of Patriot Entertainment, pursuant to the Patriot merger. The
Company issued a total of 6.4 million shares (64% of the original issue) to the
Voting Trust formed in connection with the Company's reorganization for the
subsequent transfer to each of two classes of creditors: 3.2 million shares are
to be transferred to the producer's class and 3.2 million shares to the general
unsecured creditors. To facilitate the exchange of shares in connection with the
proposed mergers among the Company, Orion, Actava and MITI, the 6.4 million
shares will be held in the Voting Trust until the Merger Agreement among the
parties becomes effective or expires. The financial statements for all periods
presented herein give effect to the issuance of the 10 million shares adjusted
for current activity, which includes the repurchase of a total of 130,000 shares
and the issuance of a total of 1,344,900 shares to officers pursuant to bonus
awards. See Note 12 for further discussion regarding the bankruptcy related
stock issuances.
Pursuant to the Plan, the Company is authorized to issue up to a maximum of
1,526,316 shares of Common Stock under a Stock Awards Plan, all of which were
available for grant at March 31, 1995 and 1994. The Stock Awards Plan provides
for granting of non-qualified stock options, incentive stock options and stock
appreciation rights. No awards have been granted as of March 31, 1995.
F-100
<PAGE>
MCEG STERLING INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
MARCH 31, 1995
(TABULAR DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
NOTE 11. SUBSIDIARY HELD FOR DISPOSITION
In July 1993, the Company acquired the stock of Thames Television, Inc.
(renamed Badger Holdings, Inc., "Badger") for a nominal amount for the purpose
of disposing of its assets and liabilities. The Company has accounted for Badger
using the cost recovery method as control of Badger is anticipated to be
temporary and due to the fact that the former parent of Badger still must
approve substantially all significant corporate decisions relating to Badger,
which does not allow the Company to exercise unilateral control over Badger. The
condensed financial information is presented on the liquidation basis and does
not give effect to purchase allocations based on the Company's investment. The
Company earned consulting and producing fees totalling $314,000 and $1,250,000
for 1995 and 1994, respectively, for its services in overseeing the on-going
liquidation and for its Executive Producer services on the television series
"Homicide". Although revenue recognition was substantially completed by March
31, 1995, certain direct out of pocket, reimbursable, wind-down costs and
litigation activities are anticipated to continue throughout fiscal year 1996;
see Note (c) below. The Company has been reimbursed by Badger for certain direct
out-of-pocket expenses through March 31, 1995 and believes it will be reimbursed
for all future services provided to Badger.
The Company is pursuing avenues of liquidation of Badger's remaining assets
and liabilities, particularly Badger's on-going litigation, which are discussed
further below. The Company believes that the ultimate liquidation of Badger's
assets and obligations will not have a material effect on the Company's
consolidated financial position or results of operations.
Condensed consolidated financial information for Badger, an unconsolidated
subsidiary, as of March 31, 1995, prepared on the liquidation basis of
accounting, follows:
YEAR ENDED
CONDENSED STATEMENT OF REVENUES AND EXPENSES MARCH 31, 1995
- ------------------------------------------------------------- --------------
Revenues..................................................... $ 2,000
Costs of revenues............................................ (2,217)
General and administrative................................... (1,336)
Interest expense to former parent, net(a).................... (2,776)
Reserve for contingencies(c)................................. --
-------
Loss before provision for income taxes....................... (4,329)
Provision for income taxes(b)................................ --
-------
Net loss, before adjustment of amounts payable to former
parent and reduction in accrued liabilities*............... $ (4,329)
-------
-------
F-101
<PAGE>
MCEG STERLING INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
MARCH 31, 1995
(TABULAR DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
NOTE 11. SUBSIDIARY HELD FOR DISPOSITION--(CONTINUED)
STATEMENT OF ASSETS AND LIABILITIES* MARCH 31, 1995
- ------------------------------------------------------------- --------------
Cash......................................................... $ 1,381
Receivables, net............................................. 1,193
Other assets................................................. 98
Accrued production and other liabilities..................... --
Liquidation reserves and wind-down costs (c)................. (524)
Amounts due to former parent, net of reduction for assets
available to pay liabilities (a)............................. (2,148)
Commitments and contingencies (c)............................ --
-----------
Liabilities in excess of assets at March 31, 1995............ $ 0
-----------
-----------
Liabilities in excess of assets at March 31, 1994............ $(33,843)
Net loss, before adjustment of amounts payable to former
parent and reduction in accrued liabilities*............... (4,329)
Reduction in amounts payable to former parent*............... 31,060
Reduction in accrued liabilities*............................ 7,112
-----------
Liabilities in excess of assets at March 31, 1995............ $ 0
-----------
-----------
- ------------
* Asset amounts have been recorded at their estimated net realizable value, and
liabilities are recorded at their estimated settlement amounts based upon
assets available to pay liabilities. However, actual amounts may be different
than those estimated.
YEAR ENDED
CONDENSED STATEMENT OF CHANGES IN NET ASSETS MARCH 31, 1995
- ------------------------------------------------------------- --------------
Cash Flows From Operating Activities
Loss before adjustment of amounts payable to former parent
and reduction in liabilities to estimated settlement
amounts.................................................. $ (4,329)
-------
Charges to income not requiring cash outlays
Amortization of film costs................................. 2,075
Reserve for contingencies.................................. (2,000)
Interest expense payable to former parent.................. 2,679
Depreciation and loss on disposal of property and
equipment................................................ 26
Changes in operating activities
Receivables................................................ 3,101
Film costs................................................. (2,040)
Other assets............................................... 738
Accrued participations..................................... (777)
Accrued production and other liabilities................... 603
Accrued income taxes....................................... (805)
-------
3,600
-------
Cash flows used in operations................................ (729)
Additional borrowings from former parent..................... 1,550
-------
Increase in cash............................................. 821
Cash, beginning of year...................................... 560
-------
Cash, end of year............................................ $ 1,381
-------
-------
Interest paid................................................ $ 76
-------
-------
Income taxes paid............................................ $ 0
-------
-------
(Footnotes on following page)
F-102
<PAGE>
MCEG STERLING INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
MARCH 31, 1995
(TABULAR DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
NOTE 11. SUBSIDIARY HELD FOR DISPOSITION--(CONTINUED)
(Footnotes for preceding page)
- ------------
Notes:
<TABLE>
<C> <S>
(a) Amounts Due to Former Parent
Amounts due to former parent consist of amounts owing to the former owners of Badger
under various notes payable agreements. A $2.5 million note is secured by substantially
all of Badger's rights in its film library; the balance of the borrowings are
unsecured. In addition to the borrowings outstanding, the former owners have guaranteed
certain of Badger's obligations totalling $400,000. These amounts have been reduced to
their estimated settlement value based upon assets available to pay liabilities as of
March 31, 1995.
</TABLE>
Secured, payable on demand at Prime plus 2% averaging 9.72%.......... $ 2,500
Unsecured, payable on demand at 10%.................................. 18,464
Unsecured, payable on demand at Federal Funds Rate plus .85%
averaging 5.5%....................................................... 8,500
Accrued interest..................................................... 4,344
-------
33,808
Deficit advance regarding "Homicide"................................. (600)
-------
33,208
Reduction in amount payable to former parent......................... (31,060)
-------
Adjusted amount payable to former parent............................. $ 2,148
-------
-------
<TABLE>
<C> <S>
Under the terms of the secured loan agreement, Badger is required to maintain certain
covenants, including restrictions on investments and incurring liens or other secured
obligations, among other things.
(b) Income Taxes
Due to Badger's net operating loss position, there was no provision for Federal income
taxes. Statutory provisions exist which restrict the utilization of Badger's net
operating losses (NOLs) and other tax attribute carryovers. These NOLs are not included
in the Company's net operating loss carryforwards reported in Note 8 above. As Badger
is in the process of liquidation, the amount of NOLs, which may be utilized by Badger
in the future is not determinable.
(c) Commitments and Contingencies
Office Lease
In 1992, prior to the Company's acquisition of Badger, a ten-year office lease was
entered into by Badger through December 2002. In 1995, Badger successfully sublet a
majority of its lease commitments to a new tenant, thereby reducing its lease
obligations by approximately $6.5 million. Lease commitments by year are as follows:
1996--$200,000; 1997--$165,000; 1998-- $165,000; 1999--$189,000; 2000--$165,000;
thereafter--$404,000 for a total of $1,288,000. In connection with certain guarantees
totalling approximately $400,000 by the former parent, interest is accrued at the
Federal Funds Rate plus .85%, which averaged 5.5% in 1995. Badger also leases certain
warehouse facilities on a month-to-month basis.
</TABLE>
(Footnotes on following page)
F-103
<PAGE>
MCEG STERLING INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
MARCH 31, 1995
(TABULAR DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
NOTE 11. SUBSIDIARY HELD FOR DISPOSITION--(CONTINUED)
(Footnotes for preceding page)
<TABLE>
<C> <S>
Litigation
Edito-Service, S.A. v. Thames Television, Inc. (94 CIV 2075). In April 1994,
Edito-Service, S.A. (Edito) filed a lawsuit against Thames Television, Inc. (now,
Badger) in the United States District Court for the Southern District of New York
seeking a judgment that Badger is either solely or primarily liable to pay to Musexport
Limited or its nominee the sum of Canadian $25,000,000, less certain amounts paid
through the date of the lawsuit, in annual payments determined by a formula requiring
certain minimum payments. Badger, to protect itself from possible multiple liability,
has answered the complaint by interpleading necessary parties, including Sterone.
Sterone responded by asserting that Badger is liable on an accelerated basis for
Canadian $18,000,000, representing the total deferred payments due over the remaining
life of the agreement, which could be as much as 180 years. Badger is vigorously
defending the lawsuit. Efforts to settle this matter at the present value of the
minimum deferred payments have been unsuccessful. No assurance can be given as to
whether a settlement of the litigation is achievable, and neither the outcome of the
case nor the damages, if any, that Badger would ultimately be required to pay can be
predicted with certainty in the event that a settlement is not reached.
Columbia Pictures Television, Inc. v. Reeves Communications Corporation et al. (BC
041505). In 1991, Columbia filed an action against Reeves Communications Corporation
(now Badger) and Reeves Entertainment Group seeking damages for breach of a contract
pursuant to which Columbia's predecessor-in-interest obtained certain distribution
rights in television programming produced by Reeves Communications. In March 1994, the
parties reached a settlement in principle and the lawsuit was dismissed without
prejudice. Although final settlement documentation has not yet been completed, the
settlement grants to Columbia certain distribution and recoupment rights in various
Reeves-owned television series and grants Reeves the option of purchasing for a flat
fee all of Columbia's rights to certain of the series.
Reeves Entertainment Group v. MCA Television Limited (92 5332 WJR (Tx)). In 1992,
Reeves filed an action against MCA Television Limited (MCA) seeking damages in excess
of $30 million for breach of contract, among other things, arising out of MCA's
distribution of certain Reeves owned television series. MCA counterclaimed for breach
of contract, seeking millions of dollars in damages against Reeves. The fact discovery
phase of this case has been completed, and the parties are completing expert discovery
and various other pre-trial matters. The trial is currently scheduled to begin on
November 7, 1995. Although neither the outcome of the case nor the amount of damages
Reeves would ultimately collect or pay can be predicted with certainty, management
believes that the litigation may have a favorable outcome and intends to pursue this
action vigorously.
Other Litigation. Badger and its subsidiaries are subject to other claims and legal
proceedings which Badger believes to be ordinary litigation incident to the character
of its business.
Reserve. Based upon management's review of the facts and circumstances and consultation
with counsel and other professionals, management believes that Badger's reserves are
adequate to cover the above commitments and contingencies, and that the ultimate
resolution of such matters will not have a material effect on the financial position
and results of operations of the Company.
</TABLE>
NOTE 12. REORGANIZATION PROCEEDINGS AND RELATED MATTERS
On August 17, 1990, an involuntary petition for relief under chapter 7 of
the Bankruptcy Code was filed against MCEG Productions, Inc., a subsidiary of
the Company, in the United States District Court
F-104
<PAGE>
MCEG STERLING INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
MARCH 31, 1995
(TABULAR DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
NOTE 12. REORGANIZATION PROCEEDINGS AND RELATED MATTERS--(CONTINUED)
for the Central District of California (the "California Court"). On October 31,
1990, involuntary petitions for relief were filed in the California Court
against the Company and another of its subsidiaries. In late 1990 and early
1991, the Company and 34 subsidiaries consented to the entry of orders for
relief under chapter 11, thereby converting the involuntary liquidation cases to
voluntary reorganizations under chapter 11 of the Bankruptcy Code. From November
1990 through June 1991, most of the Company's other subsidiaries filed voluntary
petitions for relief under chapter 11. During the pendency of the chapter 11
reorganization cases, MCEG and its subsidiaries continued in possession of their
property and conducted their business as "debtors in possession," with the
assistance of a new management group consisting of certain members of the
Company's current management.
The Company and most of its subsidiaries emerged from bankruptcy effective
March 30, 1992 pursuant to the Debtors' Second Amended Joint Plan of
Reorganization (the "Sterling Plan") dated February 5, 1992. Two of the
Company's subsidiaries were not included in the Company Plan, and their
respective chapter 11 cases are still pending. The Company anticipates that such
subsidiaries will be liquidated. Set forth below is a synopsis of the Sterling
Plan which contains only a brief summary of such plan and is qualified in its
entirety by reference to the Sterling Plan.
Under the Sterling Plan, the Company issued a total of 10,000,000 shares of
its common stock to former creditors, former stockholders and certain other
persons.
As of March 20, 1995, all objections to preconfirmation claims of creditors
were resolved, and all administrative claims, tax claims, priority claims and
secured claims, except the secured claims of certain talent guilds, were paid in
full. A settlement between the Company and the various talent guilds with
respect to secured and unsecured claims arising from certain collective
bargaining agreements became effective March 20, 1995, pursuant to which the
Company is to pay the guilds a total of $689,000 in full settlement of all
pre-petition guild claims.
Pursuant to the Sterling Plan, holders of claims based upon, among other
things, profit participations, royalties or other performance based upon the
Company's exploitation of film rights (Class C-1), received an aggregate of
3,200,000 shares of the Company's Common Stock, together with a share of the net
cash proceeds, if any, from litigation claims assigned by the Company to the
liquidation estate under the Sterling Plan.
Holders of allowed general unsecured claims (Class C-2) received an
aggregate of 3,200,000 shares of the Company's Common Stock under the Sterling
Plan, together with a share of the net cash proceeds, if any, from litigation
claims assigned by the Company to the liquidation estate under the Sterling
Plan.
The shares of the Company's Common Stock issuable to holders of Class C-1
and C-2 claims are held in a voting trust. To facilitate the exchange of shares
under the Merger Agreement, these shares will be held in the voting trust until
such time as the Merger Agreement becomes effective or terminates.
Holders of allowed claims with respect to the Company's 14% Convertible
Subordinated Debentures due January 15, 2009 (the "Old Sterling Debentures") and
with respect to the Sterling Subordinated, Participating, Exchangeable Notes
(the "Old Sterling Notes") (collectively, Class C-3), received an aggregate of
1,900,000 shares of the Company's Common Stock under the Sterling Plan,
F-105
<PAGE>
MCEG STERLING INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
MARCH 31, 1995
(TABULAR DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
NOTE 12. REORGANIZATION PROCEEDINGS AND RELATED MATTERS--(CONTINUED)
and, under certain circumstances, may receive a share of the net cash proceeds
from litigation claims assigned by the Company to the liquidation estate under
the Sterling Plan. Distributions under the Sterling Plan with respect to the Old
Sterling Debentures are subject to a lien under the Indenture to reimburse the
Trustee thereunder for its reasonable costs and expenses in the Company's
chapter 11 case. As required under the Sterling Plan, the shares of the
Company's Common Stock distributable to the Old Sterling Debenture holders were
issued to the Indenture Trustee for further distribution to the former debenture
holders.
As of March 31, 1995, the Company had settled all but one of the lawsuits
assigned by it to the liquidation estate. In accordance with the Sterling Plan,
a portion of the proceeds of such litigation, after deduction of certain fees,
of participation shares and the repayment of certain indebtedness, will be used
to pay the amounts payable to the guilds under the settlement described above.
The balance of such proceeds, together with any additional net proceeds from
outstanding litigation claims, is to be divided among the various creditor
classes and the Company in accordance with the Sterling Plan.
NOTE 13. SUBSEQUENT EVENTS
On April 12, 1995, the Company entered into a Merger Agreement (the "Merger
Agreement") with The Actava Group Inc. ("Actava"), Orion Pictures Corporation
("Orion") and Metromedia International Telecommunications ("MITI"). (See Note 16
for a discussion of amendments to the Merger Agreement). The Merger Agreement
provides that at the effective time of the mergers, each of the Company, Orion
and MITI will merge with and into Actava, with Actava, renamed "Metromedia
International Group, Inc.," being the surviving corporation of the mergers. The
following summary of the Merger Agreement is qualified in its entirety by
reference to such agreement, a copy of which has been previously filed with the
Securities and Exchange Commission. The Merger Agreement provides that each
share of the Company's common stock will be converted as follows: (i) if the
average of the last sale price for Actava's common stock as officially reported
on the NYSE for the last 20 consecutive trading days ending on the business day
immediately preceding the effective time of the mergers (the "Average Closing
Price") is less than $10.50, each share of the Company's outstanding common
stock will be converted into a number of shares of Actava common stock by
solving for "Y" in the following formula and dividing "Y" by the number of
shares of the Company's common stock outstanding on the business day immediately
preceding the effective time of the mergers:
6,000,000
"Y" = ----------------------
Average Closing Price;
(ii) if the Average Closing Price is greater than or equal to $10.50 and
less than or equal to $14.875, then each share of the Company's outstanding
common stock will be equal to a fraction, the numerator of which is 571,428 and
the denominator of which is the number of shares of the Company's common stock
outstanding on the business day immediately preceding the effective time of the
mergers or (iii) if the Average Closing Price is greater than $14.875, each
share of the Company's outstanding common stock will be converted into a number
of shares of Actava common stock by solving for "Y" in the following formula and
dividing "Y" by the number of shares of the Company's common stock outstanding
on the business day immediately preceding the effective time of the mergers:
F-106
<PAGE>
MCEG STERLING INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
MARCH 31, 1995
(TABULAR DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
NOTE 13. SUBSEQUENT EVENTS--(CONTINUED)
8,500,000
"Y" = ---------------------
Average Closing Price
Assuming that the effective time of the mergers was June 8, 1995, the
Company's stockholders would have exchanged each share of the Company's common
stock for .05235 shares of Actava common stock and collectively the Company's
stockholders would have been entitled to receive approximately 1.5% of the
surviving corporation's common stock. The Actava common stock to be issued to
the Company's, Orion's and MITI's stockholders in connection with the mergers
will be identical to the shares of Actava common stock currently outstanding.
The closing of each merger contemplated by the Merger Agreement is also
contingent upon the closing of the other mergers contemplated by the Merger
Agreement. In addition, the consummation of the mergers contemplated by the
Merger Agreement is subject, among other things, to approval by the stockholders
of the Company, Actava, Orion and MITI, the receipt of all required consents,
the successful refinancing of the currently outstanding amounts owed by certain
parties to the Merger Agreement, to the Average Closing Price not being less
than $8.25, that no material adverse change in businesses, assets, prospects,
condition or results of operations of the Company, Actava, Orion or MITI shall
have occurred since the date of the Merger Agreement, that the shares of
Actava's common stock currently outstanding and to be issued to the stockholders
of the Company, Orion and MITI pursuant to the Merger Agreement shall have been
excepted for listing on the New York Stock Exchange, the American Stock Exchange
or accepted for quotation on NASDAQ/NMS, the receipt of certain fairness
opinions with respect to the mergers and the receipt of all regulatory
approvals, including approval with the Hart-Scott-Rubino Antitrust Improvement
Act of 1976, as amended. The Merger Agreement also generally requires the
Company to conduct its operations in the ordinary course of business.
The Merger Agreement may be terminated at any time prior to the effective
time by (i) the mutual written consent of the parties, (ii) unilaterally by any
party, if the effective time has not occurred on or before December 31, 1995, or
(iii) by a non-breaching party in the case of certain material breaches by
another party.
F-107
<PAGE>
MCEG STERLING INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
MARCH 31, 1995
(TABULAR DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
NOTE 14. SUPPLEMENTAL DATA
<TABLE><CAPTION>
1995 1994 1993
------ ------ ------
<S> <C> <C> <C>
Revenues by Geographic Territory:
Europe, excluding United Kingdom................................ $2,549 $1,543 $ 938
Far East........................................................ 1,264 690 586
Latin America and other......................................... 363 981 522
United Kingdom, Australia and New Zealand....................... 138 189 417
------ ------ ------
4,314 3,403 2,463
United States and Canada........................................ 4,129 4,436 4,674
------ ------ ------
$8,443 $7,839 $7,137
------ ------ ------
------ ------ ------
Participations and Consulting Revenues:
Participation contract revenues................................. $ 431 $ 596 $ 977
Consulting contract revenues.................................... 2,046 1,981 1,508
------ ------ ------
$2,477 2,577 2,485
------ ------ ------
------ ------ ------
</TABLE>
Revenues recognized in 1995 of $2 million, representing 24% of total
revenues were generated from a combination of 4 consulting clients, foreign and
domestic distributors, none of which represented more than 10% of the Company's
total revenues.
Revenues recognized in 1994 of $3.0 million, representing 39% of total
revenues, were generated from 4 domestic distributors and consulting clients.
During fiscal 1994, the Company recorded $1,362,000 of revenues under foreign
distribution agreements with Showtime, which represented approximately 17% of
total revenues. The fees earned from the former parent of Badger totalled
$1,250,000, approximately 16% of total revenues. Revenues recognized in 1993 of
$2.5 million, representing 55% of total film distribution revenues, were
generated from four domestic distributors. Revenues recognized in 1992 of $5
million, representing 65% of total revenues, were generated from two
distributors.
The Company's sales are distributed comparably throughout a diversified
domestic and foreign customer base. However, a substantial portion of its
debtors' abilities to honor their contracts is dependent on the entertainment
economic sector.
F-108
<PAGE>
MCEG STERLING INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
MARCH 31, 1995
(TABULAR DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
NOTE 15. QUARTERLY FINANCIAL DATA (UNAUDITED)
<TABLE><CAPTION>
JUNE 30 SEPTEMBER 30 DECEMBER 31 MARCH 31
------- ------------ ----------- --------
<S> <C> <C> <C> <C>
1995
Revenues....................................... $ 1,355 $1,722 $ 2,707 $2,659
Gross profit*.................................. 685 756 814 1,532
Income before extraordinary item............... (22) 38 44 199
Net income..................................... (22) 38 44 199
Income per share before extraordinary income... -- -- -- .02
Earnings per share............................. -- -- -- .02
1994
Revenues....................................... $ 2,427 $1,796 $ 1,201 $2,415
Gross profit*.................................. 1,159 887 695 732
Income before extraordinary item............... 234 105 22 39
Net income..................................... 234 105 22 189
Income per share before extraordinary income... 0.02 0.01 -- --
Earnings per share............................. 0.02 0.01 -- 0.02
1993
Revenues....................................... $ 1,222 $1,408 $ 2,735 $1,772
Gross profit*.................................. 514 690 1,240 708
Net income (loss).............................. (62) 88 301 (43)
Earnings (loss) per share...................... (0.01) 0.01 0.03 --
</TABLE>
- ------------
* Gross profit is defined as Revenues less Costs of Revenues.
NOTE 16. EVENT SUBSEQUENT TO THE DATE OF THE AUDITORS' REPORT (UNAUDITED)
Sale of Subsidiary
Effective July 20, 1995, all of the capital stock of Badger Holdings, Inc.
(an unconsolidated wholly-owned subsidiary of the Company) was transferred to an
affiliate of John Hyde and Ann Jacobus, the Chief Executive Officer and
Executive Vice President and General Counsel, respectively, of the Company, for
a purchase price equal to the nominal consideration originally paid by the
Company for such stock, which management believes represents the fair market
value of such stock. The former parent of Badger consented to the sale. The
transaction did not result in any gain or loss to the Company.
Amendments to Merger Agreement
As indicated in Note 13, Actava, Orion, MITI and Sterling amended and
restated in its entirety the Merger Agreement and amended certain related
ancillary agreements (collectively, the "Amendments"). The Amendments generally
provided for, among other things, (i) the merger of Orion and MITI with and into
newly formed, wholly-owned subsidiaries of Actava and (ii) establishing the
Sterling Exchange Ratio on the Determination Date (i.e., five days prior to the
Meetings).
F-109
<PAGE>
MCEG STERLING INCORPORATED
CONDENSED CONSOLIDATED BALANCE SHEETS
IN THOUSANDS
<TABLE><CAPTION>
JUNE 30, MARCH 31,
1995 1995
----------- ---------
(UNAUDITED)
<S> <C> <C>
ASSETS:
Cash................................................................. $ 613 $ 382
Receivables, net..................................................... 3,140 3,842
Film costs, net...................................................... 2,891 3,518
Other assets......................................................... 430 404
Investment in subsidiary held for disposition........................ -- --
----------- ---------
$ 7,074 $ 8,146
----------- ---------
----------- ---------
LIABILITIES AND STOCKHOLDERS' EQUITY:
Accounts payable..................................................... $ 226 $ 556
Accrued participations and residuals................................. 1,957 2,174
Accrued production and other liabilities............................. 398 1,018
Note payable......................................................... 495 495
Deferred revenues.................................................... 232 166
----------- ---------
3,308 4,409
----------- ---------
Commitments and contingencies
Stockholders' equity
Preferred stock--Par $.01, 1 million authorized, none issued....... -- --
Common stock--Par $.001, 25 million authorized,
11.2 million outstanding......................................... 11 11
Paid in capital.................................................... 1,989 1,989
Retained earnings.................................................. 1,766 1,737
----------- ---------
3,766 3,737
----------- ---------
$ 7,074 $ 8,146
----------- ---------
----------- ---------
</TABLE>
The accompanying notes are an integral part of these consolidated balance
sheets.
F-110
<PAGE>
MCEG STERLING INCORPORATED
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
IN THOUSANDS, EXCEPT PER SHARE DATA (UNAUDITED)
<TABLE><CAPTION>
THREE MONTHS ENDED
JUNE 30,
------------------
1995 1994
------- -------
<S> <C> <C>
REVENUES
Film distribution...................................................... $ 1,184 $ 797
Participations and consulting.......................................... 521 558
------- -------
1,705 1,355
------- -------
EXPENSES
Costs of revenues...................................................... 922 670
General and administrative............................................. 754 707
------- -------
1,676 1,377
------- -------
INCOME (LOSS) BEFORE PROVISION FOR INCOME TAXES 29 (22)
Provision for income taxes............................................. 13 --
------- -------
NET INCOME (LOSS)........................................................ $ 16 $ (22)
------- -------
Income (loss) per common share........................................... $ -- $ --
------- -------
Average number of common shares outstanding.............................. 11,215 10,995
------- -------
------- -------
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
F-111
<PAGE>
MCEG STERLING INCORPORATED
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
IN THOUSANDS (UNAUDITED)
<TABLE><CAPTION>
THREE MONTHS
ENDED
JUNE 30,
-----------------
1995 1994
----- -------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Income (Loss) before provision for income taxes......................... $ 29 $ (22)
----- -------
Charges to income not requiring cash outlays
Amortization of film costs and depreciation............................. 736 473
Changes in operating activities
Receivables............................................................. 702 (583)
Film costs.............................................................. (87) (1,329)
Other assets............................................................ (48) (116)
Accounts payable........................................................ (320) (76)
Accrued participations and residuals.................................... (217) 22
Accrued production and other liabilities................................ (620) (83)
Deferred revenues....................................................... 66 774
----- -------
212 (918)
----- -------
Cash flows provided by (used in) operations before income taxes........... 241 (940)
Income taxes paid, net.................................................. (10) (26)
----- -------
Cash flows provided by (used in) operations............................... 231 (966)
----- -------
INVESTING ACTIVITIES
Property and equipment.................................................. -- (7)
----- -------
-- (7)
----- -------
FINANCING ACTIVITIES
Borrowings.............................................................. -- --
Repayment of Borrowings................................................. -- --
Stock repurchases....................................................... -- --
----- -------
-- --
----- -------
INCREASE (DECREASE) IN CASH............................................... 231 (973)
Cash, beginning of period................................................. 382 2,079
----- -------
CASH, END OF PERIOD....................................................... $ 613 $ 1,106
----- -------
----- -------
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
F-112
<PAGE>
MCEG STERLING INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. The accompanying unaudited condensed consolidated financial statements
have been prepared in accordance with generally accepted accounting principles
for interim financial information and with the instructions to Rule 10-01 or
Regulation S-X. Accordingly, they do not include all of the information and
notes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments (consisting
of normal recurring adjustments) considered necessary for a fair presentation
have been included. Operating results for the three month period ended June 30,
1995 are not necessarily indicative of the results that may be expected for the
year ended March 31, 1996. For further information please refer to the
consolidated financial statements and notes thereto included in the Company's
Annual Report on Form 10-K for the year ended March 31, 1995.
2. Pursuant to the Company's Plan of Reorganization, effective March 30,
1992, 10 million shares of the Company's Common Stock were to be issued to
certain claimants, consultants and members of management. The financial
statements for all periods presented herein give effect to the issuance of the
10 million shares adjusted for current activity.
3. No cash dividends were declared or paid during the three month periods
ended June 30, 1995 and June 30, 1994.
4. At June 30, 1995, receivables include $242,000 in secured notes from
third parties payable on demand with interest accruing at prime plus 2%.
5. Film costs consist of the following (in thousands):
<TABLE><CAPTION>
JUNE 30, MARCH 31,
1995 1995
----------- ------------
<S> <C> <C>
Completed and released......................................... $ 13,102 $ 13,102
Less accumulated amortization.................................. (10,298) (9,584)
----------- ------------
2,804 3,518
Productions in progress........................................ 87 --
----------- ------------
$ 2,891 $ 3,518
----------- ------------
----------- ------------
</TABLE>
In May 1995, the Company entered into an agreement to acquire foreign
rights for six films, "Down Came a Blackbird", "Trade Off", "Mrs. Munck",
"Undertow", "Ruby Jean and Joe" and "Bastard Out of Carolina" for minimum
guaranteed advances totalling approximately $9.5 million. These amounts are
payable through approximately December 1996, with funding for such payments
expected to be generated from pre-sales of the foreign territories acquired. As
of June 30, 1995, none of the above mentioned films had been delivered to the
Company. During the three month period ended June 1995, the Company made
pre-sales totalling approximately $2 million in contract commitments for the
titles listed above. The first scheduled payment towards the minimum guaranteed
advances is approximately $1.1 million and is due fifteen days from delivery of
film elements. The Company anticipates receiving delivery of three titles in the
quarter ended September 30, 1995.
Costs of revenues include amortization of film costs, direct royalty
expenses, other direct distribution and consulting costs. Costs of revenues also
include nominal direct royalty distribution and consulting costs attributable to
a related party.
F-113
<PAGE>
MCEG STERLING INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(UNAUDITED)
6. Accounts payable consist of the following (in thousands):
<TABLE><CAPTION>
JUNE 30, MARCH 31,
1995 1995
----------- ------------
<S> <C> <C>
Accounts payable................................................. $ 174 $ 86
Payroll and related liabilities.................................. 42 450
State and foreign taxes payable.................................. 10 20
----- -----
$ 226 $556
----- -----
----- -----
</TABLE>
7. In late July 1993, the Company acquired the stock of Thames Television,
Inc. (renamed Badger Holdings, Inc., "Badger") for a nominal amount for the
purpose of disposing of its assets and liabilities. Badger's operations have
essentially ceased; however, it is anticipated that certain wind down costs and
litigation activities may continue throughout the fiscal year 1996. The Company
believes that the ultimate liquidation of Badger's assets and obligations will
not have a material effect on the Company's consolidated financial position or
results of operations.
Effective July 20, 1995, all of the capital stock of Badger was
transferred to an affiliate of John Hyde and Ann Jacobus, the Chief Executive
Officer and Executive Vice President and General Counsel, respectively, of the
Company, for a purchase price equal to the nominal consideration originally paid
by the Company for such stock, which management believes represents the fair
market value of such stock. The former parent of Badger consented to the sale.
The transaction did not result in any gain or loss to the Company.
F-114
<PAGE>
APPENDIX A
- --------------------------------------------------------------------------------
AMENDED AND RESTATED
AGREEMENT AND PLAN OF MERGER
BY AND AMONG
THE ACTAVA GROUP INC.,
ORION PICTURES CORPORATION,
MCEG STERLING INCORPORATED,
METROMEDIA INTERNATIONAL TELECOMMUNICATIONS, INC.,
OPC MERGER CORP.
AND
MITI MERGER CORP.
-------------------
September 27, 1995
-------------------
- --------------------------------------------------------------------------------
<PAGE>
TABLE OF CONTENTS
<TABLE><CAPTION>
PAGE
-----
<C> <S> <C> <C>
ARTICLE 1 THE MERGERS........................................................... A-2
1.1 The Mergers........................................................... A-2
1.1.1 The Orion Merger............................................ A-2
1.1.2 The Sterling Merger......................................... A-2
1.1.3 The MITI Merger............................................. A-2
1.2 Effective Time........................................................ A-2
1.2.1 The Orion Merger............................................ A-2
1.2.2 The Sterling Merger......................................... A-2
1.2.3 The MITI Merger............................................. A-3
1.3 Certificates of Incorporation......................................... A-3
1.3.1 The Orion Merger............................................ A-3
1.3.2 The Sterling Merger......................................... A-3
1.3.3 The MITI Merger............................................. A-3
1.4 By-laws............................................................... A-3
1.4.1 The Orion Merger............................................ A-3
1.4.2 The Sterling Merger......................................... A-3
1.4.3 The MITI Merger............................................. A-3
1.5 Directors............................................................. A-4
1.5.1 The Orion Merger............................................ A-4
1.5.2 The Sterling Merger......................................... A-4
1.5.3 The MITI Merger............................................. A-4
1.6 Meeting of Stockholders............................................... A-4
1.7 Proxy Statement; Form S-4............................................. A-4
1.8 Additional Actions.................................................... A-5
ARTICLE 2 CONVERSION OF SECURITIES.............................................. A-5
2.1 Actava Securities..................................................... A-5
2.2 Conversion of Orion, Sterling and MITI Securities..................... A-5
2.2.1 Orion Securities............................................ A-5
2.2.2 Sterling Securities......................................... A-6
2.2.3 MITI Securities............................................. A-6
2.3 Surrender and Exchange of Orion Common Stock, Sterling Common Stock
and MITI Common Stock................................................. A-7
2.4 Fractional Shares..................................................... A-8
ARTICLE 3 REPRESENTATIONS AND WARRANTIES OF ACTAVA.............................. A-8
3.1 Organization and Good Standing........................................ A-8
3.2 Capitalization........................................................ A-8
3.3 Subsidiaries.......................................................... A-9
3.4 Authorization; Binding Agreement...................................... A-9
3.5 Governmental Approvals................................................ A-9
3.6 No Violations......................................................... A-10
3.7 Proxy Statement; Form S-4............................................. A-10
3.8 SEC Filings........................................................... A-10
3.9 Financial Statements.................................................. A-11
3.10 Absence of Certain Changes or Events.................................. A-11
3.11 Compliance with Laws.................................................. A-11
3.12 Permits............................................................... A-12
3.13 Finders and Investment Bankers........................................ A-12
</TABLE>
i
<PAGE>
<TABLE>
<CAPTION>
PAGE
-----
<C> <S> <C> <C>
3.14 Contracts............................................................. A-12
3.15 Employee Benefit Plans................................................ A-12
3.16 Taxes................................................................. A-14
3.17 Liabilities........................................................... A-15
3.18 Environmental Matters................................................. A-15
3.19 Intellectual Property................................................. A-17
3.20 Real Estate........................................................... A-18
3.21 Records............................................................... A-18
3.22 Title to and Condition of Personal Property........................... A-18
3.23 No Adverse Actions.................................................... A-18
3.24 Labor Matters......................................................... A-18
3.25 Investment Company Act................................................ A-19
3.26 Insurance............................................................. A-19
3.27 Products.............................................................. A-19
ARTICLE 3A FURTHER REPRESENTATIONS AND WARRANTIES OF ACTAVA...................... A-20
ARTICLE 3B REPRESENTATIONS AND WARRANTIES OF ACTAVA, OPC MERGERCO AND MITI
MERGERCO.............................................................. A-20
3B.1 Organization and Good Standing........................................ A-20
3B.2 Capitalization........................................................ A-20
3B.3 Subsidiaries.......................................................... A-21
3B.4 Authorization; Binding Agreement...................................... A-21
3B.5 Governmental Approvals................................................ A-21
3B.6 No Violations......................................................... A-21
3B.7 Conduct of Business................................................... A-22
3B.8 Liabilities........................................................... A-22
3B.9 Records............................................................... A-22
ARTICLE 4 REPRESENTATIONS AND WARRANTIES OF ORION............................... A-22
4.1 Organization and Good Standing........................................ A-22
4.2 Capitalization........................................................ A-22
4.3 Subsidiaries.......................................................... A-23
4.4 Authorization; Binding Agreement...................................... A-23
4.5 Governmental Approvals................................................ A-23
4.6 No Violations......................................................... A-23
4.7 Proxy Statement; Form S-4............................................. A-24
4.8 SEC Filings........................................................... A-24
4.9 Financial Statements.................................................. A-24
4.10 Absence of Certain Changes or Events.................................. A-24
4.11 Compliance with Laws.................................................. A-25
4.12 Permits............................................................... A-25
4.13 Finders and Investment Bankers........................................ A-25
4.14 Contracts............................................................. A-25
4.15 Employee Benefit Plans................................................ A-26
4.16 Taxes................................................................. A-28
4.17 Liabilities........................................................... A-28
4.18 Environmental Protection.............................................. A-29
4.19 Intellectual Property................................................. A-30
4.20 Real Estate........................................................... A-30
4.21 Records............................................................... A-30
4.22 Title to and Condition of Personal Property........................... A-30
</TABLE>
ii
<PAGE>
<TABLE>
<CAPTION>
PAGE
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<C> <S> <C> <C>
4.23 No Adverse Actions.................................................... A-31
4.24 Labor Matters......................................................... A-31
4.25 Investment Company Act................................................ A-31
4.26 Insurance............................................................. A-32
4.27 Products.............................................................. A-32
4.28 MetProductions Indebtedness........................................... A-32
4.29 No Conflict........................................................... A-32
ARTICLE 4A FURTHER REPRESENTATIONS AND WARRANTIES OF ORION....................... A-32
ARTICLE 5 REPRESENTATIONS AND WARRANTIES OF STERLING............................ A-33
5.1 Organization and Good Standing........................................ A-33
5.2 Capitalization........................................................ A-33
5.3 Subsidiaries.......................................................... A-33
5.4 Authorization; Binding Agreement...................................... A-34
5.5 Governmental Approvals................................................ A-34
5.6 No Violations......................................................... A-34
5.7 Proxy Statement; Form S-4............................................. A-35
5.8 SEC Filings........................................................... A-35
5.9 Financial Statements.................................................. A-35
5.10 Absence of Certain Changes or Events.................................. A-35
5.11 Compliance with Laws.................................................. A-36
5.12 Permits............................................................... A-36
5.13 Finders and Investment Bankers........................................ A-36
5.14 Contracts............................................................. A-36
5.15 Employee Benefit Plans................................................ A-37
5.16 Taxes................................................................. A-38
5.17 Liabilities........................................................... A-39
5.18 Environmental Protection.............................................. A-39
5.19 Intellectual Property................................................. A-40
5.20 Real Estate........................................................... A-41
5.21 Records............................................................... A-41
5.22 Title to and Condition of Personal Property........................... A-41
5.23 No Adverse Actions.................................................... A-41
5.24 Labor Matters......................................................... A-42
5.25 Investment Company Act................................................ A-42
5.26 Insurance............................................................. A-42
5.27 Products.............................................................. A-42
ARTICLE 5A FURTHER REPRESENTATIONS AND WARRANTIES OF STERLING.................... A-43
ARTICLE 6 REPRESENTATIONS AND WARRANTIES OF MITI................................ A-43
6.1 Organization and Good Standing........................................ A-43
6.2 Capitalization........................................................ A-44
6.3 Subsidiaries.......................................................... A-44
6.4 Authorization; Binding Agreement...................................... A-44
6.5 No Violations......................................................... A-45
6.6 Proxy Statement; Form S-4............................................. A-45
6.7 Governmental Approvals................................................ A-45
6.8 Financial Statements.................................................. A-45
6.9 Absence of Certain Changes or Events.................................. A-46
6.10 Compliance with Laws.................................................. A-46
</TABLE>
iii
<PAGE>
<TABLE>
<CAPTION>
PAGE
-----
<C> <S> <C> <C>
6.11 Permits............................................................... A-46
6.12 Finders and Investment Bankers........................................ A-47
6.13 Employee Benefit Plans................................................ A-47
6.14 Taxes................................................................. A-48
6.15 Liabilities........................................................... A-49
6.16 Environmental Protection.............................................. A-49
6.17 Intellectual Property................................................. A-50
6.18 Real Estate........................................................... A-51
6.19 Contracts............................................................. A-51
6.20 Litigation............................................................ A-51
6.21 Records............................................................... A-52
6.22 Title to and Condition of Personal Property........................... A-52
6.23 No Adverse Actions.................................................... A-52
6.24 Labor Matters......................................................... A-52
6.25 Investment Company Act................................................ A-53
6.26 Insurance............................................................. A-53
6.27 Products.............................................................. A-53
ARTICLE 6A FURTHER REPRESENTATIONS AND WARRANTIES OF MITI........................ A-53
ARTICLE 7 COVENANTS OF ACTAVA................................................... A-54
7.1 Conduct of Business of Actava......................................... A-54
7.2 Notification of Certain Matters....................................... A-55
7.3 Access and Information................................................ A-56
7.4 Stockholder Approval.................................................. A-57
7.5 Benefit Plans......................................................... A-57
7.6 No Inconsistent Activities............................................ A-57
7.7 SEC and Stockholder Filings........................................... A-57
7.8 Consents, Waivers, Authorizations, etc................................ A-57
7.9 Roadmaster Approval of the Mergers.................................... A-57
7.10 Related Agreements.................................................... A-58
7.11 Indemnification....................................................... A-58
ARTICLE 8 COVENANTS OF ORION.................................................... A-58
8.1 Conduct of Business of Orion.......................................... A-58
8.2 Notification of Certain Matters....................................... A-59
8.3 Access and Information................................................ A-60
8.4 Stockholder Approval.................................................. A-61
8.5 Benefit Plans......................................................... A-61
8.6 No Inconsistent Activities............................................ A-61
8.7 SEC and Stockholder Filings........................................... A-61
8.8 Consents, Waivers, Authorizations, etc................................ A-61
ARTICLE 9 COVENANTS OF STERLING................................................. A-62
9.1 Conduct of Business of Sterling....................................... A-62
9.2 Notification of Certain Matters....................................... A-63
9.3 Access and Information................................................ A-63
9.4 Stockholder Approval.................................................. A-64
9.5 Benefit Plans......................................................... A-64
9.6 No Inconsistent Activities............................................ A-65
9.7 SEC and Stockholder Filings........................................... A-65
9.8 Consents, Waivers, Authorizations, etc................................ A-65
</TABLE>
iv
<PAGE>
<TABLE>
<CAPTION>
PAGE
-----
<C> <S> <C> <C>
ARTICLE 10 COVENANTS OF MITI..................................................... A-65
10.1 Conduct of Business of MITI........................................... A-65
10.2 Notification of Certain Matters....................................... A-67
10.3 Access and Information................................................ A-67
10.4 Stockholder Approval.................................................. A-68
10.5 Benefit Plans......................................................... A-68
10.6 No Inconsistent Activities............................................ A-69
10.7 Stockholder Communications............................................ A-69
10.8 Consents, Waivers, Authorizations, etc................................ A-69
ARTICLE 11 COVENANTS OF EACH OF ACTAVA, OPC MERGERCO, MITI MERGERCO, ORION,
STERLING AND MITI..................................................... A-69
11.1 Further Assurances.................................................... A-70
11.2 Public Announcements.................................................. A-70
11.3 Exchange Act and Securities Act Compliance............................ A-70
11.4 Surviving Corporation Board of Directors.............................. A-70
11.5 Listing of the Common Stock........................................... A-70
11.6 Labor Matters......................................................... A-71
11.7 Refinancing of Indebtedness........................................... A-71
ARTICLE 12 CONDITIONS............................................................ A-71
12.1 Conditions to Each Merging Party's Obligations........................ A-71
12.1.1 Stockholder Approval........................................ A-71
12.1.2 Consummation of the Mergers................................. A-71
12.1.3 No Injunction............................................... A-71
12.1.4 HSR Act..................................................... A-72
12.1.5 Required Consents........................................... A-72
12.1.6 Effective Form S-4.......................................... A-72
12.1.7 Appraisal Rights............................................ A-72
12.2 Conditions to Obligations of Actava................................... A-72
12.2.1 Obligations Performed....................................... A-72
12.2.2 Representations and Warranties.............................. A-72
12.2.3 Certificates Delivered...................................... A-72
12.2.4 No Material Adverse Change.................................. A-72
12.2.5 Actava Stock Price.......................................... A-73
12.2.6 Opinions of Counsel......................................... A-73
12.2.7 Fairness Opinion............................................ A-73
12.2.8 Listing..................................................... A-73
12.2.9 Refinancing of Orion Senior Indebtedness.................... A-73
12.2.10 Refinancing of Orion Subordinated Indebtedness.............. A-73
12.2.11 FIRPTA Certificate.......................................... A-73
12.3 Conditions to Obligations of Orion.................................... A-73
12.3.1 Obligations Performed....................................... A-73
12.3.2 Representations and Warranties.............................. A-73
12.3.3 Certificate................................................. A-74
12.3.4 No Material Adverse Change.................................. A-74
12.3.5 Opinions of Counsel......................................... A-74
12.3.6 Fairness Opinion............................................ A-74
12.3.7 Refinancing of Orion Senior Indebtedness.................... A-74
12.3.8 Refinancing of Orion Subordinated Indebtedness.............. A-74
12.3.9 Refinancing of Other Indebtedness........................... A-74
</TABLE>
v
<PAGE>
<TABLE>
<CAPTION>
PAGE
-----
<C> <S> <C> <C>
12.3.10 Refinancing or Contribution of MetProductions Indebtedness
and MII Indebtedness........................................ A-74
12.3.11 Ancillary Agreements; Shelf Registration Statement.......... A-74
12.4 Conditions to Obligations of Sterling................................. A-75
12.4.1 Obligations Performed....................................... A-75
12.4.2 Representations and Warranties.............................. A-75
12.4.3 Certificates Delivered...................................... A-75
12.4.4 No Material Adverse Change.................................. A-75
12.4.5 Opinions of Counsel......................................... A-75
12.4.6 Fairness Opinion............................................ A-75
12.5 Conditions to Obligations of MITI..................................... A-75
12.5.1 Obligations Performed....................................... A-75
12.5.2 Representations and Warranties.............................. A-76
12.5.3 Certificates Delivered...................................... A-76
12.5.4 No Material Adverse Change.................................. A-76
12.5.5 Opinions of Counsel......................................... A-76
12.5.6 Fairness Opinion............................................ A-76
12.5.7 Listing..................................................... A-76
ARTICLE 13 CLOSING............................................................... A-76
13.1 Time and Place........................................................ A-76
13.2 Filing of Certificates of Merger, Etc................................. A-76
ARTICLE 14 TERMINATION AND ABANDONMENT........................................... A-77
14.1 Termination................................................. A-77
14.2 Procedure and Effect of Termination......................... A-78
ARTICLE 15 MISCELLANEOUS......................................................... A-78
15.1 Amendment and Modification.................................. A-78
15.2 Waiver of Compliance; Consents.............................. A-78
15.3 Survival of Representations and Warranties.................. A-79
15.4 Notices..................................................... A-79
15.5 Assignment.................................................. A-79
15.6 Expenses.................................................... A-79
15.7 GOVERNING LAW............................................... A-79
15.8 Counterparts................................................ A-79
15.9 Interpretation; Definitions................................. A-79
15.10 Entire Agreement............................................ A-82
</TABLE>
vi
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<TABLE><CAPTION>
EXHIBITS
<S> <C>
Exhibit A-1 Orion Certificate of Merger
Exhibit A-2 Sterling Certificate of Merger
Exhibit A-3 MITI Certificate of Merger
Exhibit B By-laws of the Surviving Corporation
Exhibit C-1 Contribution Agreement
Exhibit C-2 Registration Rights Agreement
Exhibit D Opinion of Paul, Weiss, Rifkind, Wharton & Garrison
Exhibit E Opinion of Robinson Brog Leinwand Greene Genovese & Gluck, P.C.
Exhibit F Opinion of Rubin Baum Levin Constant & Friedman
Exhibit G Opinion of Long, Aldridge & Norman
SCHEDULES
Schedule 1.5.2(a) Directors
Schedule 1.5.2(b) Directors
Schedule 3.2(a) Options, Warrants, etc.
Schedule 3.2(b) Stock Issuances and Repurchases
Schedule 3.3 Holdings
Schedule 3.6 Consents, etc.
Schedule 3.12 Permits
Schedule 3.14 Contracts
Schedule 3.15(i) Employee Benefit Plans
Schedule 3.15(iii) Employee Benefit Plans
Schedule 3.15(iv) Employee Benefit Plans
Schedule 3.15(v) Employee Benefit Plans
Schedule 3.15(vi) Employee Benefit Plans
Schedule 3.15(vii) Severance and Acceleration
Schedule 3.16 Tax Matters
Schedule 3.17 Liabilities
Schedule 3.18 Environmental Protection
Schedule 3.18(ix) Hazardous Substances
Schedule 3.19 Intellectual Property
Schedule 3.20(a) Owned Real Estate
Schedule 3.20(b) Leased Real Estate
Schedule 3.22 Personal Property
Schedule 3.24(a) Labor Matters
Schedule 3.24(b) WARN ACT
Schedule 3.24(c) Employment Practices
Schedule 3.26 Insurance
Schedule 3.27(a) Products Liability
Schedule 3.27(b) Products Liability
Schedule 4.2(a) Options, Warrants, etc.
Schedule 4.3 Holdings
Schedule 4.6 Consents, etc.
Schedule 4.10(i) Certain Changes
Schedule 4.10(v) Certain Changes
Schedule 4.10(vi) Certain Changes
Schedule 4.12 Permits
Schedule 4.14 Contracts
Schedule 4.15(i) Employee Benefit Plans
Schedule 4.15(iii) Employee Benefit Plans
Schedule 4.15(iv) Employee Benefit Plans
</TABLE>
vii
<PAGE>
<TABLE>
<S> <C>
Schedule 4.15(v) Employee Benefit Plans
Schedule 4.15(vi) Employee Benefit Plans
Schedule 4.15(vii) Severance and Acceleration
Schedule 4.16 Tax Matters
Schedule 4.17 Liabilities
Schedule 4.18 Environmental Protection
Schedule 4.18(ix) Hazardous Substances
Schedule 4.19 Intellectual Property
Schedule 4.20(a) Owned Real Estate
Schedule 4.20(b) Leased Real Estate
Schedule 4.22 Personal Property
Schedule 4.24(a) Labor Matters
Schedule 4.24(b) WARN ACT
Schedule 4.24(c) Employment Practices
Schedule 4.26 Insurance
Schedule 4.27(a) Products Liability
Schedule 4.27(b) Products Liability
Schedule 5.2(a) Options, Warrants, etc.
Schedule 5.2(b) Stock Issuances and Repurchases
Schedule 5.3 Holdings
Schedule 5.6 Consents, etc.
Schedule 5.10(v) Certain Changes
Schedule 5.12 Permits
Schedule 5.14 Contracts
Schedule 5.15(i) Employee Benefit Plans
Schedule 5.15(iii) Employee Benefit Plans
Schedule 5.15(iv) Employee Benefit Plans
Schedule 5.15(v) Employee Benefit Plans
Schedule 5.15(vi) Employee Benefit Plans
Schedule 5.15(vii) Severance and Acceleration
Schedule 5.16 Tax Matters
Schedule 5.17 Liabilities
Schedule 5.18 Environmental Protection
Schedule 5.18(ix) Hazardous Substances
Schedule 5.19 Intellectual Property
Schedule 5.20(b) Leased Real Estate
Schedule 5.24(a) Labor Matters
Schedule 5.24(b) WARN ACT
Schedule 5.24(c) Employment Practices
Schedule 5.26 Insurance
Schedule 5.27(a) Products Liability
Schedule 5.27(b) Products Liability
Schedule 6.1(a) Joint Ventures
Schedule 6.1(b) Joint Venture Organizational Documents
Schedule 6.2(a) Options, Warrants, etc.
Schedule 6.2(b) Stock Issuances and Repurchases
Schedule 6.3 Subsidiaries, Holdings
Schedule 6.5 Consents, etc.
Schedule 6.7 Governmental Approvals
Schedule 6.9 Absence of Certain Changes or Events
Schedule 6.10 Compliance with Laws
Schedule 6.11 Permits
</TABLE>
viii
<PAGE>
<TABLE>
<S> <C>
Schedule 6.13(i) Employee Benefit Plans
Schedule 6.13(iii) Employee Benefit Plans
Schedule 6.13(iv) Employee Benefit Plans
Schedule 6.13(v) Employee Benefit Plans
Schedule 6.13(vi) Employee Benefit Plans
Schedule 6.13(vii) Severance and Acceleration
Schedule 6.14 Tax Matters
Schedule 6.15 Liabilities
Schedule 6.16 Environmental Protection
Schedule 6.16(ix) Hazardous Substances
Schedule 6.17 Intellectual Property
Schedule 6.18(b) Leased Real Estate
Schedule 6.19 Contracts
Schedule 6.20 Litigation
Schedule 6.24(a) Labor Matters
Schedule 6.24(c) Employment Practices
Schedule 6.26 Insurance
Schedule 6.27(a) Products Liability
Schedule 6.27(b) Products Liability
Schedule 7.1 Actava Credit Facilities
Schedule 8.1 Orion Credit Facilities
Schedule 9.1 Sterling Credit Facilities
Schedule 10.1 MITI Credit Facilities
Schedule 10.1(ii) MITI Issuances
Schedule 12.2.9 Refinancing of Orion Senior Indebtedness
Schedule 12.2.10 Refinancing of Orion Subordinated Indebtedness
Schedule 15.9(viii) Orion Exchange Ratio
Schedule 15.9(ix) MITI Exchange Ratio
Schedule 15.9(x)(a) Sterling Exchange Ratio
Schedule 15.9(x)(b) Sterling Exchange Ratio
</TABLE>
ix
<PAGE>
AMENDED AND RESTATED AGREEMENT AND PLAN OF MERGER
AMENDED AND RESTATED AGREEMENT AND PLAN OF MERGER, dated as of September 27,
1995 the "Agreement"), by and among THE ACTAVA GROUP INC., a Delaware
corporation ("Actava"), ORION PICTURES CORPORATION, a Delaware corporation
("Orion"), MCEG STERLING INCORPORATED, a Delaware corporation ("Sterling"),
METROMEDIA INTERNATIONAL TELECOMMUNICATIONS, INC., a Delaware corporation
("MITI," and together with Actava, Orion and Sterling, sometimes referred to
herein as the "Merging Parties"), OPC MERGER CORP., a Delaware corporation and a
wholly owned subsidiary of Actava ("OPC Mergerco"), and MITI MERGER CORP., a
Delaware corporation and a wholly owned subsidiary of Actava ("MITI Mergerco").
WHEREAS, the Boards of Directors of Actava and OPC Mergerco have approved
the merger of Orion with and into OPC Mergerco (the "Orion Merger") upon the
terms and subject to the conditions of this Agreement;
WHEREAS, the Board of Directors of Actava has approved the merger of
Sterling with and into Actava (the "Sterling Merger") upon the terms and subject
to the conditions of this Agreement;
WHEREAS, the Boards of Directors of Actava and MITI Mergerco have approved
the merger of MITI with and into MITI Mergerco (the "MITI Merger"; together with
the Orion Merger and the Sterling Merger, the "Mergers") upon the terms and
subject to the conditions of this Agreement;
WHEREAS, the Board of Directors of Orion has approved the Orion Merger upon
the terms and subject to the conditions of this Agreement;
WHEREAS, the Board of Directors of Sterling has approved the Sterling Merger
upon the terms and subject to the conditions of this Agreement;
WHEREAS, the Board of Directors of MITI has approved the MITI Merger upon
the terms and subject to the conditions of this Agreement;
WHEREAS, at the Effective Time (as defined below), pursuant to the terms of
a Contribution Agreement substantially in the form of Exhibit C-1 hereto (the
"Contribution Agreement"), between Actava and the Metromedia Holders listed on
the signature pages thereto (the "Metromedia Holders"), the Metromedia Holders
will contribute, assign or convey to the Surviving Corporation (a) the
MetProductions Indebtedness (as defined below) and/or (b) the MII Indebtedness
(as defined below) in return for a number of shares of common stock, par value
$1.00 per share, of Actava (the "Common Stock") as specified in the Contribution
Agreement, if the MetProductions Indebtedness and/or the MII Indebtedness is not
refinanced or repaid in full in accordance with this Agreement; and
WHEREAS, it is the express intention of Actava, Orion, Sterling, MITI, OPC
Mergerco and MITI Mergerco that each of the Mergers constitutes a tax-free
reorganization for federal income tax purposes under the Internal Revenue Code
of 1986, as amended, and the regulations thereunder (the "Code").
A-1
<PAGE>
Accordingly, the parties hereto agree as follows:
ARTICLE 1
THE MERGERS
1.1 The Mergers.
1.1.1 The Orion Merger. At the Orion Effective Time (as defined in
Section 1.2.1), upon the terms and subject to the conditions of this
Agreement, Orion shall be merged with and into OPC Mergerco in accordance
with the Delaware General Corporation Law ("DGCL") and the separate
existence of Orion shall thereupon cease, and OPC Mergerco, as the surviving
corporation in the Orion Merger, shall continue its corporate existence
under the laws of the State of Delaware. The Orion Merger shall have the
effects set forth in Section 259 of the DGCL.
1.1.2 The Sterling Merger. At the Sterling Effective Time (as defined in
Section 1.2.2), upon the terms and subject to the conditions of this
Agreement, Sterling shall be merged with and into Actava in accordance with
the DGCL and the separate existence of Sterling shall thereupon cease, and
Actava, as the surviving corporation in the Sterling Merger, shall continue
its corporate existence under the laws of the State of Delaware. The
Sterling Merger shall have the effects set forth in Section 259 of the DGCL.
1.1.3 The MITI Merger. At the MITI Effective Time (as defined in Section
1.2.3), upon the terms and subject to the conditions of this Agreement, MITI
shall be merged with and into MITI Mergerco in accordance with the DGCL and
the separate existence of MITI shall thereupon cease, and MITI Mergerco, as
the surviving corporation in the MITI Merger, shall continue its corporate
existence under the laws of the State of Delaware. The MITI Merger shall
have the effects set forth in Section 259 of the DGCL.
1.2 Effective Time.
1.2.1 The Orion Merger. The Orion Merger shall become effective at the
date and time of the filing of the Certificate of Merger substantially in
the form of Exhibit A-1 to this Agreement (the "Orion Certificate of
Merger") with the Secretary of State of Delaware in accordance with the
provisions of the DGCL. The date and time when the Orion Merger shall become
effective is herein referred to as the "Orion Effective Time." OPC Mergerco,
as the surviving corporation of the Orion Merger, shall be referred to
herein as the "Orion Merger Surviving Corporation." In accordance with the
DGCL, all of the rights, privileges, powers, immunities, purposes and
franchises of OPC Mergerco and Orion shall vest in the Orion Merger
Surviving Corporation and all debts, liabilities, obligations and duties of
OPC Mergerco and Orion shall become the debts, liabilities, obligations and
duties of the Orion Merger Surviving Corporation.
1.2.2 The Sterling Merger. The Sterling Merger shall become effective at
the date and time of the filing of the Certificate of Merger substantially
in the form of Exhibit A-2 to this Agreement (the "Sterling Certificate of
Merger") with the Secretary of State of Delaware in accordance with the
provisions of the DGCL. The date and time when the Sterling Merger shall
become effective is herein referred to as the "Sterling Effective Time."
Actava, as the surviving corporation of the Sterling Merger, shall be
referred to herein as the "Surviving Corporation." In accordance with the
DGCL, all of the rights, privileges, powers, immunities, purposes and
franchises of Actava and Sterling shall vest in the Surviving Corporation
and all debts, liabilities, obligations and duties of Actava and Sterling
shall become the debts, liabilities, obligations and duties of the Surviving
Corporation.
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1.2.3 The MITI Merger. The MITI Merger shall become effective at the
date and time of the filing of the Certificate of Merger substantially in
the form of Exhibit A-3 to this Agreement (the "MITI Certificate of Merger")
with the Secretary of State of Delaware in accordance with the provisions of
the DGCL. The date and time when the MITI Merger shall become effective is
herein referred to as the "MITI Effective Time" and the date and time of the
last to occur of (x) the Orion Effective Time, (y) the Sterling Effective
Time, and (z) the MITI Effective Time, is herein referred to as the
"Effective Time." MITI Mergerco, as the surviving corporation of the MITI
Merger, shall be referred to herein as the "MITI Merger Surviving
Corporation." In accordance with the DGCL, all of the rights, privileges,
powers, immunities, purposes and franchises of MITI Mergerco and MITI shall
vest in the MITI Merger Surviving Corporation and all debts, liabilities,
obligations and duties of MITI Mergerco and MITI shall become the debts,
liabilities, obligations and duties of the MITI Merger Surviving
Corporation.
1.3 Certificates of Incorporation.
1.3.1 The Orion Merger. The Certificate of Incorporation of OPC Mergerco
as in effect immediately prior to the Orion Effective Time shall be the
Certificate of Incorporation of the Orion Merger Surviving Corporation until
thereafter amended as provided by law, except that at the Orion Effective
Time, Article FIRST of the Certificate of Incorporation of the Orion Merger
Surviving Corporation shall be amended to read as follows: "The name of the
Corporation is ORION PICTURES CORPORATION (the "Corporation")."
1.3.2 The Sterling Merger. The Restated Certificate of Incorporation of
Actava shall be further amended and restated by this Agreement and the
Sterling Certificate of Merger, and as so amended and restated, shall be the
Certificate of Incorporation of the Surviving Corporation until thereafter
amended as provided by law. The amendments effectuated by this Agreement and
the Sterling Certificate of Merger are included in their entirety in the
form of the Restated Certificate of Incorporation attached as Exhibit A to
Exhibit A-2 to this Agreement and shall include (i) a change of the name of
the Surviving Corporation to "Metromedia International Group, Inc." and (ii)
an increase in the number of authorized shares of Common Stock as specified
therein.
1.3.3 The MITI Merger. The Certificate of Incorporation of MITI Mergerco
shall be the Certificate of Incorporation of the MITI Merger Surviving
Corporation until thereafter amended as provided by law except that at the
MITI Effective Time, Article FIRST of the Certificate of Incorporation of
the MITI Merger Surviving Corporation shall be amended to read as follows:
"The name of the corporation is METROMEDIA INTERNATIONAL TELECOMMUNICATIONS,
INC. (the "Corporation")."
1.4 By-laws.
1.4.1 The Orion Merger. The By-laws of OPC Mergerco as in effect
immediately prior to the Orion Effective Time shall be the By-laws of the
Orion Merger Surviving Corporation until thereafter amended.
1.4.2 The Sterling Merger. The By-laws of Actava shall be amended and
restated as of the Effective Time substantially in the form of Exhibit B
hereto and as so amended and restated shall be the By-laws of the Surviving
Corporation until thereafter amended.
1.4.3 The MITI Merger. The By-laws of MITI Mergerco as in effect
immediately prior to the MITI Effective Time shall be the By-laws of the
MITI Merger Surviving Corporation until thereafter amended.
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1.5 Directors.
1.5.1 The Orion Merger. The directors of the Orion Merger Surviving
Corporation at the Effective Time shall consist of three individuals
designated at the Effective Time by the Board of Directors of the Surviving
Corporation, each of whom shall hold office from the Effective Time until
their respective successors are duly elected or appointed and qualified in
the manner provided in the Certificate of Incorporation and By-laws of the
Orion Merger Surviving Corporation.
1.5.2 The Sterling Merger. The directors of the Surviving Corporation at
the Effective Time shall consist of the persons listed on Schedule 1.5.2(a),
each of whom shall hold office from the Effective Time until their
respective successors are duly elected or appointed and qualified in the
manner provided in the Certificate of Incorporation and By-laws of the
Surviving Corporation; provided, however, that if at the Effective Time (i)
Triton Group Ltd., a Delaware corporation ("Triton"), is entitled to
designate one director to the Surviving Corporation's Board of Directors
pursuant to an Amended and Restated Stockholder Agreement dated as of June
25, 1993 between Triton and Actava (the "Triton Stockholder Agreement"), and
(ii) Triton has not waived its rights under the Triton Stockholder Agreement
to designate one director to the Surviving Corporation's Board of Directors,
then the directors of the Surviving Corporation at the Effective Time shall
consist of the persons listed on Schedule 1.5.2(b), each of whom shall hold
office from the Effective Time until their respective successors are duly
elected or appointed and qualified in the manner provided in the Certificate
of Incorporation and By-laws of the Surviving Corporation.
1.5.3 The MITI Merger. The directors of the MITI Merger Surviving
Corporation at the Effective Time shall consist of three individuals
designated at the Effective Time by the Board of Directors of the Surviving
Corporation, each of whom shall hold office from the Effective Time until
their respective successors are duly elected or appointed and qualified in
the manner provided in the Certificate of Incorporation and By-laws of the
MITI Merger Surviving Corporation.
1.6 Meeting of Stockholders. Each of Actava, Orion, Sterling and MITI hereby
covenants and agrees that it shall, as promptly as practicable, take all
necessary action in accordance with applicable law to convene a meeting of its
stockholders and shall use its best efforts to hold such meeting as promptly as
practicable after the date hereof. The purpose of such meeting shall be, among
other things, to consider and vote upon this Agreement and the transactions
contemplated hereby (including, without limitation, the Mergers and the
amendment of Actava's Restated Certificate of Incorporation to be effectuated by
the filing of the Sterling Certificate of Merger). Notwithstanding the
foregoing, MITI shall be deemed to have fulfilled the foregoing requirements if
its stockholders act by written consent in lieu of such meeting pursuant to the
provisions of Section 228 of the DGCL. Subject to applicable law and fiduciary
duties, including the duties of loyalty and care, the Board of Directors of each
of Actava, Orion, Sterling and MITI shall recommend that their stockholders vote
in favor of the Mergers, as applicable, and the adoption of this Agreement, as
applicable, and the approval of the transactions contemplated by such
agreements.
1.7 Proxy Statement; Form S-4. As soon as practicable, Actava, Orion and
Sterling shall file with the Securities and Exchange Commission (the "SEC")
under the Securities Exchange Act of 1934, as amended (the "Exchange Act"), and
each shall use its respective best efforts to have cleared by the SEC, a joint
proxy statement (the "Proxy Statement"), with respect to the meeting of
Actava's, Orion's and Sterling's stockholders referred to in Section 1.6. In
connection therewith, as soon as practicable after the date hereof, Actava shall
file with the SEC a Registration Statement on Form S-4 (the "Form S-4") to
register under the Securities Act of 1933, as amended (the "Securities Act"),
the shares of the Common Stock to be issued in the Mergers which Form S-4 shall
incorporate the Proxy Statement. Each of the parties hereto shall use its best
efforts promptly to provide in writing all information related to it which is
required for inclusion in the Proxy Statement and Form S-4 in order to have the
Form S-4 declared effective by the SEC as promptly as practicable. Actava shall
use its best
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efforts to comply, prior to the Effective Time, with all applicable requirements
of "Blue Sky" and federal and state securities laws in connection with the
Mergers and the issuance of the Common Stock in connection therewith.
1.8 Additional Actions. If, at any time after the Effective Time, the
Surviving Corporation, the Orion Merger Surviving Corporation or the MITI Merger
Surviving Corporation shall consider or be advised that any deeds, bills of
sale, assignments, assurances or any other actions or things are necessary or
desirable to vest, perfect or confirm of record or otherwise in the Surviving
Corporation, the Orion Merger Surviving Corporation or the MITI Merger Surviving
Corporation, as the case may be, its right, title or interest in, to or under
any of the rights, properties or assets of Orion, Sterling or MITI or otherwise
to carry out this Agreement, the officers and directors of the Surviving
Corporation, the Orion Merger Surviving Corporation and the MITI Merger
Surviving Corporation, as appropriate, shall be authorized to execute and
deliver, in the name and on behalf of Orion, Sterling or MITI or otherwise, all
such deeds, bills of sale, assignments and assurances and to take and do, in the
name and on behalf of Orion, Sterling or MITI or otherwise, all such other
actions and things as may be necessary or desirable to vest, perfect or confirm
any and all right, title and interest in, to and under such rights, properties
or assets in the Surviving Corporation, the Orion Merger Surviving Corporation
or the MITI Merger Surviving Corporation, as the case may be, or otherwise to
carry out this Agreement.
ARTICLE 2
CONVERSION OF SECURITIES
2.1 Actava Securities.
(i) All issued and outstanding securities of Actava outstanding
immediately prior to the Effective Time (including, without limitation, all
shares of Common Stock and all options and warrants exercisable for and
securities convertible into shares of Common Stock) shall remain outstanding
following the Mergers with the same terms and subject to the same conditions
as in effect prior to the Effective Time.
(ii) It will not be necessary for holders of Common Stock to exchange
their existing stock certificates for stock certificates bearing the new
name of the Surviving Corporation prior to or at the Effective Time, but
after the Effective Time, as presently outstanding certificates of Common
Stock are presented for transfer, new certificates bearing the new name of
the Surviving Corporation and representing the same number of shares of
Common Stock as is currently set forth on such presently outstanding
certificates will be issued, or such new certificates shall be issued upon
request upon delivery of the certificates evidencing such Common Stock to
the Surviving Corporation's transfer agent. From and after the Effective
Time, and until such time as all of the certificates representing the Common
Stock bearing the previous name of the Surviving Corporation are presented
for transfer or exchange, such certificates which have not been presented
for transfer or exchange shall represent the same number of shares of Common
Stock as is currently set forth on such certificates and holders thereof
shall have the same per share right to receive dividends and vote such
shares as if such holders had transferred or exchanged such certificates for
new certificates bearing the new name of the Surviving Corporation.
2.2 Conversion of Orion, Sterling and MITI Securities.
2.2.1 Orion Securities.
(i) At the Orion Effective Time, each share of common stock, par
value $.25 per share, of Orion (the "Orion Common Stock"), issued and
outstanding immediately prior to the Orion
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Effective Time, shall, by virtue of the Orion Merger and without any
action on the part of the holder thereof, be converted into the right to
receive a number of shares of Common Stock equal to the Orion Exchange
Ratio (as hereafter defined) (subject to appropriate adjustment in the
event of a stock split, stock dividend or recapitalization or other
similar event applicable to shares of Common Stock prior to the Orion
Effective Time) upon surrender of the certificate representing such share
of Orion Common Stock.
(ii) Each share of Orion Common Stock held in treasury by Orion
immediately prior to the Orion Effective Time shall, by virtue of the
Orion Merger, be canceled and retired and cease to exist, without any
conversion thereof.
2.2.2 Sterling Securities.
(i) At the Sterling Effective Time, each share of common stock, par
value $.001 per share, of Sterling (the "Sterling Common Stock"), issued
and outstanding immediately prior to the Sterling Effective Time, shall,
by virtue of the Sterling Merger and without any action on the part of
the holder thereof, be converted into the right to receive a number of
shares of Common Stock equal to the Sterling Exchange Ratio (as hereafter
defined) (subject to appropriate adjustment in the event of a stock
split, stock dividend or recapitalization or other similar event
applicable to shares of Common Stock prior to the Sterling Effective
Time) upon surrender of the certificate representing such share of
Sterling Common Stock.
(ii) Each share of Sterling Common Stock held in treasury by Sterling
immediately prior to the Sterling Effective Time shall, by virtue of the
Sterling Merger, be canceled and retired and cease to exist, without any
conversion thereof.
(iii) Notwithstanding anything in this Agreement to the contrary,
shares of Sterling Common Stock outstanding immediately prior to the
Sterling Effective Time held by a holder (if any) who is entitled to
demand, and who properly demands, appraisal for such shares in accordance
with Section 262 of the DGCL ("Sterling Dissenting Shares") shall not be
converted into a right to receive the consideration specified in Section
2.2.2(i) hereof unless such holder fails to perfect or otherwise loses
such holder's right to appraisal, if any. If, after the Sterling
Effective Time, such holder fails to perfect or otherwise loses any such
right to appraisal, such shares shall be treated as if they had been
converted as of the Sterling Effective Time into a right to receive the
consideration specified in Section 2.2.2(i) hereof. Sterling shall give
prompt notice to Actava of any demands received by Sterling for appraisal
of shares of Sterling Common Stock and Actava shall have the right to
participate in and direct all negotiations and proceedings with respect
to such demands. Sterling shall not, except with the prior written
consent of Actava, which consent shall not be unreasonably withheld, make
any payment with respect to, or settle or offer to settle, any such
demands.
2.2.3 MITI Securities.
(i) At the MITI Effective Time, each share of common stock, par value
$.001 per share, of MITI (the "MITI Common Stock"), issued and
outstanding immediately prior to the MITI Effective Time, shall, by
virtue of the MITI Merger and without any action on the part of the
holder thereof, be converted into the right to receive a number of shares
of Common Stock equal to the MITI Exchange Ratio (as hereafter defined)
(subject to appropriate adjustment in the event of a stock split, stock
dividend or recapitalization or other similar event applicable to shares
of Common Stock prior to the MITI Effective Time) upon surrender of the
certificate representing such share of MITI Common Stock.
(ii) At the MITI Effective Time, each holder of an option or warrant
or other right exercisable for or convertible into shares of MITI Common
Stock ("MITI Options and
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Warrants") will receive, by virtue of the MITI Merger and without any
action on the part of the holder thereof, options or warrants or other
rights exercisable for or convertible into shares of Common Stock with
the same terms and conditions as the MITI Options and Warrants except
that the exercise price and the number of shares issuable upon exercise
shall be divided and multiplied, respectively, by the MITI Exchange Ratio
(subject to appropriate adjustment in the event of a stock split, stock
dividend or recapitalization or other similar event applicable to shares
of Common Stock prior to the MITI Effective Time).
(iii) Each share of MITI Common Stock held in treasury by MITI
immediately prior to the MITI Effective Time shall, by virtue of the MITI
Merger, be canceled and retired and cease to exist, without any
conversion thereof.
(iv) Notwithstanding anything in this Agreement to the contrary,
shares of MITI Common Stock outstanding immediately prior to the MITI
Effective Time held by a holder (if any) who is entitled to demand, and
who properly demands, appraisal for such shares in accordance with
Section 262 of the DGCL ("MITI Dissenting Shares" shall not be converted
into a right to receive the consideration specified in Section 2.2.3(i)
hereof unless such holder fails to perfect or otherwise loses such
holder's right to appraisal, if any. If, after the MITI Effective Time,
such holder fails to perfect or otherwise loses any such right to
appraisal, such shares shall be treated as if they had been converted as
of the MITI Effective Time into a right to receive the consideration
specified in Section 2.2.3(i) hereof. MITI shall give prompt notice to
Actava of any demands received by MITI for appraisal of shares of MITI
Common Stock and Actava shall have the right to participate in and direct
all negotiations and proceedings with respect to such demands. MITI shall
not, except with the prior written consent of Actava, which consent shall
not be unreasonably withheld, make any payment with respect to, or settle
or offer to settle, any such demands.
2.3 Surrender and Exchange of Orion Common Stock, Sterling Common Stock and
MITI Common Stock. After the Effective Time, each holder of an outstanding
certificate or certificates (the "Old Certificates") theretofore representing
shares of Orion Common Stock, Sterling Common Stock or MITI Common Stock shall
surrender such Old Certificates to such bank or trust company as may be
designated by the Surviving Corporation as the exchange agent (the "Exchange
Agent") and shall receive in exchange therefor, upon satisfaction of customary
delivery requirements, certificates representing the number of whole shares of
Common Stock into which shares of Orion Common Stock, Sterling Common Stock or
MITI Common Stock, as the case may be, have been converted (it being understood
that subject to the provisions of Section 2.4 hereof, in connection with the
Sterling Merger, the Surviving Corporation will instruct the Exchange Agent to
deliver the number of whole shares of Common Stock plus cash in lieu of
fractional shares which the Sterling Voting Trust (as defined herein) is
entitled to receive pursuant to the Sterling Merger in accordance with Section
2.2.2(i) hereof to the beneficiaries of such trust in exchange for the Old
Certificates representing the shares of Sterling Common Stock owned by the
voting trust (the "Sterling Voting Trust") created by the Voting Trust
Agreement). Until so surrendered and exchanged, each outstanding Old Certificate
after the Effective Time shall be deemed for all purposes to evidence the number
of whole shares of Common Stock into which the shares of Orion Common Stock,
Sterling Common Stock or MITI Common Stock, as the case may be, represented by
such certificate are to be converted pursuant to Section 2.2 of this Agreement;
provided, however, that no dividends or other distributions, if any, in respect
of such shares of Common Stock, declared after the Effective Time and payable to
holders of record after the Effective Time, shall be paid to the holders of any
unsurrendered Old Certificates until such Old Certificates are surrendered.
Subject to applicable law, after the surrender and exchange of Old Certificates,
the record holders thereof will be entitled to receive any such dividends or
other distributions without interest thereon, which theretofore have become
payable with respect to the number of shares of Common Stock for which such Old
Certificate was exchangeable. Holders of any unsurrendered Old Certificates
shall not be entitled to vote until such unsurrendered Old Certificates are
exchanged pursuant to this Section 2.3.
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2.4 Fractional Shares. No fractional shares of Common Stock shall be issued
in connection with the conversion of shares of Orion Common Stock, Sterling
Common Stock or MITI Common Stock, as the case may be, in connection with the
Mergers nor will any outstanding fractional share interest entitle the owner
thereof to vote, to receive dividends or to exercise any other right of a
stockholder of the Surviving Corporation. In lieu of any such fractional shares,
any holder of Orion Common Stock, Sterling Common Stock or MITI Common Stock, as
the case may be, who would otherwise have been entitled to receive a fractional
share of Common Stock shall, upon surrender of certificates representing such
holders' shares of Orion Common Stock, Sterling Common Stock or MITI Common
Stock, as the case may be, be paid in cash the value of each such fraction,
which for this purpose shall be calculated by multiplying such fraction by the
"Average Closing Price." For purposes of this Agreement, "Average Closing Price"
means the average of the last sale prices for Common Stock as reported on the
New York Stock Exchange ("NYSE") for the last 20 consecutive trading days ending
on the business day immediately preceding the day which is five calendar days
prior to the day on which the meetings of Actava's, Orion's and Sterling's
stockholders referred to in Section 1.6 hereof are held, or if such day is not a
business day, on the business day immediately preceding such day (the
"Determination Date"), subject to appropriate adjustment in the event of a stock
split, stock dividend or recapitalization or other similar event applicable to
shares of Common Stock held of record on or before the Effective Time to the
extent not reflected in such sale prices.
ARTICLE 3
REPRESENTATIONS AND WARRANTIES
OF ACTAVA
Actava represents and warrants as of April 12, 1995 to each of Orion,
Sterling and MITI as follows (all references in this Article 3 to "as of the
date of this Agreement" or to "as of the date hereof" shall be deemed to refer
to April 12, 1995):
3.1 Organization and Good Standing. Actava and each of its material
subsidiaries is a corporation duly organized, validly existing and in good
standing under the laws of the jurisdiction of its incorporation and has all
requisite corporate power and authority to own, lease and operate its properties
and to carry on its business as now being conducted. Actava and each of its
material subsidiaries is duly qualified or licensed and in good standing to do
business in each jurisdiction in which the character of the property owned,
leased or operated by it or the nature of the business conducted by it makes
such qualification or licensing necessary, except where the failure to be so
duly qualified or licensed and in good standing would not have an Actava
Material Adverse Effect (as defined in Section 15.9). Actava has heretofore
delivered or made available to each of Orion, Sterling and MITI accurate and
complete copies of the Certificates of Incorporation and By-laws, or equivalent
governing instruments, as currently in effect, of Actava and each of its
subsidiaries.
3.2 Capitalization. The authorized capital stock of Actava consists of
100,000,000 shares of Common Stock, 1,000,000 shares of Preference Stock,
without par value ("Actava Preference Stock"), and 5,000,000 shares of Preferred
Stock, par value $1.00 per share (the "Actava Preferred Stock"). As of March 31,
1995, 17,327,158 shares of Common Stock, no shares of Actava Preference Stock
and no shares of Actava Preferred Stock were issued and outstanding. No other
capital stock of Actava is authorized or issued. All issued and outstanding
shares of capital stock of Actava are validly issued, fully paid and
non-assessable and were issued free of preemptive rights and in compliance with
applicable federal and state securities laws and regulations. Except as set
forth on Schedule 3.2(a), at the date hereof there are not any outstanding
rights, subscriptions, warrants, calls, unsatisfied preemptive rights, options
or other agreements of any kind to purchase or otherwise receive from Actava any
of the outstanding, authorized but unissued, unauthorized or treasury shares of
the capital stock or any
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other security of Actava, and there is no authorized or outstanding security of
any kind convertible into or exchangeable for any such capital stock. Except as
set forth on Schedule 3.2(b), since March 31, 1995, Actava has not (i) issued
any shares of capital stock, except pursuant to the exercise of then outstanding
options or warrants in accordance with their terms or (ii) repurchased any
shares of Common Stock.
3.3 Subsidiaries. Exhibit 21 to Actava's filing on Form 10-K for the year
ended December 31, 1994, as amended, sets forth the name, jurisdiction of
incorporation or organization and percentages of outstanding capital stock or
other equivalent equity ownership owned, directly or indirectly, by Actava, with
respect to each subsidiary of Actava. Except as set forth on Schedule 3.3,
Actava and its subsidiaries own no material direct or indirect equity interest
in any corporation (other than direct or indirect subsidiaries of Actava),
partnership, joint venture or other entity, domestic or foreign. All of the
outstanding shares of capital stock in each of Actava's subsidiaries have been
duly authorized and validly issued and are fully paid and non-assessable. Except
as set forth on Schedule 3.3, to Actava's knowledge, there are no irrevocable
proxies or similar obligations with respect to such capital stock and no equity
securities or other interests of any of the subsidiaries are or may become
required to be issued by reason of any options, warrants, rights to subscribe
to, calls or commitments of any character whatsoever relating to, or securities
or rights convertible into or exchangeable for, shares of any capital stock of
any subsidiary, and there are no contracts, commitments, understandings or
arrangements by which any subsidiary is bound to issue additional shares of its
capital stock, or options, warrants or rights to purchase or acquire any
additional shares of its capital stock or securities convertible into or
exchangeable for such shares. All of such shares so owned by Actava are owned by
it free and clear of any claim, lien, encumbrance, security interest or
agreement with respect thereto.
3.4 Authorization; Binding Agreement. Actava has requisite corporate power
and authority to execute and deliver this Agreement and to consummate the
transactions contemplated hereby, subject to the approval and adoption of this
Agreement by the stockholders of Actava in accordance with the DGCL and the
Certificate of Incorporation and By-laws of Actava. The execution and delivery
of this Agreement and the consummation of the transactions contemplated hereby,
including but not limited to the Mergers, have been duly and validly authorized
by Actava's Board of Directors and no other corporate proceedings on the part of
Actava or any subsidiary of Actava are necessary to authorize the execution and
delivery of this Agreement or to consummate the transactions so contemplated
(other than the approval and adoption of this Agreement by the stockholders of
Actava in accordance with the DGCL and the Certificate of Incorporation and
By-laws of Actava). This Agreement has been duly and validly executed and
delivered by Actava, and, subject to the approval and adoption of this Agreement
by the stockholders of Actava in accordance with the DGCL and the Certificate of
Incorporation and By-laws of Actava, constitutes the legal, valid and binding
agreement of Actava, enforceable against Actava in accordance with its terms,
except to the extent that enforceability thereof may be limited by applicable
bankruptcy, insolvency, reorganization or other similar laws affecting the
enforcement of creditors' rights generally and by principles of equity regarding
the availability of remedies.
3.5 Governmental Approvals. No consent, approval or authorization of or
declaration or filing with any governmental agency or regulatory authority on
the part of Actava or any of its subsidiaries is required in connection with the
execution or delivery by Actava of this Agreement or the consummation by Actava
of the transactions contemplated hereby other than (i) the filing of this
Agreement (or the Certificate of Merger in lieu thereof) with the Secretary of
State of Delaware in accordance with the DGCL, (ii) filings with the SEC and any
applicable national securities exchange, (iii) filings under state securities or
"Blue Sky" laws, (iv) federal, state and local regulatory approvals and consents
and (v) filings under the Hart-Scott-Rodino Antitrust Improvements Act of 1976,
as amended, and the rules and regulations promulgated thereunder (the "HSR
Act").
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3.6 No Violations. The execution and delivery by Actava of this Agreement,
the consummation of the transactions contemplated hereby and compliance by
Actava with any of the provisions hereof will not (i) conflict with or result in
any breach of any provision of the Articles or Certificates of Incorporation or
By-laws or other governing instruments of Actava or any of its subsidiaries,
(ii) except as set forth on Schedule 3.6 and except for any of the following
which does not and will not have an Actava Material Adverse Effect, require any
consent, approval or notice under or result in a violation or breach of, or
constitute (with or without due notice or lapse of time or both) a default (or
give rise to any right of termination, cancellation or acceleration or augment
the performance required) under any of the terms, conditions or provisions of
any note, bond, mortgage, indenture, lease, license, agreement or other
instrument or obligation to which Actava or any of its subsidiaries is a party
or by which any of them or any of their properties or assets may be bound, (iii)
result in the creation or imposition of any lien, charge or other encumbrance of
any kind upon any of the assets of Actava or any of its subsidiaries other than
any such lien, charge or other encumbrance which does not and will not have an
Actava Material Adverse Effect or (iv) subject to obtaining the governmental and
other consents referred to in Section 3.5, contravene any material law, rule or
regulation of any state or of the United States or any political subdivision
thereof or therein, or any material order, writ, injunction, determination or
award currently in effect to which Actava or any of its subsidiaries or any of
their respective assets or properties are subject.
3.7 Proxy Statement; Form S-4. None of the information relating to Actava
and its subsidiaries included in the Proxy Statement or Form S-4 will be false
or misleading with respect to any material fact, or omit to state any material
fact required to be stated therein or necessary in order to make the statements
therein, in light of the circumstances under which they were made, not
misleading. Except for information supplied or to be supplied by Orion, Sterling
or MITI in writing for inclusion therein, as to which no representation is made,
the Proxy Statement, and any supplements or amendments thereto, will comply in
all material respects with the Exchange Act and the rules and regulations
thereunder.
3.8 SEC Filings. Actava has made available to each of Orion, Sterling and
MITI true and complete copies of (i) its Annual Reports on Form 10-K, as
amended, for the years ended December 31, 1992, 1993 and 1994, as filed with the
SEC, (ii) its proxy statements relating to all of Actava's meetings of
stockholders (whether annual or special) since January 1, 1993, as filed with
the SEC, and (iii) all other reports, statements and registration statements
(including Quarterly Reports on Form 10-Q and Current Reports on Form 8-K, as
amended) filed by Actava with the SEC since January 1, 1993 (the reports and
statements set forth in clauses (i), (ii) and (iii) are referred to collectively
as the "Actava SEC Filings"). With respect to Roadmaster Industries, Inc., a
Delaware corporation ("Roadmaster"), Actava has made available to each of Orion,
Sterling and MITI true and complete copies of (i) Roadmaster's Annual Reports on
Form 10-K for the years ended December 31, 1992, 1993 and 1994, as filed with
the SEC, (ii) Roadmaster's proxy statements relating to all of Roadmaster's
meetings of stockholders (whether annual or special) since January 1, 1993, as
filed with the SEC, and (iii) all other reports, statements and registration
statements (including Quarterly Reports on Form 10-Q and Current Reports on Form
8-K, as amended) filed by Roadmaster with the SEC since January 1, 1992 (the
reports and statements set forth in clauses (i), (ii) and (iii) are referred to
collectively as the "Roadmaster SEC Filings"). As of their respective dates,
none of the Actava SEC Filings or, to Actava's actual knowledge, without
investigation, Roadmaster SEC Filings (including all exhibits and schedules
thereto and documents incorporated by reference therein), contained any untrue
statement of a material fact or omitted to state a material fact required to be
stated therein or necessary to make the statements therein, in light of the
circumstances under which they were made, not misleading. Each of the Actava SEC
Filings and, to Actava's actual knowledge, without investigation, Roadmaster SEC
Filings at the time of filing complied in all material respects with the
Exchange Act or the Securities Act, as the case may be, and the rules and
regulations thereunder. As of the date hereof, there are no claims, actions, or
proceedings (and to Actava's knowledge no investigations) pending by or against
or to Actava's knowledge threatened against Actava or any of its subsidiaries,
or to Actava's actual
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knowledge, without investigation, Roadmaster or any of its subsidiaries, or any
properties or rights of Actava or any of its subsidiaries, or any properties or
rights of Actava or any of its subsidiaries, or any properties or rights of, to
Actava's actual knowledge, without investigation, Roadmaster or any of its
subsidiaries, before any court or any administrative, governmental or regulatory
authority or body which is required to be described in any Actava SEC Filing or,
to Actava's actual knowledge, without investigation, Roadmaster SEC Filing that
is not so described which have or will have an Actava Material Adverse Effect.
3.9 Financial Statements. The consolidated balance sheets of Actava as of
December 31, 1992, 1993 and 1994 and the related consolidated statements of
operations, stockholders' equity and cash flows for the years then ended,
including the footnotes thereto, certified by Ernst & Young LLP, Actava's
independent certified public accountants, as set forth in Actava's Annual
Reports on Form 10-K, as amended, for the years ended December 31, 1992, 1993
and 1994, have been prepared in accordance with generally accepted accounting
principles applied on a consistent basis during the periods involved and fairly
present the financial position of Actava and its consolidated subsidiaries as of
the dates thereof and the results of their operations for the periods then
ended.
3.10 Absence of Certain Changes or Events. Except as set forth in the Actava
SEC Filings, since December 31, 1994 there has not been: (i) any material
adverse change in the business, assets, prospects, condition (financial or
other) or the results of operations of Actava and its subsidiaries taken as a
whole other than any such change caused by general economic conditions,
political or governmental instability or uncertainty, civil disturbances or
unrest, war or other similar acts of force majeure; (ii) any notification from
Eastman Kodak Company ("Kodak") that it intends to set off any amounts or
otherwise dispute any amounts payable under that certain $100 million promissory
note dated August 12, 1994 made by Kodak in favor of Actava; (iii) any
declaration, payment or setting aside for payment of any dividend or any
redemption, purchase or other acquisition of any shares of capital stock or
securities of Actava; (iv) any return of any capital or other distribution of
assets to stockholders of Actava; (v) any material investment of a capital
nature by Actava or any of its subsidiaries either by the purchase of any
property or assets or by any acquisition (by merger, consolidation or
acquisition of stock or assets) of any corporation, partnership or other
business organization or division thereof; (vi) any sale, disposition or other
transfer of assets or properties of Actava and its subsidiaries in excess of
$100,000 individually or $1,000,000 in the aggregate; (vii) any employment or
consulting agreement entered into by Actava and its subsidiaries with any
officer or consultant of Actava and its subsidiaries providing for annual salary
or other annual payments in excess of $100,000 or any amendment or modification
to, or termination of, any current employment or consulting agreement to which
Actava or any of its subsidiaries is a party which provides for annual salary or
other annual payments in excess of $100,000; (viii) any agreement to take,
whether in writing or otherwise, any action which, if taken prior to the date
hereof, would have made any representation or warranty in this Article 3 untrue,
incomplete or incorrect in any material respect; (ix) any change in accounting
methods or practices or any change in depreciation or amortization policies or
rates; or (x) any failure by Actava or its subsidiaries to conduct their
respective businesses only in the ordinary course consistent with past practice.
Except as set forth in the Roadmaster SEC Filings, since December 31, 1994, to
Actava's actual knowledge, without investigation, there has not occurred any
material adverse change in the business, assets, prospects, conditions
(financial or otherwise) or the results of operations of Roadmaster and its
subsidiaries taken as a whole.
3.11 Compliance with Laws. The business of Actava and its subsidiaries has
been operated in compliance with all laws, ordinances, regulations and orders of
all governmental entities, domestic or foreign, except for any instances of
non-compliance which do not and will not have an Actava Material Adverse Effect.
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3.12 Permits. Except as set forth on Schedule 3.12, (i) Actava and its
subsidiaries have all permits, certificates, licenses, approvals and other
authorizations (collectively, "Actava Permits") required in connection with the
operation of their businesses, (ii) neither Actava nor any of its subsidiaries
are in violation of any Actava Permit applicable to any of them or to the
operation of their businesses, and (iii) no proceedings are pending or, to
Actava's knowledge, threatened, to revoke or terminate any Actava Permit,
except, in the case of clause (i) or (ii) above, those the absence or violation
of which do not and will not have an Actava Material Adverse Effect.
3.13 Finders and Investment Bankers. Neither Actava nor any of its officers
or directors has employed any broker or finder or incurred any liability for any
brokerage fees, commissions or finders' fees in connection with the transactions
contemplated hereby except a fee payable to CS First Boston Corporation ("First
Boston") pursuant to that certain engagement letter dated February 15, 1995
between First Boston and Actava.
3.14 Contracts. There is no material contract or other material agreement
("Contract") required to be described in or filed as an exhibit to any Actava
SEC Filing that is not described in or filed as required by the Securities Act
or the Exchange Act, as the case may be. All such Contracts are valid and
binding and are in full force and effect and enforceable in accordance with
their respective terms other than such Contracts which by their terms are no
longer in force or effect. Except as set forth in Schedule 3.6 or 3.14, (i) no
approval or consent of, or notice to, any person is needed in order to ensure
that such Contracts shall continue in full force and effect in accordance with
their respective terms without penalty, acceleration or rights of early
termination following the consummation of the transactions contemplated by this
Agreement, and (ii) Actava or its subsidiaries is not in violation or breach of
or default under any such Contract; nor to Actava's knowledge is any other party
to any such Contract in violation or breach of or default under any such
Contract, except in the case of clauses (i) and (ii) above, any of the foregoing
which do not and will not have an Actava Material Adverse Effect.
3.15 Employee Benefit Plans.
(i) Except as set forth on Schedule 3.15(i), there are no employee
benefit plans or arrangements of any type, including (i) plans described in
section 3(3) of the Employee Retirement Income Security Act of 1974, as
amended, and the regulations thereunder ("ERISA") and any other material
plans, programs, practices or policies, including, but not limited to, any
pension, profit sharing, retirement, thrift, stock purchase or stock option
plan, or any other compensation, welfare, fringe benefit or retirement plan,
program, policy, understanding or arrangement of any kind whatsoever,
whether formal or informal, providing for benefits for or the welfare of any
or all of the current or former employees or agents of Actava and their
beneficiaries or dependents, or (ii) multiemployer plans as defined in
section 3(37) of ERISA, or (iii) multiple employer plans as defined in
Section 413 of the Code, under which Actava has or in the future could have,
directly or indirectly through an entity which is considered a "single
employer" within the meaning of sections 414(b), (c), (m) and (o) of the
Code (a "Commonly Controlled Entity"), any liability with respect to any
current or former employee of Actava or any Commonly Controlled Entity
(collectively, "Actava Benefit Plans").
(ii) With respect to each Actava Benefit Plan (where applicable), Actava
has delivered to each of Orion, Sterling and MITI complete and accurate
copies or summaries of (a) all plan texts and material agreements, (b) all
material employee communications, (c) the most recent annual report, (d) the
most recent annual and periodic accounting of plan assets, (e) the most
recent determination letter received from the Internal Revenue Service and
(f) the most recent actuarial valuation.
(iii) With respect to each Actava Benefit Plan, except as set forth on
Schedule 3.15(iii), (a) if intended to qualify under Code sections 401(a) or
403(a), (i) such Actava Benefit Plan has received a favorable determination
letter from the Internal Revenue Service (the "Service")
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indicating that such Plan meets such requirements, and such determination by
the Service includes any new or modified requirements under the Tax Reform
Act of 1986 and subsequent legislation enacted thereafter through and
including the Omnibus Budget Reconciliation Act of 1993, or (ii) an
application for a favorable determination letter including such legislation
was filed with the Service prior to the expiration of the remedial amendment
period (as defined in Code section 401(b) and regulations thereunder, and as
extended pursuant to notices and revenue rulings of the Service) for filing
such an application and such Plan has been substantially amended to comply
with the Tax Reform Act of 1986 and subsequent legislation enacted through
and including the Omnibus Budget Reconciliation Act of 1993, or (iii) the
remedial amendment period (as defined in (ii) above) with respect to such
Plan has not yet expired, and an application for a favorable determination
letter including such legislation will be timely filed with the Service
prior to the expiration of such period and the Plan will be amended to
comply with the Tax Reform Act of 1986 and subsequent legislation enacted
thereafter through and including the Omnibus Budget Reconciliation Act of
1993 prior to the expiration of such period, (b) if intended to qualify
under Code sections 401(a) or 403(a) and if originally effective prior to
January 1, 1986, such Actava Benefit Plan has previously received a
favorable determination letter from the Service indicating that such Plan
meets the requirements of Code sections 401(a) or 403(a) as in effect on the
date of the letter, including without limitation, the Tax Equity and Fiscal
Responsibility Act of 1982 ("TEFRA"), the Deficit Reduction Act of 1984
("DEFRA"), and the Retirement Equity Act of 1984 ("REACT"), (c) such Actava
Benefit Plan has been administered in material compliance with its terms and
applicable law, (d) no event has occurred and there exists no circumstance
under which Actava could, directly or indirectly through a Commonly
Controlled Entity, incur material liability under ERISA, the Code or
otherwise (other than routine claims for benefits), (e) there are no
actions, suits or claims pending (other than routine claims for benefits)
or, to Actava's knowledge, threatened, with respect to any Actava Benefit
Plan or against the assets of any Actava Benefit Plan, (f) no "accumulated
funding deficiency" (as defined in ERISA section 302) has occurred, (g) no
"prohibited transaction" (as defined in ERISA section 406 or in Code section
4975) has occurred, (h) no "reportable event" (as defined in ERISA section
4043) has occurred, (i) all contributions and PBGC premiums or premiums due
under an insurance contract that insures benefits payable under an Actava
Benefit Plan, as applicable, have been made on a timely basis and (j) all
contributions made or required to be made under any Actava Benefit Plan
which have been treated as deductible for purposes of one or more federal
income tax returns of Actava meet the requirements for deductibility under
the Code and all contributions that have not been made have been properly
recorded on the books of Actava or a Commonly Controlled Entity in
accordance with generally accepted accounting principles.
(iv) With respect to each Actava Benefit Plan that is subject to Title
IV of ERISA, except as set forth on Schedule 3.15(iv), (a) as of the date
hereof and at the Effective Time, the market value of assets (exclusive of
any contribution due to such Actava Benefit Plan) equals or exceeds the
present value of benefit liabilities as of the latest actuarial valuation
date shown for such plan (but not prior to 12 months prior to the date
hereof), determined on the basis of a shutdown of Actava and termination of
such Actava Benefit Plan in accordance with actuarial assumptions used by
the Pension Benefit Guaranty Corporation in single-employer plan
terminations and since its last valuation date, there have been no
amendments to such Actava Benefit Plan that materially increased the present
value of benefit liabilities (determined as provided above) nor any other
material adverse changes in the funding status of such Actava Benefit Plan,
and (b) Actava has not incurred, directly or indirectly through a Commonly
Controlled Entity, any liability arising from a plan termination or plan
withdrawal from a multiemployer plan.
(v) With respect to each Actava Benefit Plan that is a "welfare plan"
(as defined in ERISA section 3(1)), except as set forth on Schedule 3.15(v),
(a) no such plan provides medical or death benefits (whether or not insured)
with respect to current or former employees beyond their termination of
employment or the end of the month of their termination of employment (other
than
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coverage mandated by law), (b) there are no reserves, assets, surplus or
prepaid premiums under any such plan and (c) Actava and any Commonly
Controlled Entity have materially complied with the requirements of Code
section 4980B.
(vi) With respect to each Actava Benefit Plan that is a multiemployer
plan, (a) Schedule 3.15(vi) indicates the number of employees with respect
to whom Actava or any Commonly Controlled Entity makes contributions to each
such plan and the most recent information available to Actava or any
Commonly Controlled Entity with respect to the withdrawal liability of
Actava or such Commonly Controlled Entity under each such plan, (b) each
such plan is not, as of the date hereof, insolvent or in reorganization, nor
does it have an accumulated funding deficiency, and Actava does not know of
any reason why such plan would become insolvent or in reorganization or have
an accumulated funding deficiency in the foreseeable future, (c) Actava or
any Commonly Controlled Entity has made all contributions to each such plan
due or accrued as of the date hereof and will have made all such
contributions as of the Effective Time and (d) the withdrawal liability with
respect to each such Plan if any Commonly Controlled Entity were to withdraw
from the plan at the Effective Time is less than or equal to $0.
(vii) Except as set forth on Schedule 3.15(vii), the consummation of the
transactions contemplated by this Agreement will not (a) entitle any
individual to severance pay, or (b) accelerate the time of payment, vesting
of benefits (including stock options and restricted stock) or increase the
amount of compensation due to any individual.
3.16 Taxes.
(a) Except as set forth on Schedule 3.16, (i) Actava and each of its
subsidiaries timely has filed (after giving effect to any extensions of the
time to file which were obtained) prior to the date of this Agreement, and
will file prior to the Effective Time, all returns required to be filed
prior to the date of this Agreement and/or required to be filed prior to the
Effective Time by any of them with respect to, and has paid (or Actava has
paid on its behalf), or has or will set up an adequate reserve for the
payment of, all taxes, together with interest and penalties thereon
("Taxes"), required to be paid prior to the date of the Agreement or the
Effective Time, as the case may be, and the most recent financial statements
contained in the SEC Filings reflect an adequate reserve for all Taxes
payable by Actava and its subsidiaries accrued through the date of such
financial statements and (ii) no deficiencies for any Taxes have been
proposed, asserted or assessed against Actava or any of its subsidiaries
other than those which are being contested in good faith and by proper
proceedings by Actava, except in the case of clauses (i) and (ii) above, any
of the foregoing which do not and will not have an Actava Material Adverse
Effect.
(b) The Federal income tax returns of Actava and each of its
subsidiaries consolidated in such returns have been examined by and settled
with the IRS, or the statute of limitations with respect to such years has
expired, for all years through 1987.
(c) Except as set forth on Schedule 3.16, none of Actava, any subsidiary
of Actava, or to Actava's knowledge, any group of which Actava or any
subsidiary of Actava is now or ever was a member, has filed or entered into
any election, consent or extension agreement that extends any applicable
statute of limitations or the time within which a return must be filed which
statute of limitations has not expired or return has not been timely filed.
(d) Except as set forth on Schedule 3.16, (i) none of Actava, any
subsidiary of Actava or, to Actava's knowledge, any group of which Actava or
any subsidiary of Actava is now or ever was a member, is a party to any
action or proceeding pending or, to Actava's knowledge, threatened by any
governmental authority for assessment or collection of Taxes, (ii) no
unresolved claim for assessment or collection of Taxes has, to Actava's
knowledge, been asserted, (iii) no audit or investigation of Actava or any
subsidiary of Actava by any governmental authority is pending or, to
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Actava's knowledge, threatened and (iv) no such matters are under discussion
with any governmental authority which, in the case of clauses (i-iv), could
have an Actava Material Adverse Effect.
3.17 Liabilities. Except (i) as expressly disclosed in the Actava SEC
Filings or (ii) as set forth on Schedule 3.17, and in the case of (i) and (ii)
above, as does not and will not have an Actava Material Adverse Effect, Actava
and its subsidiaries do not have any direct or indirect indebtedness, liability,
claim, loss, damage, deficiency, obligation or responsibility, fixed or unfixed,
choate or inchoate, liquidated or unliquidated, secured or unsecured, accrued,
absolute, contingent or otherwise ("Liabilities"), whether or not of a kind
required by generally accepted accounting principles to be set forth in a
financial statement, other than Liabilities incurred since December 31, 1994 in
the ordinary course of business. Except as set forth on Schedule 3.17 or
reflected in the Actava SEC Filings, Actava and its subsidiaries do not have (i)
material obligations in respect of borrowed money, (ii) material obligations
evidenced by bonds, debentures, notes or other similar instruments, (iii)
material obligations which would be required by generally accepted accounting
principles to be classified as "capital leases", (iv) material obligations to
pay the deferred purchase price of property or services, except trade accounts
payable arising in the ordinary course of business and payable not more than
twelve (12) months from the date of incurrence, and (v) any guaranties of any
material obligations of any other person.
3.18 Environmental Matters. Except as disclosed on Schedule 3.18:
(i) Neither Actava nor any of its subsidiaries is or has been in
violation in any material respect of any applicable Safety and Environmental
Law (as hereafter defined).
(ii) Actava and its subsidiaries have all Permits (as hereafter defined)
required pursuant to Safety and Environmental Laws that are material to the
conduct of the business of Actava or any of its subsidiaries, all such
Permits are in full force and effect, no action or proceeding to revoke,
limit or modify any of such Permits is pending, and Actava and each of its
subsidiaries is in compliance in all material respects with all terms and
conditions thereof.
(iii) Neither Actava nor any of its subsidiaries has received, or
expects to receive due to the consummation of the Mergers, any material
Environmental Claim (as hereafter defined).
(iv) To Actava's knowledge, Actava and its subsidiaries have filed all
notices required under Safety and Environmental Laws indicating the past or
present Release (as hereafter defined), generation, treatment, storage or
disposal of Hazardous Substances (as hereafter defined).
(v) Neither Actava nor any of its subsidiaries have entered into any
written agreement with any Governmental Body (as hereafter defined) or any
other person by which Actava or any of its subsidiaries has assumed
responsibility, either directly or as a guarantor or surety, for the
remediation of any condition arising from or relating to a Release or
threatened Release of Hazardous Substances into the Environment (as
hereafter defined).
(vi) To Actava's knowledge, there is not now and has not been at any
time in the past a Release or threatened Release of Hazardous Substances
into the Environment for which Actava or any of its subsidiaries may be
directly or indirectly responsible.
(vii) To Actava's knowledge, there is not now and has not been at any
time in the past at, on or in any of the real properties owned, leased or
operated by Actava or any of its subsidiaries, and, to Actava's knowledge,
was not at, on or in any real property previously owned, leased or operated
by Actava or any of its subsidiaries or any predecessor: (A) any generation,
use, handling, Release, treatment, recycling, storage or disposal of any
Hazardous Substances, (B) any underground storage tank, surface impoundment,
lagoon or other containment facility (past or present) for the temporary or
permanent storage, treatment or disposal of Hazardous Substances, (C) any
landfill or solid waste disposal area, (D) any asbestos-containing material
in a condition requiring
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abatement, (E) any polychlorinated biphenyls (PCBs) used in hydraulic oils,
electrical transformers or other equipment, (F) any Release or threatened
Release, or any visible signs of Releases or threatened Releases, of a
Hazardous Substance to the Environment in form or quantity requiring
Remedial Action (as hereafter defined) under Safety and Environmental Laws,
or (G) any Hazardous Substances present at such property, excepting such
quantities as are handled in accordance with all applicable manufacturer's
instructions and Safety and Environmental Laws and in proper storage
containers, and as are necessary for the operations of Actava and its
subsidiaries.
(viii) To Actava's knowledge, there is no basis or reasonably
anticipated basis for any material Environmental Claim or material
Environmental Compliance Costs (as hereafter defined).
(ix) Neither Actava nor any of its subsidiaries have transported,
stored, treated or disposed, nor have they allowed or arranged for any third
persons to transport, store, treat or dispose, any Hazardous Substance to or
at: (a) any location other than a site lawfully permitted to receive such
substances for such purposes, or (b) any location designated for Remedial
Action pursuant to Safety and Environmental Laws; nor have they performed,
arranged for or allowed by any method or procedure such transportation or
disposal in contravention of any Safety and Environmental Laws or in any
other manner which may result in Environmental Compliance Costs or in an
Environmental Claim. All locations at which Actava or any of its
subsidiaries have disposed of any Hazardous Substance are listed on Schedule
3.18(ix).
For purposes of this Agreement, the following terms have the following
meanings:
(i) "Environment" means navigable waters, waters of the contiguous zone,
ocean waters, natural resources, surface waters, ground water, drinking
water supply, land surface, subsurface strata, ambient air, both inside and
outside of buildings and structures, man-made buildings and structures, and
plant and animal life on earth.
(ii) "Environmental Claims" means any notification, whether direct or
indirect, formal or informal, written or oral, pursuant to Safety and
Environmental Laws or principles of common law relating to pollution,
protection of the Environment or health and safety, that any of the current
or past operations of any of the Merging Parties or any of their
subsidiaries, or any by-product thereof, or any of the property currently or
formerly owned, leased or operated by any of the Merging Parties or any of
their subsidiaries, or the operations or property of any predecessor of any
of the Merging Parties or any of their subsidiaries is or may be implicated
in or subject to any proceeding, action, investigation, claim, lawsuit,
order, agreement or evaluation by any Governmental Body or any other person.
(iii) "Environmental Compliance Costs" means any expenditures, costs,
assessments or expenses (including, without limitation, any expenditures,
costs, assessments or expenses in connection with the conduct of any
Remedial Action, as well as reasonable fees, disbursements and expenses of
attorneys, experts, personnel and consultants), whether direct or indirect,
necessary to cause the operations, real property, assets, equipment or
facilities owned, leased, operated or used by any of the Merging Parties or
by any of their subsidiaries to be in compliance with any and all
requirements, as in effect as of the date hereof, of Safety and
Environmental Laws, principles of common law concerning pollution,
protection of the Environment or health and safety, or Permits issued
pursuant to Safety and Environmental Laws; provided, however, that
Environmental Compliance Costs do not include expenditures, costs,
assessments or expenses necessary in connection with normal maintenance of
such real property, assets, equipment or facilities or the replacement of
equipment in the normal course of events due to ordinary wear and tear.
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(iv) "Governmental Body" means any government or political subdivision
thereof, whether federal, state, local or foreign, or any agency or
instrumentality of any such government or political subdivision, or any
court or arbitrator.
(v) "Hazardous Substance" means any toxic waste, pollutant, hazardous
substance, toxic substance, hazardous waste, special waste, industrial
substance or waste, petroleum or petroleum-derived substance or waste,
radioactive substance or waste, or any constituent of any such substance or
waste, or any other substance regulated under or defined by any Safety and
Environmental Law.
(vi) "Permits" means all licenses, permits, orders or approvals of, and
all required registrations with, any Governmental Body that are material to
the conduct of the business of any of the Merging Parties or any of their
subsidiaries.
(vii) "Release" means any release, spill, emission, leaking, pumping,
injection, deposit, disposal, discharge, dispersal, leaching or migration
into or through the indoor or outdoor Environment or into, through or out of
any property, including the movement of Hazardous Substances through or in
the air, soil, surface water, ground water or property.
(viii) "Remedial Action" means all actions, whether voluntary or
involuntary, reasonably necessary to comply with Safety and Environmental
Laws to (A) clean up, remove, treat, cover or in any other way adjust
Hazardous Substances in the indoor or outdoor Environment; (B) prevent or
control the Release of Hazardous Substances so that they do not migrate or
endanger or threaten to endanger public health or welfare or the
Environment; or (C) perform remedial studies, investigations, restoration
and post-remedial studies, investigations and monitoring on, about or in any
real property.
(ix) "Safety and Environmental Laws" means all federal, state and local
laws and orders relating to pollution, protection of the Environment, public
or worker health and safety, or the emission, discharge, release or
threatened release of pollutants, contaminants or industrial, toxic or
hazardous substances or wastes into the Environment or otherwise relating to
the manufacture, processing, distribution, use, treatment, storage,
disposal, transport or handling of pollutants, contaminants or industrial,
toxic or hazardous substances or wastes, including, without limitation, the
Comprehensive Environmental Response, Compensation and Liability Act, 42
U.S.C. Sec. 9601 et seq., the Resource Conservation and Recovery Act, 42
U.S.C. Sec. 6901 et seq., the Toxic Substances Control Act, 15 U.S.C. Sec.
2601 et seq., the Federal Water Pollution Control Act, 33 U.S.C. Sec. 1251
et seq., the Clean Air Act, 42 U.S.C. Sec. 7401 et seq., the Federal
Insecticide, Fungicide and Rodenticide Act, 7 U.S.C. Sec. 121 et seq., the
Occupational Safety and Health Act, 29 U.S.C. Sec. 651 et seq., the Asbestos
Hazard Emergency Response Act, 15 U.S.C. Sec. 2601 et seq., the Safe
Drinking Water Act, 42 U.S.C. Sec. 300f et seq., the Oil Pollution Act of
1990 and analogous state acts.
3.19 Intellectual Property. Schedule 3.19 sets forth a list of all of
Actava's and its subsidiaries' registered patents, registered trademarks,
registered service marks, registered trade names, registered copyrights and
franchises, all applications for any of the foregoing and all permits, grants
and licenses or other rights running to or from Actava and any of its
subsidiaries relating to any of the foregoing that are material to the business
of Actava and its subsidiaries taken as a whole. Except as set forth on Schedule
3.19, to Actava's knowledge (i) Actava or one of its subsidiaries own, or are
licensed to, or otherwise have, the right to use all registered patents,
registered trademarks, registered service marks, registered trade names,
registered copyrights and franchises set forth on Schedule 3.19, and (ii)
Actava's rights in the property set forth on such list are free and clear of any
liens or other encumbrances and Actava and its subsidiaries have not received
written notice of any adversely-held patent, invention, trademark, service mark
or trade name of any other person, or notice of any charge or claim of any
person relating to such intellectual property or any process or confidential
information of Actava and its subsidiaries and to Actava's knowledge there is no
basis for any such charge or claim,
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and (iii) Actava, its subsidiaries and their respective predecessors, if any,
have not conducted business at any time during the period beginning five years
prior to the date hereof under any corporate or partnership, trade or fictitious
names other than their current corporate or partnership names, except in the
case of clauses (i), (ii) and (iii) above, any of the foregoing which do not and
will not have an Actava Material Adverse Effect.
3.20 Real Estate. (a) Schedule 3.20(a) sets forth a true, correct and
complete schedule of all real property owned by Actava or any of its
subsidiaries. Actava or one of its subsidiaries is the owner of fee title to the
real property described on Schedule 3.20(a) and to all of the buildings,
structures and other improvements located thereon free and clear of any
mortgage, deed of trust, lien, pledge, security interest, claim, lease, charge,
option, right of first refusal, easement, restrictive covenant, encroachment or
other survey defect, encumbrance or other restriction or limitation except for
the matters listed on Schedule 3.20(a) and any exceptions or restrictions which,
individually or in the aggregate, do not and will not have an Actava Material
Adverse Effect.
(b) Schedule 3.20(b) sets forth a true, correct and complete schedule of all
material leases, subleases, licenses or other agreements under which Actava or
any of its subsidiaries uses or occupies, or has the right to use or occupy, now
or in the future, any real property or improvements thereon (the "Actava Real
Property Leases"). Except for the matters listed on Schedule 3.20(b), to
Actava's knowledge, Actava holds the leasehold estate under and interest in each
Actava Real Property Lease free and clear of all material liens, encumbrances
and other rights of occupancy. Except as set forth on Schedule 3.20(b), all
Actava Real Property Leases are valid and binding on the lessors thereunder in
accordance with their respective terms and to Actava's knowledge, there is not
under any such Actava Real Property Leases any existing default, or any
condition, event or act which with notice or lapse of time or both would
constitute such a default, which in either case, considered individually or in
the aggregate with all such other Actava Real Property Leases under which there
is such a default, condition, event or act, has or will have an Actava Material
Adverse Effect.
3.21 Records. The respective minute books of Actava and each of its
subsidiaries made available to each of Orion, Sterling and MITI contain
materially accurate and complete records of all material corporate actions of
the respective stockholders and directors (and committees thereof).
3.22 Title to and Condition of Personal Property. Except as set forth on
Schedule 3.22, Actava and each of its subsidiaries have good and marketable
title to the material personal property reflected in its or their financial
statements or currently used in the operation of their businesses (other than
leased property), and such property is free and clear of all liens, claims,
charges, security interests, options, or other title defects or encumbrances,
except for those which would not have an Actava Material Adverse Effect. All
such personal property is in good operating condition and repair, ordinary wear
and tear excepted, is suitable for the use to which the same is customarily put,
is free from defects and is merchantable and is of a quality and quantity
presently usable in the ordinary course of the operation of the business of
Actava and its subsidiaries, other than such matters as would not have an Actava
Material Adverse Effect.
3.23 No Adverse Actions. There is no existing, pending or, to Actava's
knowledge, threatened termination, cancellation, modification or change in the
business relationship of Actava or any of its subsidiaries, with any supplier,
customer or other person or entity except those which do not and will not have
an Actava Material Adverse Effect. To Actava's knowledge, none of Actava, any
subsidiary of Actava or any stockholder, director, officer, agent, employee or
other person associated with or acting on behalf of any of the foregoing has
used any corporate funds for unlawful contributions, payments, gifts,
entertainment or other unlawful expenses relating to political activity, or made
any direct or indirect unlawful payments to governmental or regulatory
officials.
3.24 Labor Matters. (a) Except as set forth on Schedule 3.24(a), neither
Actava nor any of its subsidiaries has any material obligations, contingent or
otherwise, under any employment or consulting
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agreement (except if and as set forth in the schedules hereto), collective
bargaining agreement or other contract with a labor union or other labor or
employee group. There are no efforts presently being made or, to Actava's
knowledge, threatened by or on behalf of any labor union with respect to
employees of Actava or any subsidiary of Actava. No unfair labor practice
complaint against Actava or any subsidiary of Actava is pending or, to Actava's
knowledge, threatened before the National Labor Relations Board; there is no
labor strike, dispute, slowdown or stoppage pending or, to Actava's knowledge,
threatened against or involving Actava or any subsidiary of Actava; no
collective bargaining representation question exists respecting the employees of
Actava or any subsidiary of Actava; no grievance or internal or informal
complaint exists under any collective bargaining agreement, no arbitration
proceeding arising out of or under any collective bargaining agreement is
pending and no claim therefor has been asserted; no collective bargaining
agreement is currently being negotiated by Actava or any subsidiary of Actava;
and neither Actava nor any subsidiary of Actava has experienced any labor
difficulty, except as to each of the foregoing, any matter which would not have
an Actava Material Adverse Effect.
(b) Except as set forth on Schedule 3.24(b), in the last three years,
neither Actava nor any of its subsidiaries has effectuated, nor will Actava or
any of its subsidiaries at any time before the Effective Time, effectuate (i) a
"plant closing" (as defined in the Worker Adjustment and Retraining Notification
Act (and applicable similar state law (the "WARN Act")) affecting any site of
employment or one or more facilities or operating units within any site of
employment or facility of Actava or its subsidiaries; or (ii) a "mass layoff"
(as defined in the WARN Act) affecting any site of employment or facility of
Actava or its subsidiaries; nor has Actava or its subsidiaries been affected by
any transaction or engaged in layoffs or employment terminations sufficient in
number to trigger application of any similar state or local law.
(c) Except as set forth on Schedule 3.24(c), Actava and all of its
subsidiaries are in compliance with all federal and state laws respecting
immigration, employment and employment practices, fair labor practices, family
and medical leave, terms and conditions of employment (including
nondiscrimination in race, age, sex, religion, disability, etc.), and wages and
hours except to the extent failure to comply would not have an Actava Material
Adverse Effect.
3.25 Investment Company Act. Actava and each of its subsidiaries either (a)
is not an "investment company," or a company "controlled" by, or an "affiliated
company" with respect to, an "investment company," within the meaning of the
Investment Company Act of 1940, as amended (the "Investment Company Act") or (b)
satisfies all conditions for an exemption from the Investment Company Act, and,
accordingly, neither Actava nor any of its subsidiaries is required to be
registered under the Investment Company Act.
3.26 Insurance. Except as set forth on Schedule 3.26, neither Actava nor any
subsidiary of Actava has received notice of default under, or intended
cancellation or nonrenewal of, any material policies of insurance which insure
the properties, business or liability of Actava or any subsidiary of Actava,
except any of the foregoing which do not and will not have an Actava Material
Adverse Effect.
3.27 Products. (a) Except (i) as set forth on Schedule 3.27(a) and (ii) as
does not and will not have an Actava Material Adverse Effect, there are no
product liability claims against or involving Actava or any of its subsidiaries
or any product manufactured, marketed or distributed at any time by Actava or
any of its subsidiaries ("Actava Products") and no such claims have been
settled, adjudicated or otherwise disposed of since December 31, 1994.
(b) Except (i) as set forth on Schedule 3.27(b) and (ii) as does not and
will not have an Actava Material Adverse Effect, there are no statements,
citations or decisions by any Governmental Body specifically stating that any
Actava Product is defective or unsafe or fails to meet any standards promulgated
by any such Governmental Body. Except (i) as set forth on Schedule 3.27(b) and
(ii) as does not and will not have an Actava Material Adverse Effect, there have
been no recalls ordered by any
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such Governmental Body with respect to any Actava Product. Except (i) as set
forth on Schedule 3.27(b) and (ii) as does not and will not have an Actava
Material Adverse Effect, to Actava's knowledge, there is no (A) fact relating to
any Actava Product that may impose upon Actava or any of its subsidiaries a duty
to recall any Actava Product or a duty to warn customers of a defect in any
Actava Product, (B) latent or overt design, manufacturing or other defect in any
Actava Product or (C) material liability for warranty claims or returns with
respect to any Actava Product not fully reflected on Actava's financial
statements referred to in Section 3.9 hereof.
ARTICLE 3A
FURTHER REPRESENTATIONS AND
WARRANTIES OF ACTAVA
Actava represents and warrants to each of Orion, Sterling and MITI that from
and after April 12, 1995 until the date hereof, Actava has performed and
complied with in all material respects its obligations, agreements and covenants
under the Agreement and Plan of Merger dated as of April 12, 1995 among Actava,
Orion, Sterling and MITI (the "Initial Merger Agreement") which were required to
be performed or complied with by it at or prior to the date hereof.
ARTICLE 3B
REPRESENTATIONS AND WARRANTIES
OF ACTAVA, OPC MERGERCO AND MITI MERGERCO
Actava, OPC Mergerco and MITI Mergerco, jointly and severally, represent and
warrant to each of Orion, Sterling and MITI as follows:
3B.1 Organization and Good Standing. Each of OPC Mergerco and MITI Mergerco
is a corporation duly organized, validly existing and in good standing under the
laws of Delaware and has all requisite corporate power and authority to own,
lease and operate its properties and to carry on its business as now being
conducted. Each of OPC Mergerco and MITI Mergerco is duly qualified or licensed
and in good standing to do business in each jurisdiction in which the character
of the property owned, leased or operated by it or the nature of the business
conducted by it makes such qualification or licensing necessary. Actava has
heretofore delivered or made available to each of Orion, Sterling and MITI
accurate and complete copies of the Certificates of Incorporation and By-laws,
or equivalent governing instruments, as currently in effect, of each of OPC
Mergerco and MITI Mergerco.
3B.2 Capitalization. The authorized capital stock of OPC Mergerco consists
solely of 1,000 shares of Common Stock, par value $.01 per share (the "OPC
Mergerco Common Stock"), all of which as of the date hereof are issued and
outstanding and owned by Actava free and clear of all liens, pledges, mortgages,
security interests and encumbrances or other restrictions or limitations with
respect thereto. The authorized capital stock of MITI Mergerco consists solely
of 1,000 shares of Common Stock, par value $.01 per share (the "MITI Mergerco
Common Stock"), all of which as of the date hereof are issued and outstanding
and owned by Actava free and clear of all liens, pledges, mortgages, security
interests and encumbrances or other restrictions or limitations with respect
thereto. All issued and outstanding shares of capital stock of each of OPC
Mergerco and MITI Mergerco are owned by Actava and are validly issued, fully
paid and non-assessable and were issued free of preemptive rights and in
compliance with applicable federal and state securities laws and regulations.
There are not any outstanding rights, subscriptions, warrants, calls,
unsatisfied preemptive rights, options or other agreements of any kind to
purchase or otherwise receive from either OPC Mergerco or MITI Mergerco any of
the outstanding, authorized but unissued, unauthorized or treasury shares of the
capital stock or any
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other security of either OPC Mergerco or MITI Mergerco, and there is no
authorized or outstanding security of any kind convertible into or exchangeable
for any such capital stock.
3B.3 Subsidiaries. Neither OPC Mergerco nor MITI Mergerco owns any direct or
indirect equity interest in any corporation, partnership, joint venture or other
entity, domestic or foreign.
3B.4 Authorization; Binding Agreement. Each of OPC Mergerco and MITI
Mergerco has requisite corporate power and authority to execute and deliver this
Agreement and to consummate the transactions contemplated hereby, subject to the
approval and adoption of this Agreement by the stockholders of Actava in
accordance with the DGCL and the Certificate of Incorporation and By-laws of
Actava. The execution and delivery of this Agreement and the consummation of the
transactions contemplated hereby, including but not limited to the Mergers, have
been duly and validly authorized by each of OPC Mergerco's Board of Directors
and MITI Mergerco's Board of Directors and by Actava (through its Board of
Directors), as sole stockholder of each of OPC Mergerco and MITI Mergerco, and
no other corporate proceedings on the part of Actava, OPC Mergerco or MITI
Mergerco or any subsidiary of any of them are necessary to authorize the
execution and delivery of this Agreement by OPC Mergerco and MITI Mergerco or to
consummate the transactions so contemplated (other than the approval and
adoption of this Agreement by the stockholders of Actava in accordance with the
DGCL and the Certificate of Incorporation and By-laws of Actava). This Agreement
has been duly and validly executed and delivered by each of OPC Mergerco and
MITI Mergerco, and, subject to the approval and adoption of this Agreement by
the stockholders of Actava in accordance with the DGCL and the Certificate of
Incorporation and By-laws of Actava, constitutes the legal, valid and binding
agreement of each of OPC Mergerco and MITI Mergerco, enforceable against each of
OPC Mergerco and MITI Mergerco, in accordance with its terms, except to the
extent that enforceability thereof may be limited by applicable bankruptcy,
insolvency, reorganization or other similar laws affecting the enforcement of
creditors' rights generally and by principles of equity regarding the
availability of remedies.
3B.5 Governmental Approvals. No consent, approval or authorization of or
declaration or filing with any governmental agency or regulatory authority on
the part of either of OPC Mergerco and MITI Mergerco is required in connection
with the execution or delivery by either OPC Mergerco or MITI Mergerco of this
Agreement or the consummation by either OPC Mergerco or MITI Mergerco of the
transactions contemplated hereby other than (i) the filing of this Agreement (or
the Orion Certificate of Merger or MITI Certificate of Merger, as appropriate,
in lieu thereof) with the Secretary of State of Delaware in accordance with the
DGCL, (ii) filings with the SEC and any applicable national securities exchange,
(iii) filings under state securities or "Blue Sky" laws and (iv) federal, state
and local regulatory approvals and consents.
3B.6 No Violations. The execution and delivery by each of OPC Mergerco and
MITI Mergerco of this Agreement, the consummation of the transactions
contemplated hereby and compliance by each of OPC Mergerco and MITI Mergerco
with any of the provisions hereof will not (i) conflict with or result in any
breach of any provision of the Certificate of Incorporation or By-laws or other
governing instruments of either of OPC Mergerco or MITI Mergerco, (ii) require
any consent, approval or notice under or result in a violation or breach of, or
constitute (with or without due notice or lapse of time or both) a default (or
give rise to any right of termination, cancellation or acceleration or augment
the performance required) under any of the terms, conditions or provisions of
any note, bond, mortgage, indenture, lease, license, agreement or other
instrument or obligation to which either of OPC Mergerco or MITI Mergerco is a
party or by which any of them or any of their properties or assets may be bound,
(iii) result in the creation or imposition of any lien, charge or other
encumbrance of any kind upon any of the assets of either of OPC Mergerco or MITI
Mergerco or (iv) subject to obtaining the governmental and other consents
referred to in Section 3B.5, contravene any material law, rule or regulation of
any state or of the United States or any political subdivision thereof or
therein, or any material order, writ, injunction, determination or award
currently in effect to which either of OPC Mergerco or MITI Mergerco or any of
their respective assets or properties are subject.
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3B.7 Conduct of Business. Except for activities related to the approval of
this Agreement and the transactions contemplated hereby, neither OPC Mergerco
nor MITI Mergerco has conducted any business of any kind whatsoever or owns or
leases any real or personal property whatsoever.
3B.8 Liabilities. Neither OPC Mergerco nor MITI Mergerco has any direct or
indirect Liabilities, whether or not of a kind required by generally accepted
accounting principles to be set forth in a financial statement. Neither OPC
Mergerco nor MITI Mergerco has (i) obligations in respect of borrowed money,
(ii) obligations evidenced by bonds, debentures, notes or other similar
instruments, (iii) obligations which would be required by generally accepted
accounting principles to be classified as "capital leases", (iv) obligations to
pay the deferred purchase price of property or services, except trade accounts
payable arising in the ordinary course of business and payable not more than
twelve (12) months from the date of incurrence, and (v) any guaranties of any
obligations of any other person.
3B.9 Records. The respective minute books of each of OPC Mergerco and MITI
Mergerco contain accurate and complete records of all corporate actions of the
respective stockholders and directors (and committees thereof) of OPC Mergerco
and MITI Mergerco.
ARTICLE 4
REPRESENTATIONS AND WARRANTIES
OF ORION
Orion represents and warrants as of April 12, 1995 to each of Actava,
Sterling and MITI as follows (all references in this Article 4 to "as of the
date of this Agreement" or to "as of the date hereof" shall be deemed to refer
to April 12, 1995):
4.1 Organization and Good Standing. Orion and each of its material
subsidiaries is a corporation duly organized, validly existing and in good
standing under the laws of the jurisdiction of its incorporation and has all
requisite corporate power and authority to own, lease and operate its properties
and to carry on its business as now being conducted. Orion and each of its
material subsidiaries is duly qualified or licensed and in good standing to do
business in each jurisdiction in which the character of the property owned,
leased or operated by it or the nature of the business conducted by it makes
such qualification or licensing necessary, except where the failure to be so
duly qualified or licensed and in good standing would not have an Orion Material
Adverse Effect (as defined in Section 15.9). Orion has heretofore delivered or
made available to each of Actava, Sterling and MITI accurate and complete copies
of the Certificates of Incorporation and By-laws, or equivalent governing
instruments, as currently in effect, of Orion and each of its subsidiaries.
4.2 Capitalization. The authorized capital stock of Orion consists of
100,000,000 shares of Orion Common Stock and 10,000,000 shares of Preferred
Stock, par value $1.00 per share ("Orion Preferred Stock"). As of March 31,
1995, 20,000,000 shares of Orion Common Stock and no shares of Orion Preferred
Stock were issued and outstanding. No other capital stock of Orion is authorized
or issued. All issued and outstanding shares of capital stock of Orion are
validly issued, fully paid and non-assessable and were issued free of preemptive
rights and in compliance with applicable federal and state securities laws and
regulations. Except as set forth on Schedule 4.2(a), at the date hereof there
are not any outstanding rights, subscriptions, warrants, calls, unsatisfied
preemptive rights, options or other agreements of any kind to purchase or
otherwise receive from Orion any of the outstanding, authorized but unissued,
unauthorized or treasury shares of the capital stock or any other security of
Orion, and there is no authorized or outstanding security of any kind
convertible into or exchangeable for any such capital stock. Since March 31,
1995, Orion has not (i) issued any shares of capital stock or (ii) repurchased
any shares of Orion Common Stock.
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4.3 Subsidiaries. Exhibit 21 to Orion's filing on Form 10-K for the year
ended February 28, 1994, sets forth the name, jurisdiction of incorporation or
organization and percentages of outstanding capital stock or other equivalent
equity ownership owned, directly or indirectly, by Orion, with respect to each
subsidiary of Orion. Except as set forth on Schedule 4.3, Orion and its
subsidiaries own no material direct or indirect equity interest in any
corporation (other than direct or indirect subsidiaries of Orion), partnership,
joint venture or other entity, domestic or foreign. All of the outstanding
shares of capital stock in each of Orion's subsidiaries have been duly
authorized and validly issued and are fully paid and non-assessable. To Orion's
knowledge, there are no irrevocable proxies or similar obligations with respect
to such capital stock and no equity securities or other interests of any of the
subsidiaries are or may become required to be issued by reason of any options,
warrants, rights to subscribe to, calls or commitments of any character
whatsoever relating to, or securities or rights convertible into or exchangeable
for, shares of any capital stock of any subsidiary, and there are no contracts,
commitments, understandings or arrangements by which any subsidiary is bound to
issue additional shares of its capital stock, or options, warrants or rights to
purchase or acquire any additional shares of its capital stock or securities
convertible into or exchangeable for such shares. All of such shares so owned by
Orion are owned by it free and clear of any claim, lien, encumbrance, security
interest or agreement with respect thereto.
4.4 Authorization; Binding Agreement. Orion has requisite corporate power
and authority to execute and deliver this Agreement and to consummate the
transactions contemplated hereby, subject to the approval and adoption of this
Agreement by the Board of Directors and stockholders of Orion in accordance with
the DGCL and the Certificate of Incorporation and By-laws of Orion. This
Agreement has been duly and validly executed and delivered by Orion, and,
subject to the approval and adoption of this Agreement by the Board of Directors
and stockholders of Orion in accordance with the DGCL and the Certificate of
Incorporation and By-laws of Orion, constitutes the legal, valid and binding
agreement of Orion, enforceable against Orion in accordance with its terms,
except to the extent that enforceability thereof may be limited by applicable
future bankruptcy, insolvency, reorganization or other similar laws affecting
the enforcement of creditors' rights generally and by principles of equity
regarding the availability of remedies.
4.5 Governmental Approvals. No consent, approval or authorization of or
declaration or filing with any governmental agency or regulatory authority on
the part of Orion or any of its subsidiaries is required in connection with the
execution or delivery by Orion of this Agreement or the consummation by Orion of
the transactions contemplated hereby other than (i) the filing of this Agreement
(or the Certificate of Merger in lieu thereof) with the Secretary of State of
Delaware in accordance with the DGCL, (ii) filings with the SEC and any
applicable national securities exchange, (iii) filings under state securities or
"Blue Sky" laws, (iv) federal, state and local regulatory approvals and consents
and (v) filings under the HSR Act.
4.6 No Violations. The execution and delivery of this Agreement, the
consummation of the transactions contemplated hereby and compliance by Orion
with any of the provisions hereof will not (i) conflict with or result in any
breach of any provision of the Articles or Certificates of Incorporation or
By-laws or other governing instruments of Orion or any of its subsidiaries, (ii)
except as set forth on Schedule 4.6 and except for any of the following which
does not and will not have an Orion Material Adverse Effect, require any
consent, approval or notice under or result in a violation or breach of, or
constitute (with or without due notice or lapse of time or both) a default (or
give rise to any right of termination, cancellation or acceleration or augment
the performance required) under any of the terms, conditions or provisions of
the Plan (as defined in Section 4.17) or any note, bond, mortgage, indenture,
lease, license, agreement or other instrument or obligation to which Orion or
any of its subsidiaries is a party or by which any of them or any of their
properties or assets may be bound, (iii) result in the creation or imposition of
any lien, charge or other encumbrance of any kind upon any of the assets of
Orion or any of its subsidiaries other than any such lien, charge or other
encumbrance which does not or
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will not have an Orion Material Adverse Effect or (iv) subject to obtaining the
governmental and other consents referred to in Section 4.5, contravene any
material law, rule or regulation of any state or of the United States or any
political subdivision thereof or therein, or any material order, writ,
injunction, determination or award currently in effect to which Orion or any of
its subsidiaries or any of their respective assets or properties are subject.
4.7 Proxy Statement; Form S-4. None of the information relating to Orion and
its subsidiaries included in the Proxy Statement or Form S-4 will be false or
misleading with respect to any material fact, or omit to state any material fact
required to be stated therein or necessary in order to make the statements
therein, in light of the circumstances under which they were made, not
misleading. Except for information supplied or to be supplied by Actava,
Sterling or MITI in writing for inclusion therein, as to which no representation
is made, the Proxy Statement and Form S-4, and any supplements or amendments
thereto, will comply in all material respects with the Exchange Act and the
Securities Act, as the case may be, and in each case the rules and regulations
thereunder.
4.8 SEC Filings. Orion has made available to each of Actava, Sterling and
MITI true and complete copies of (i) its Annual Reports on Form 10-K, as
amended, for the years ended February 29, 1992, and February 28, 1993 and 1994,
as filed with the SEC, (ii) its proxy statements relating to all of Orion's
meetings of stockholders (whether annual or special) since March 1, 1992, as
filed with the SEC, and (iii) all other reports, statements and registration
statements (including Quarterly Reports on Form 10-Q and Current Reports on Form
8-K, as amended) filed by Orion with the SEC since March 1, 1992 (the reports
and statements set forth in clauses (i), (ii) and (iii) are referred to
collectively as the "Orion SEC Filings"). As of their respective dates, none of
the Orion SEC Filings (including all exhibits and schedules thereto and
documents incorporated by reference therein), contained any untrue statement of
a material fact or omitted to state a material fact required to be stated
therein or necessary to make the statements therein, in light of the
circumstances under which they were made, not misleading. Each of the Orion SEC
Filings at the time of filing complied in all material respects with the
Exchange Act or the Securities Act, as the case may be, and the rules and
regulations thereunder. As of the date hereof there are no claims, actions or
proceedings (and to Orion's knowledge no investigations) pending by or against,
or to Orion's knowledge threatened against Orion or any of its subsidiaries, or
any properties or rights of Orion or any of its subsidiaries, before any court
or any administrative, governmental or regulatory authority or body which is
required to be described in any Orion SEC Filing that is not so described which
have or will have an Orion Material Adverse Effect.
4.9 Financial Statements. The consolidated balance sheets of Orion as of
February 29, 1992 and February 28, 1993 and 1994 and the related consolidated
statements of operations, stockholders' equity and cash flows for the years then
ended, including the footnotes thereto, certified by Ernst & Young LLP as to
1992 and KPMG Peat Marwick LLP as to 1993 and 1994, Orion's independent
certified public accountants, as set forth in Orion's Annual Reports on Form
10-K, as amended, for the years ended February 29, 1992 and February 28, 1993
and 1994 and the unaudited consolidated balance sheet of Orion for the nine
months ended November 30, 1994, and the related consolidated statements of
operations, stockholders' equity and cash flows, including the footnotes
thereto, as set forth in Orion's Quarterly Report on Form 10-Q for the period
ended November 30, 1994, have been prepared in accordance with generally
accepted accounting principles applied on a consistent basis during the periods
involved and fairly present the financial position of Orion and its consolidated
subsidiaries as of the dates thereof and the results of their operations for the
periods then ended (subject, in the case of any unaudited interim financial
statements, to normal year-end audit adjustments and to the lack of complete
footnotes).
4.10 Absence of Certain Changes or Events. Except as set forth in the Orion
SEC Filings, since November 30, 1994, there has not been: (i) any material
adverse change in the business, assets, prospects, condition (financial or
other) or the results of operations of Orion and its subsidiaries taken as
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a whole other than any such change set forth on Schedule 4.10(i) or caused by
general economic conditions, political or governmental instability or
uncertainty, civil disturbances or unrest, war or other similar acts of force
majeure; (ii) any declaration, payment or setting aside for payment of any
dividend or any redemption, purchase or other acquisition of any shares of
capital stock or securities of Orion; (iii) any return of any capital or other
distribution of assets to stockholders of Orion; (iv) any material investment of
a capital nature by Orion or any of its subsidiaries either by the purchase of
any property or assets or by any acquisition (by merger, consolidation or
acquisition of stock or assets) of any corporation, partnership or other
business organization or division thereof; (v) except as set forth on Schedule
4.10(v), any sale, disposition, license or other transfer of assets or
properties of Orion and its subsidiaries (A) in excess of $100,000 individually
or $1,000,000 in the aggregate for sales, dispositions or transfers of assets
other than licensing of film and television product and (B) pursuant to a
license for film and television product other than such a license (I) entered
into in the ordinary course of business, (II) with a duration not in excess of
seven years and (III) providing for payments not in excess of $500,000 in the
aggregate; (vi) except as set forth on Schedule 4.10(vi), any employment or
consulting agreement entered into by Orion and its subsidiaries with any officer
or consultant of Orion and its subsidiaries providing for annual salary or other
annual payments in excess of $100,000 or any amendment or modification to, or
termination of, any current employment or consulting agreement to which Orion or
any of its subsidiaries is a party which provides for annual salary or other
annual payments in excess of $100,000; (vii) any agreement to take, whether in
writing or otherwise, any action which, if taken prior to the date hereof, would
have made any representation or warranty in this Article 4 untrue, incomplete or
incorrect in any material respect; (viii) any change in accounting methods or
practices or any change in depreciation or amortization policies or rates; or
(ix) any failure by Orion or its subsidiaries to conduct their respective
businesses only in the ordinary course consistent with past practice.
4.11 Compliance with Laws. The business of Orion and its subsidiaries has
been operated in compliance with all laws, ordinances, regulations and orders of
all governmental entities, domestic or foreign, except for any instances of
non-compliance which do not and will not have an Orion Material Adverse Effect.
4.12 Permits. Except as set forth on Schedule 4.12, (i) Orion and its
subsidiaries have all permits, certificates, licenses, approvals and other
authorizations (collectively, "Orion Permits") required in connection with the
operation of their businesses, (ii) neither Orion nor any of its subsidiaries
are in violation of any Orion Permit applicable to any of them or to the
operation of their businesses, and (iii) no proceedings are pending or, to
Orion's knowledge threatened, to revoke or terminate any Orion Permit, except,
in the case of clause (i) or (ii) above, those the absence or violation of which
do not and will not have an Orion Material Adverse Effect.
4.13 Finders and Investment Bankers. Neither Orion nor any of its officers
or directors has employed any broker or finder or incurred any liability for any
brokerage fees, commissions or finders' fees in connection with the transactions
contemplated hereby except a fee payable to Alex. Brown & Sons Incorporated
("Alex. Brown") pursuant to that certain engagement letter dated as of March 16,
1995 between Alex. Brown and Orion and a fee payable to Donaldson, Lufkin &
Jenrette Securities Corporation.
4.14 Contracts. There is no Contract required to be described in or filed as
an exhibit to any Orion SEC Filing that is not described in or filed as required
by the Securities Act or the Exchange Act, as the case may be. All such
Contracts are valid and binding and are in full force and effect and enforceable
in accordance with their respective terms other than such Contracts which by
their terms are no longer in force or effect or were otherwise rejected by Orion
in connection with Orion's filing under and emergence from Chapter 11 of the
United States Bankruptcy Code. Except as set forth in Schedule 4.6 or 4.14, (i)
no approval or consent of, or notice to, any person is needed in order to ensure
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that such Contracts shall continue in full force and effect in accordance with
their respective terms without penalty, acceleration or rights of early
termination following the consummation of the transactions contemplated by this
Agreement, and (ii) Orion or its subsidiaries is not in violation or breach of
or default under any such Contract; nor to Orion's knowledge is any other party
to any such Contract in violation or breach of or default under any such
Contract, except in the case of clauses (i) and (ii) above, any of the foregoing
which do not and will not have an Orion Material Adverse Effect.
4.15 Employee Benefit Plans.
(i) Except as set forth on Schedule 4.15(i), there are no employee
benefit plans or arrangements of any type, including (i) plans described in
section 3(3) of ERISA and any other material plans, programs, practices or
policies, including, but not limited to, any pension, profit sharing,
retirement, thrift, stock purchase or stock option plan, or any other
compensation, welfare, fringe benefit or retirement plan, program, policy,
understanding or arrangement of any kind whatsoever, whether formal or
informal, providing for benefits for or the welfare of any or all of the
current or former employees or agents of Orion and their beneficiaries or
dependents, or (ii) multiemployer plans as defined in section 3(37) of
ERISA, or (iii) multiple employer plans as defined in Section 413 of the
Code, under which Orion has or in the future could have, directly or
indirectly through a "Commonly Controlled Entity" (within the meaning of
sections 414(b), (c), (m) and (o) of the Code), any liability with respect
to any current or former employee of Orion or any Commonly Controlled Entity
(collectively, "Orion Benefit Plans").
(ii) With respect to each Orion Benefit Plan (where applicable), Orion
has delivered to each of Actava, Sterling and MITI complete and accurate
copies or summaries of (a) all plan texts and material agreements, (b) all
material employee communications, (c) the most recent annual report, (d) the
most recent annual and periodic accounting of plan assets, (e) the most
recent determination letter received from the Internal Revenue Service and
(f) the most recent actuarial valuation.
(iii) With respect to each Orion Benefit Plan, except as set forth on
Schedule 4.15(iii), (a) if intended to qualify under Code sections 401(a) or
403(a), (i) such Orion Benefit Plan has received a favorable determination
letter from the Internal Revenue Service (the "Service") indicating that
such Plan meets such requirements, and such determination by the Service
includes any new or modified requirements under the Tax Reform Act of 1986
and subsequent legislation enacted thereafter through and including the
Omnibus Budget Reconciliation Act of 1993, or (ii) an application for a
favorable determination letter including such legislation was filed with the
Service prior to the expiration of the remedial amendment period (as defined
in Code section 401(b) and regulations thereunder, and as extended pursuant
to notices and revenue rulings of the Service) for filing such an
application and such Plan has been substantially amended to comply with the
Tax Reform Act of 1986 and subsequent legislation enacted through and
including the Omnibus Budget Reconciliation Act of 1993, or (iii) the
remedial amendment period (as defined in (ii) above) with respect to such
Plan has not yet expired, and an application for a favorable determination
letter including such legislation will be timely filed with the Service
prior to the expiration of such period and the Plan will be amended to
comply with the Tax Reform Act of 1986 and subsequent legislation enacted
thereafter through and including the Omnibus Budget Reconciliation Act of
1993 prior to the expiration of such period, (b) if intended to qualify
under Code sections 401(a) or 403(a) and if originally effective prior to
January 1, 1986, such Orion Benefit Plan has previously received a favorable
determination letter from the Service indicating that such Plan meets the
requirements of Code sections 401(a) or 403(a) as in effect on the date of
the letter, including without limitation, TEFRA, DEFRA, and REACT, (c) such
Orion Benefit Plan has been administered in material compliance with its
terms and applicable law, (d) no event has occurred and there exists no
circumstance under which Orion could, directly or indirectly through a
Commonly Controlled Entity, incur material liability under ERISA, the Code
or otherwise (other than routine claims for benefits), (e) there are no
actions, suits or claims pending (other than
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routine claims for benefits) or, to Orion's knowledge, threatened, with
respect to any Orion Benefit Plan or against the assets of any Orion Benefit
Plan, (f) no "accumulated funding deficiency" (as defined in ERISA section
302) has occurred, (g) no "prohibited transaction" (as defined in ERISA
section 406 or in Code section 4975) has occurred, (h) no "reportable event"
(as defined in ERISA section 4043) has occurred, (i) all contributions and
PBGC premiums or premiums due under an insurance contract that insures
benefits payable under an Orion Benefit Plan, as applicable, have been made
on a timely basis and (j) all contributions made or required to be made
under any Orion Benefit Plan which have been treated as deductible for
purposes of one or more federal income tax returns of Orion meet the
requirements for deductibility under the Code and all contributions that
have not been made have been properly recorded on the books of Orion or a
Commonly Controlled Entity in accordance with generally accepted accounting
principles.
(iv) With respect to each Orion Benefit Plan that is subject to Title IV
of ERISA, except as set forth on Schedule 4.15(iv), (a) as of the date
hereof and at the Effective Time, the market value of assets (exclusive of
any contribution due to such Orion Benefit Plan) equals or exceeds the
present value of benefit liabilities as of the latest actuarial valuation
date shown for such plan (but not prior to 12 months prior to the date
hereof), determined on the basis of a shutdown of Orion and termination of
such Orion Benefit Plan in accordance with actuarial assumptions used by the
Pension Benefit Guaranty Corporation in single-employer plan terminations
and since its last valuation date, there have been no amendments to such
Orion Benefit Plan that materially increased the present value of benefit
liabilities (determined as provided above) nor any other material adverse
changes in the funding status of such Orion Benefit Plan, and (b) Orion has
not incurred, directly or indirectly through a Commonly Controlled Entity,
any liability arising from a plan termination or plan withdrawal from a
multiemployer plan.
(v) With respect to each Orion Benefit Plan that is a "welfare plan" (as
defined in ERISA section 3(1)), except as set forth on Schedule 4.15(v), (a)
no such plan provides medical or death benefits (whether or not insured)
with respect to current or former employees beyond their termination of
employment or the end of the month of their termination of employment (other
than coverage mandated by law), (b) there are no reserves, assets, surplus
or prepaid premiums under any such plan and (c) Orion and any Commonly
Controlled Entity have materially complied with the requirements of Code
section 4980B.
(vi) With respect to each Orion Benefit Plan that is a multiemployer
plan, (a) Schedule 4.15(vi) indicates the number of employees with respect
to whom Orion or any Commonly Controlled Entity makes contributions to each
such plan and the most recent information available to Orion or any Commonly
Controlled Entity with respect to the withdrawal liability of Orion or such
Commonly Controlled Entity under each such plan, (b) each such plan is not,
as of the date hereof, insolvent or in reorganization, nor does it have an
accumulated funding deficiency, and Orion does not know of any reason why
such plan would become insolvent or in reorganization or have an accumulated
funding deficiency in the foreseeable future, (c) Orion or any Commonly
Controlled Entity has made all contributions to each such plan due or
accrued as of the date hereof and will have made all such contributions as
of the Effective Time and (d) the withdrawal liability with respect to each
such Plan if any Commonly Controlled Entity were to withdraw from the plan
at the Effective Time is less than or equal to $0.
(vii) Except as set forth on Schedule 4.15(vii), the consummation of the
transactions contemplated by this Agreement will not (a) entitle any
individual to severance pay, or (b) accelerate the time of payment, vesting
of benefits (including stock options and restricted stock) or increase the
amount of compensation due to any individual.
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4.16 Taxes.
(a) Except as set forth on Schedule 4.16, (i) Orion and each of its
subsidiaries timely has filed (after giving effect to any extensions of the
time to file which were obtained) prior to the date of this Agreement, and
will file prior to the Effective Time, all returns required to be filed
prior to the date of this Agreement and/or required to be filed prior to the
Effective Time by any of them with respect to, and has paid (or Orion has
paid on its behalf), or has or will set up an adequate reserve for the
payment of, all Taxes required to be paid prior to the date of the Agreement
or the Effective Time, as the case may be, and the most recent financial
statements contained in the SEC Filings reflect an adequate reserve for all
Taxes payable by Orion and its subsidiaries accrued through the date of such
financial statements and (ii) no deficiencies for any Taxes have been
proposed, asserted or assessed against Orion or any of its subsidiaries
other than those which are being contested in good faith and by proper
proceedings by Orion, except in the case of clauses (i) and (ii) above, any
of the foregoing which do not and will not have an Orion Material Adverse
Effect.
(b) The Federal income tax returns of Orion and each of its subsidiaries
consolidated in such returns have been examined by and settled with the IRS,
or the statute of limitations with respect to such years has expired, for
all years through 1991.
(c) Except as set forth on Schedule 4.16, none of Orion, any subsidiary
of Orion or, to Orion's knowledge, any group of which Orion or any
subsidiary of Orion is now or ever was a member has filed or entered into
any election, consent or extension agreement that extends any applicable
statute of limitations or the time within which a return must be filed,
which statute of limitations has not expired or return has not been timely
filed.
(d) Except as set forth on Schedule 4.16, (i) none of Orion, any
subsidiary of Orion or, to Orion's knowledge, any group of which Orion or
any subsidiary of Orion is now or ever was a member, is a party to any
action or proceeding pending or, to Orion's knowledge, threatened by any
governmental authority for assessment or collection of Taxes, (ii) no
unresolved claim for assessment or collection of Taxes has to Orion's
knowledge been asserted, (iii) no audit or investigation of Orion or any
subsidiary of Orion by any governmental authority is pending or, to Orion's
knowledge, threatened and (iv) no such matters are under discussion with any
governmental authority which in the case of clauses (i-iv), could have an
Orion Material Adverse Effect.
4.17 Liabilities. Except (i) as expressly disclosed in the Orion SEC Filings
or (ii) as set forth on Schedule 4.17, and in the case of (i) and (ii) above, as
does not and will not have an Orion Material Adverse Effect, Orion and its
subsidiaries do not have any direct or indirect Liabilities, whether or not of a
kind required by generally accepted accounting principles to be set forth in a
financial statement, other than Liabilities incurred since November 30, 1994 in
the ordinary course of business. Except as set forth on Schedule 4.17 or
reflected in the Orion SEC Filings, Orion and its subsidiaries do not have (i)
material obligations in respect of borrowed money, (ii) material obligations
evidenced by bonds, debentures, notes or other similar instruments, (iii)
material obligations which would be required by generally accepted accounting
principles to be classified as "capital leases", (iv) material obligations to
pay the deferred purchase price of property or services, except trade accounts
payable arising in the ordinary course of business and payable not more than
twelve (12) months from the date of incurrence, and (v) any guaranties of any
material obligations of any other person. Schedule 4.17 sets forth a list, dated
as of the date hereof, of all unresolved "Claims" in excess of $100,000 as
defined in and arising out of Orion's Modified Third Amended Joint Consolidated
Plan of Reorganization dated October 20, 1992, as amended (the "Plan")
specifying in reasonable detail the name of such claimant and the amount and
classification of each such Claim.
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4.18 Environmental Protection. Except as disclosed on Schedule 4.18:
(i) Neither Orion nor any of its subsidiaries is or has been in
violation in any material respect of any applicable Safety and Environmental
Law.
(ii) Orion and its subsidiaries have all Permits required pursuant to
Safety and Environmental Laws that are material to the conduct of the
business of Orion or any of its subsidiaries, all such Permits are in full
force and effect, no action or proceeding to revoke, limit or modify any of
such Permits is pending, and Orion and each of its subsidiaries is in
compliance in all material respects with all terms and conditions thereof.
(iii) Neither Orion nor any of its subsidiaries has received, or expects
to receive due to the consummation of the Orion Merger, any material
Environmental Claim.
(iv) To Orion's knowledge, Orion and its subsidiaries have filed all
notices required under Safety and Environmental Laws indicating the past or
present Release, generation, treatment, storage or disposal of Hazardous
Substances.
(v) Neither Orion nor any of its subsidiaries have entered into any
written agreement with any Governmental Body or any other person by which
Orion or any of its subsidiaries has assumed responsibility, either directly
or as a guarantor or surety, for the remediation of any condition arising
from or relating to a Release or threatened Release of Hazardous Substances
into the Environment.
(vi) To Orion's knowledge, there is not now and has not been at any time
in the past a Release or threatened Release of Hazardous Substances into the
Environment for which Orion or any of its subsidiaries may be directly or
indirectly responsible.
(vii) To Orion's knowledge, there is not now and has not been at any
time in the past at, on or in any of the real properties owned, leased or
operated by Orion or any of its subsidiaries, and, to Orion's knowledge, was
not at, on or in any real property previously owned, leased or operated by
Orion or any of its subsidiaries or any predecessor: (A) any generation,
use, handling, Release, treatment, recycling, storage or disposal of any
Hazardous Substances, (B) any underground storage tank, surface impoundment,
lagoon or other containment facility (past or present) for the temporary or
permanent storage, treatment or disposal of Hazardous Substances, (C) any
landfill or solid waste disposal area, (D) any asbestos-containing material
in a condition requiring abatement, (E) any polychlorinated biphenyls (PCBs)
used in hydraulic oils, electrical transformers or other equipment, (F) any
Release or threatened Release, or any visible signs of Releases or
threatened Releases, of a Hazardous Substance to the Environment in form or
quantity requiring Remedial Action under Safety and Environmental Laws, or
(G) any Hazardous Substances present at such property, excepting such
quantities as are handled in accordance with all applicable manufacturer's
instructions and Safety and Environmental Laws and in proper storage
containers, and as are necessary for the operations of Orion and its
subsidiaries.
(viii) To Orion's knowledge, there is no basis or reasonably anticipated
basis for any material Environmental Claim or material Environmental
Compliance Costs.
(ix) Neither Orion nor any of its subsidiaries have transported, stored,
treated or disposed, nor have they allowed or arranged for any third persons
to transport, store, treat or dispose, any Hazardous Substance to or at: (a)
any location other than a site lawfully permitted to receive such substances
for such purposes, or (b) any location designated for Remedial Action
pursuant to Safety and Environmental Laws; nor have they performed, arranged
for or allowed by any method or procedure such transportation or disposal in
contravention of any Safety and Environmental Laws or in any other manner
which may result in Environmental Compliance Costs or in an
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Environmental Claim. All locations at which Orion or any of its subsidiaries
have disposed of any Hazardous Substance are listed on Schedule 4.18(ix).
4.19 Intellectual Property. Schedule 4.19 sets forth a list of all of
Orion's and its subsidiaries' registered patents, registered trademarks,
registered service marks, registered trade names, registered copyrights and
franchises, all applications for any of the foregoing and all permits, grants
and licenses or other rights running to Orion and any of its subsidiaries
relating to any of the foregoing that are material to the business of Orion and
its subsidiaries taken as a whole. Except as set forth on Schedule 4.19, to
Orion's knowledge (i) Orion or one of its subsidiaries own, or are licensed to,
or otherwise have, the right to use all registered patents, registered
trademarks, registered service marks, registered trade names, registered
copyrights and franchises set forth on Schedule 4.19, and (ii) Orion's rights in
the property set forth on such list are free and clear of any liens or other
encumbrances and Orion and its subsidiaries have not received written notice of
any adversely-held patent, invention, trademark, service mark or trade name of
any other person, or notice of any charge or claim of any person relating to
such intellectual property or any process or confidential information of Orion
and its subsidiaries and to Orion's knowledge there is no basis for any such
charge or claim, and (iii) Orion, its subsidiaries and their respective
predecessors, if any, have not conducted business at any time during the period
beginning five years prior to the date hereof under any corporate or
partnership, trade or fictitious names other than their current corporate or
partnership names, except in the case of clauses (i), (ii) and (iii) above, any
of the foregoing which do not and will not have an Orion Material Adverse
Effect.
4.20 Real Estate.
(a) Schedule 4.20(a) sets forth a true, correct and complete schedule of
all real property owned by Orion or any of its subsidiaries. Orion or one of
its subsidiaries is the owner of fee title to the real property described on
Schedule 4.20(a) and to all of the buildings, structures and other
improvements located thereon free and clear of any mortgage, deed of trust,
lien, pledge, security interest, claim, lease, charge, option, right of
first refusal, easement, restrictive covenant, encroachment or other survey
defect, encumbrance or other restriction or limitation except for the
matters listed on Schedule 4.20(a) and any exceptions or restrictions which,
individually or in the aggregate, do not and will not have an Orion Material
Adverse Effect.
(b) Schedule 4.20(b) sets forth a true, correct and complete schedule of
all material leases, subleases, licenses or other agreements under which
Orion or any of its subsidiaries uses or occupies, or has the right to use
or occupy, now or in the future, any real property or improvements thereon
(the "Orion Real Property Leases"). Except for the matters listed on
Schedule 4.20(b), to Orion's knowledge, Orion holds the leasehold estate
under and interest in each Orion Real Property Lease free and clear of all
material liens, encumbrances and other rights of occupancy. Except as set
forth on Schedule 4.20(b), all Orion Real Property Leases are valid and
binding on the lessors thereunder in accordance with their respective terms
and to Orion's knowledge, there is not under any such Orion Real Property
Leases any existing default, or any condition, event or act which with
notice or lapse of time or both would constitute such a default, which in
either case, considered individually or in the aggregate with all such other
Orion Real Property Leases under which there is such a default, condition,
event or act, has or will have an Orion Material Adverse Effect.
4.21 Records. The respective minute books of Orion and each of its
subsidiaries made available to each of Actava, Sterling and MITI contain
materially accurate and complete records of all material corporate actions of
the respective stockholders and directors (and committees thereof).
4.22 Title to and Condition of Personal Property. Except as set forth on
Schedule 4.22, Orion and each of its subsidiaries have good and marketable title
to the material personal property reflected in its or their financial statements
or currently used in the operation of their businesses (other than leased
property), and such property is free and clear of all liens, claims, charges,
security interests, options, or
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other title defects or encumbrances, except for those which would not have an
Orion Material Adverse Effect. All such personal property is in good operating
condition and repair, ordinary wear and tear excepted, is suitable for the use
to which the same is customarily put, is free from defects and is merchantable
and is of a quality and quantity presently usable in the ordinary course of the
operation of the businesses of Orion and its subsidiaries, other than such
matters as would not have an Orion Material Adverse Effect.
4.23 No Adverse Actions. There is no existing, pending or, to Orion's
knowledge, threatened termination, cancellation, modification or change in the
business relationship of Orion or any of its subsidiaries, with any supplier,
customer or other person or entity except those which do not and will not have
an Orion Material Adverse Effect. To Orion's knowledge, none of Orion, any
subsidiary of Orion or any stockholder, director, officer, agent, employee or
other person associated with or acting on behalf of any of the foregoing has
used any corporate funds for unlawful contributions, payments, gifts,
entertainment or other unlawful expenses relating to political activity, or made
any direct or indirect unlawful payments to governmental or regulatory
officials.
4.24 Labor Matters.
(a) Except as set forth on Schedule 4.24(a), neither Orion nor any of
its subsidiaries has any material obligations, contingent or otherwise,
under any employment or consulting agreement (except if and as set forth in
the schedules hereto), collective bargaining agreement or other contract
with a labor union or other labor or employee group. There are no efforts
presently being made or, to Orion's knowledge, threatened by or on behalf of
any labor union with respect to employees of Orion or any subsidiary of
Orion. No unfair labor practice complaint against Orion or any subsidiary of
Orion is pending or, to Orion's knowledge, threatened before the National
Labor Relations Board; there is no labor strike, dispute, slowdown or
stoppage pending or, to Orion's knowledge, threatened against or involving
Orion or any subsidiary of Orion; no collective bargaining representation
question exists respecting the employees of Orion or any subsidiary of
Orion; no grievance or internal or informal complaint exists under any
collective bargaining agreement, no arbitration proceeding arising out of or
under any collective bargaining agreement is pending and no claim therefor
has been asserted; no collective bargaining agreement is currently being
negotiated by Orion or any subsidiary of Orion; and neither Orion nor any
subsidiary of Orion has experienced any labor difficulty, except as to each
of the foregoing, any matter which would not have an Orion Material Adverse
Effect.
(b) Except as set forth on Schedule 4.24(b), in the last three years,
neither Orion nor any of its subsidiaries has effectuated, nor will Orion or
any of its subsidiaries at any time before the Effective Time, effectuate
(i) a "plant closing" (as defined in the WARN Act) affecting any site of
employment or one or more facilities or operating units within any site of
employment or facility of Orion or its subsidiaries; or (ii)a "mass layoff"
(as defined in the WARN Act) affecting any site of employment or facility of
Orion or its subsidiaries; nor has Orion or its subsidiaries been affected
by any transaction or engaged in layoffs or employment terminations
sufficient in number to trigger application of any similar state or local
law.
(c) Except as set forth on Schedule 4.24(c), Orion and all of its
subsidiaries are in compliance with all federal and state laws respecting
immigration, employment and employment practices, fair labor practices,
family and medical leave, terms and conditions of employment (including
nondiscrimination in race, age, sex, religion, disability, etc.) and wages
and hours except to the extent failure to comply would not have an Orion
Material Adverse Effect.
4.25 Investment Company Act. Orion and each of its subsidiaries either (a)
is not an "investment company," or a company "controlled" by, or an "affiliated
company" with respect to, an "investment company," within the meaning of the
Investment Company Act or (b) satisfies all conditions for an
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exemption from the Investment Company Act, and, accordingly, neither Orion nor
any of its subsidiaries is required to be registered under the Investment
Company Act.
4.26 Insurance. Except as set forth on Schedule 4.26, neither Orion nor any
subsidiary of Orion has received notice of default under, or intended
cancellation or nonrenewal of, any material policies of insurance which insure
the properties, business or liability of Orion or any subsidiary of Orion,
except any of the foregoing which do not and will not have an Orion Material
Adverse Effect.
4.27 Products. (a) Except (i) as set forth on Schedule 4.27(a) and (ii) as
does not and will not have an Orion Material Adverse Effect, there are no
product liability claims against or involving Orion or any of its subsidiaries
or any product manufactured, marketed or distributed at any time by Orion or any
of its subsidiaries ("Orion Products") and no such claims have been settled,
adjudicated or otherwise disposed of since November 30, 1994.
(b) Except (i) as set forth on Schedule 4.27(b) and (ii) as does not and
will not have an Orion Material Adverse Effect, there are no statements,
citations or decisions by any Governmental Body specifically stating that any
Orion Product is defective or unsafe or fails to meet any standards promulgated
by any such Governmental Body. Except (i) as set forth on Schedule 4.27(b) and
(ii) as does not and will not have an Orion Material Adverse Effect, there have
been no recalls ordered by any such Governmental Body with respect to any Orion
Product. Except (i) as set forth on Schedule 4.27(b) and (ii) as does not and
will not have an Orion Material Adverse Effect, to Orion's knowledge, there is
no (A) fact relating to any Orion Product that may impose upon Orion or any of
its subsidiaries a duty to recall any Orion Product or a duty to warn customers
of a defect in any Orion Product, (B) latent or overt design, manufacturing or
other defect in any Orion Product or (C) material liability for warranty claims
or returns with respect to any Orion Product not fully reflected on Orion's
financial statements referred to in Section 4.9 hereof.
4.28 MetProductions Indebtedness. As of March 31, 1995, the principal amount
outstanding of the MetProductions Indebtedness was $6.28 million.
4.29 No Conflict. Other than the restrictions and covenants set forth in the
agreements, instruments and indentures referred to in Sections 12.2.9 and
12.2.10, Orion is not a party to any note, bond, mortgage, indenture, lease,
license, agreement or other instrument or obligation which would (i) restrict
Orion's ability to produce or acquire from third parties film product other than
with financing which is non-recourse to Orion or (ii) require Orion to deposit
and distribute its Net Cash Flow (as defined below) in accordance with the
Collateral Trust Agreement (as defined below). The representation and warranty
made in this Section 4.29 shall be deemed an Orion Modified Representation (as
hereinafter defined) subject to the provisions of Section 12.2.2(i) of this
Agreement.
ARTICLE 4A
FURTHER REPRESENTATIONS
AND WARRANTIES OF ORION
Orion represents and warrants to each of Actava, Sterling and MITI that from
and after April 12, 1995 until the date hereof, Orion has performed and complied
with in all material respects its obligations, agreements and covenants under
the Initial Merger Agreement which were required to be performed or complied
with by it at or prior to the date hereof.
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ARTICLE 5
REPRESENTATIONS AND WARRANTIES
OF STERLING
Sterling represents and warrants as of April 12, 1995 to each of Actava,
Orion and MITI as follows (all references in this Article 5 to "as of the date
of this Agreement" or to "as of the date hereof" shall be deemed to refer to
April 12, 1995):
5.1 Organization and Good Standing. Sterling and each of its material
subsidiaries as disclosed on Exhibit 22.1 to Sterling's filing on Form 10-K for
the year ended March 31, 1994, is a corporation duly organized, validly existing
and in good standing under the laws of the jurisdiction of its incorporation and
has all requisite corporate power and authority to own, lease and operate its
properties and to carry on its business as now being conducted. Sterling and
each of its material subsidiaries is duly qualified or licensed and in good
standing to do business in each jurisdiction in which the character of the
property owned, leased or operated by it or the nature of the business conducted
by it makes such qualification or licensing necessary, except where the failure
to be so duly qualified or licensed and in good standing would not have a
Sterling Material Adverse Effect (as defined in Section 15.9). Sterling has
heretofore delivered or made available to each of Actava, Orion and MITI
accurate and complete copies of the Certificates of Incorporation and By-laws,
or equivalent governing instruments, as currently in effect, of Sterling and
each of its subsidiaries.
5.2 Capitalization. The authorized capital stock of Sterling consists of
25,000,000 shares of Sterling Common Stock and 1,000,000 shares of preferred
stock, par value $.01 per share ("Sterling Preferred Stock"). As of March 31,
1995 11,215,000 shares of Sterling Common Stock were issued and outstanding and
no shares of Sterling Preferred Stock were issued and outstanding. No other
capital stock of Sterling is authorized or issued. All issued and outstanding
shares of capital stock of Sterling are validly issued, fully paid and
non-assessable and were issued free of preemptive rights and in compliance with
applicable federal and state securities laws and regulations. Except as set
forth on Schedule 5.2(a), at the date hereof there are not any outstanding
rights, subscriptions, warrants, calls, unsatisfied preemptive rights, options
or other agreements of any kind to purchase or otherwise receive from Sterling
any of the outstanding, authorized but unissued, unauthorized or treasury shares
of the capital stock or any other security of Sterling, and there is no
authorized or outstanding security of any kind convertible into or exchangeable
for any such capital stock. Except as set forth on Schedule 5.2(b), since March
31, 1995, Sterling has not (i) issued any shares of capital stock, except
pursuant to the exercise of then outstanding options or warrants in accordance
with their terms or (ii) repurchased any shares of Sterling Common Stock.
5.3 Subsidiaries. Exhibit 22.1 to Sterling's filing on Form 10-K for the
year ended March 31, 1994 sets forth the name, jurisdiction of incorporation or
organization and percentages of outstanding capital stock or other equivalent
equity ownership owned, directly or indirectly, by Sterling, with respect to
each material subsidiary of Sterling. Except as set forth on Schedule 5.3,
Sterling and its subsidiaries own no material direct or indirect equity interest
in any corporation (other than direct or indirect subsidiaries of Sterling),
partnership, joint venture or other entity, domestic or foreign. All of the
outstanding shares of capital stock in each of Sterling's subsidiaries have been
duly authorized and validly issued and are fully paid and non-assessable. Except
as set forth on Schedule 5.3, to Sterling's knowledge there are no irrevocable
proxies or similar obligations with respect to such capital stock and no equity
securities or other interests of any of the subsidiaries are or may become
required to be issued by reason of any options, warrants, rights to subscribe
to, calls or commitments of any character whatsoever relating to, or securities
or rights convertible into or exchangeable for, shares of any capital stock of
any subsidiary, and there are no contracts, commitments, understandings or
arrangements by which any subsidiary is bound to issue additional shares of its
capital stock, or options, warrants or
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rights to purchase or acquire any additional shares of its capital stock or
securities convertible into or exchangeable for such shares. Except as set forth
on Schedule 5.3, all of such shares so owned by Sterling are owned by it free
and clear of any claim, lien, encumbrance, security interest or agreement with
respect thereto.
5.4 Authorization; Binding Agreement. Sterling has requisite corporate power
and authority to execute and deliver this Agreement and to consummate the
transactions contemplated hereby, subject to the approval and adoption of this
Agreement by the stockholders of Sterling in accordance with the DGCL and the
Certificate of Incorporation and By-laws of Sterling. The execution and delivery
of this Agreement and the consummation of the transactions contemplated hereby,
including but not limited to the Sterling Merger, have been duly and validly
authorized by Sterling's Board of Directors and no other corporate proceedings
on the part of Sterling or any subsidiary of Sterling are necessary to authorize
the execution and delivery of this Agreement or to consummate the transactions
so contemplated (other than the approval and adoption of this Agreement by the
stockholders of Sterling in accordance with the DGCL and the Certificate of
Incorporation and By-laws of Sterling). This Agreement has been duly and validly
executed and delivered by Sterling, and, subject to the approval and adoption of
this Agreement by the stockholders of Sterling in accordance with the DGCL and
the Certificate of Incorporation and By-laws of Sterling, constitutes the legal,
valid and binding agreement of Sterling, enforceable against Sterling in
accordance with its terms, except to the extent that enforceability thereof may
be limited by applicable future bankruptcy, insolvency, reorganization or other
similar laws affecting the enforcement of creditors' rights generally and by
principles of equity regarding the availability of remedies.
5.5 Governmental Approvals. No consent, approval or authorization of or
declaration or filing with any governmental agency or regulatory authority on
the part of Sterling or any of its subsidiaries is required in connection with
the execution or delivery by Sterling of this Agreement or the consummation by
Sterling of the transactions contemplated hereby other than (i) the filing of
this Agreement (or the Certificate of Merger in lieu thereof) with the Secretary
of State of Delaware in accordance with the DGCL, (ii) filings with the SEC and
any applicable national securities exchange, (iii) filings under state
securities or "Blue Sky" laws, (iv) federal, state and local regulatory
approvals and consents and (v) filings under the HSR Act.
5.6 No Violations. The execution and delivery of this Agreement, the
consummation of the transactions contemplated hereby and compliance by Sterling
with any of the provisions hereof will not (i) conflict with or result in any
breach of any provision of the Articles or Certificates of Incorporation or
By-laws or other governing instruments of Sterling or any of its subsidiaries,
(ii) except as set forth on Schedule 5.6 and except for any of the following
which does not and will not have a Sterling Material Adverse Effect, require any
consent, approval or notice under or result in a violation or breach of, or
constitute (with or without due notice or lapse of time or both) a default (or
give rise to any right of termination, cancellation or acceleration or augment
the performance required) under any of the terms, conditions or provisions of
any note, bond, mortgage, indenture, lease, license, agreement or other
instrument or obligation to which Sterling or any of its subsidiaries is a party
or by which any of them or any of their properties or assets may be bound, (iii)
result in the creation or imposition of any lien, charge or other encumbrance of
any kind upon any of the assets of Sterling or any of its subsidiaries other
than any such lien, charge or other encumbrance which does not and will not have
a Sterling Material Adverse Effect or (iv) subject to obtaining the governmental
and other consents referred to in Section 5.5, contravene any material law, rule
or regulation of any state or of the United States or any political subdivision
thereof or therein, or any material order, writ, injunction, determination or
award currently in effect to which Sterling or any of its subsidiaries or any of
their respective assets or properties are subject.
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5.7 Proxy Statement; Form S-4. None of the information relating to Sterling
and its subsidiaries included in the Proxy Statement or Form S-4 will be false
or misleading with respect to any material fact, or omit to state any material
fact required to be stated therein or necessary in order to make the statements
therein, in light of the circumstances under which they were made, not
misleading. Except for information supplied or to be supplied by Actava, Orion
and MITI in writing for inclusion therein, as to which no representation is
made, the Proxy Statement, and any supplements or amendments thereto, will
comply in all material respects with the Exchange Act and the rules and
regulations thereunder.
5.8 SEC Filings. Sterling has made available to each of Actava, Orion and
MITI true and complete copies of (i) its Annual Reports on Form 10-K, as
amended, for the years ended March 31, 1992, 1993 and 1994, as filed with the
SEC, (ii) its proxy statements relating to all of Sterling's meetings of
stockholders (whether annual or special) since April 1, 1992, as filed with the
SEC, and (iii) all other reports, statements and registration statements
(including Quarterly Reports on Form 10-Q and Current Reports on Form 8-K, as
amended) filed by Sterling with the SEC since April 1, 1992 (the reports and
statements set forth in clauses (i), (ii) and (iii) are referred to collectively
as the "Sterling SEC Filings"). As of their respective dates, none of the
Sterling SEC Filings (including all exhibits and schedules thereto and documents
incorporated by reference therein), contained any untrue statement of a material
fact or omitted to state a material fact required to be stated therein or
necessary to make the statements therein, in light of the circumstances under
which they were made, not misleading. Each of the Sterling SEC Filings at the
time of filing complied in all material respects with the Exchange Act or the
Securities Act, as the case may be, and the rules and regulations thereunder. As
of the date hereof there are no claims, actions or proceedings (and to
Sterling's knowledge no investigations) pending by or against or, to Sterling's
knowledge, threatened against Sterling or any of its subsidiaries, or any
properties or rights of Sterling or any of its subsidiaries, before any court or
any administrative, governmental or regulatory authority or body which is
required to be described in any Sterling SEC Filing that is not so described
which have or will have a Sterling Material Adverse Effect.
5.9 Financial Statements. The consolidated balance sheets of Sterling as of
March 31, 1993 and 1994 and the related consolidated statements of operations,
stockholders' equity and cash flows for the years then ended, including the
footnotes thereto, audited by Arthur Andersen LLP, Sterling's independent public
accountants, as set forth in Sterling's Annual Reports on Form 10-K, as amended,
for the years ended March 31, 1992, 1993 and 1994, and the unaudited
consolidated balance sheet of Sterling for the nine months ended December 31,
1994 and the related consolidated statements of operations, stockholders' equity
and cash flows, including the footnotes thereto, as set forth in Sterling's
Quarterly Report on Form 10-Q for the period ended December 31, 1994, have been
prepared in accordance with generally accepted accounting principles applied on
a consistent basis during the periods involved and fairly present the financial
position of Sterling and its consolidated subsidiaries as of the dates thereof
and the results of their operations for the periods then ended (subject, in the
case of any unaudited interim financial statements, to normal year-end audit
adjustments and to the lack of complete footnotes).
5.10 Absence of Certain Changes or Events. Except as set forth in the
Sterling SEC Filings, since December 31, 1994 there has not been: (i) any
material adverse change in the business, assets, prospects, condition (financial
or other) or the results of operations of Sterling and its subsidiaries taken as
a whole other than any such change caused by general economic conditions,
political or governmental instability or uncertainty, civil disturbances or
unrest, war or other similar acts of force majeure; (ii) any declaration,
payment or setting aside for payment of any dividend or any redemption, purchase
or other acquisition of any shares of capital stock or securities of Sterling;
(iii) any return of any capital or other distribution of assets to stockholders
of Sterling; (iv) except as set forth on Schedule 5.10(v), any material
investment of a capital nature by Sterling or any of its subsidiaries either by
the purchase of any property or assets or by any acquisition (by merger,
consolidation or acquisition of stock or
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assets) of any corporation, partnership or other business organization or
division thereof; (v) except as set forth on Schedule 5.10(v), any sale,
disposition, license or other transfer of assets or properties of Sterling and
its subsidiaries (A) in excess of $100,000 individually or $1,000,000 in the
aggregate for sales, dispositions or transfers of assets other than licensing a
film and television product and (B) pursuant to a license of film or television
product other than such a license (I) entered into in the ordinary course of
business, (II) with a duration not in excess of 7 years and (III) providing for
payments not in excess of $500,000 in the aggregate; (vi) any employment or
consulting agreement entered into by Sterling and its subsidiaries with any
officer or consultant of Sterling and its subsidiaries providing for annual
salary or other annual payments in excess of $100,000 or any amendment or
modification to, or termination of, any current employment or consulting
agreement to which Sterling or any of its subsidiaries is a party which provides
for annual salary or other annual payments in excess of $100,000; (vii) any
agreement to take, whether in writing or otherwise, any action which, if taken
prior to the date hereof, would have made any representation or warranty in this
Article 5 untrue, incomplete or incorrect in any material respect; (viii) any
change in accounting methods or practices or any change in depreciation or
amortization policies or rates; or (ix) any failure by Sterling or its
subsidiaries to conduct their respective businesses only in the ordinary course
consistent with past practice.
5.11 Compliance with Laws. The business of Sterling and its subsidiaries has
been operated in compliance with all laws, ordinances, regulations and orders of
all governmental entities, domestic or foreign, except for any instances of
non-compliance which do not and will not have a Sterling Material Adverse
Effect.
5.12 Permits. Except as set forth on Schedule 5.12, (i) Sterling and its
subsidiaries have all permits, certificates, licenses, approvals and other
authorizations (collectively, "Sterling Permits") required in connection with
the operation of their businesses, (ii) neither Sterling nor any of its
subsidiaries are in violation of any Sterling Permit applicable to any of them
or to the operation of their businesses, and (iii) no proceedings are pending
or, to Sterling's knowledge, threatened, to revoke or terminate any Sterling
Permit, except, in the case of clause (i) or (ii) above, those the absence or
violation of which do not and will not have a Sterling Material Adverse Effect.
5.13 Finders and Investment Bankers. Neither Sterling nor any of its
officers or directors has employed any broker or finder or incurred any
liability for any brokerage fees, commissions or finders' fees in connection
with the transactions contemplated hereby, except a fee payable to Houlihan,
Lokey, Howard & Zukin ("Houlihan Lokey") pursuant to that certain engagement
letter dated April 11, 1995 between Houlihan Lokey and Sterling.
5.14 Contracts. There is no Contract required to be described in or filed as
an exhibit to any Sterling SEC Filing that is not described in or filed as
required by the Securities Act or the Exchange Act, as the case may be. All such
Contracts are valid and binding and are in full force and effect and enforceable
in accordance with their respective terms other than such Contracts which by
their terms are no longer in force or effect. Except as set forth in Schedule
5.6 or 5.14, (i) no approval or consent of, or notice to, any person is needed
in order to ensure that such Contracts shall continue in full force and effect
in accordance with their respective terms without penalty, acceleration or
rights of early termination following the consummation of the transactions
contemplated by this Agreement, and (ii) Sterling or its subsidiaries is not in
violation or breach of or default under any such Contract; nor to Sterling's
knowledge is any other party to any such Contract in violation or breach of or
default under any such Contract, except in the case of clauses (i) and (ii)
above, any of the foregoing which do not and will not have a Sterling Material
Adverse Effect.
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5.15 Employee Benefit Plans.
(i) Except as set forth on Schedule 5.15(i), there are no employee
benefit plans or arrangements of any type, including (i) plans described in
section 3(3) of ERISA and any other material programs, practices or
policies, including, but not limited to, any pension, profit sharing,
retirement, thrift, stock purchase or stock option plan, or any other
compensation, welfare, fringe benefit or retirement plan, program, policy,
understanding or arrangement of any kind whatsoever, whether formal or
informal, providing for benefits for or the welfare of any or all of the
current or former employees or agents of Sterling and their beneficiaries or
dependents, or (ii) multiemployer plans as defined in section 3(37) of
ERISA, or (iii) multiple employer plans as defined in Section 413 of the
Code, under which Sterling has or in the future could have, directly or
indirectly through a "Commonly Controlled Entity" (within the meaning of
sections 414(b), (c), (m) and (o) of the Code), any liability with respect
to any current or former employee of Sterling or any Commonly Controlled
Entity (collectively, "Sterling Benefit Plans").
(ii) With respect to each Sterling Benefit Plan (where applicable),
Sterling has delivered to each of Actava, Orion and MITI complete and
accurate copies or summaries of (a) all plan texts and material agreements,
(b) all material employee communications, (c) the most recent annual report,
(d) the most recent annual and periodic accounting of plan assets, (e) the
most recent determination letter received from the Internal Revenue Service
and (f) the most recent actuarial valuation.
(iii) With respect to each Sterling Benefit Plan, except as set forth on
Schedule 5.15(iii), (a) if intended to qualify under Code sections 401(a) or
403(a), (i) such Sterling Benefit Plan has received a favorable
determination letter from the Internal Revenue Service (the "Service")
indicating that such Plan meets such requirements, and such determination by
the Service includes any new or modified requirements under the Tax Reform
Act of 1986 and subsequent legislation enacted thereafter through and
including the Omnibus Budget Reconciliation Act of 1993, or (ii) an
application for a favorable determination letter including such legislation
was filed with the Service prior to the expiration of the remedial amendment
period (as defined in Code section 401(b) and regulations thereunder, and as
extended pursuant to notices and revenue rulings of the Service) for filing
such an application and such Plan has been substantially amended to comply
with the Tax Reform Act of 1986 and subsequent legislation enacted through
and including the Omnibus Budget Reconciliation Act of 1993, or (iii) the
remedial amendment period (as defined in (ii) above) with respect to such
Plan has not yet expired, and an application for a favorable determination
letter including such legislation will be timely filed with the Service
prior to the expiration of such period and the Plan will be amended to
comply with the Tax Reform Act of 1986 and subsequent legislation enacted
thereafter through and including the Omnibus Budget Reconciliation Act of
1993 prior to the expiration of such period, (b) if intended to qualify
under Code sections 401(a) or 403(a) and if originally effective prior to
January 1, 1986, such Sterling Benefit Plan has previously received a
favorable determination letter from the Service indicating that such Plan
meets the requirements of Code sections 401(a) or 403(a) as in effect on the
date of the letter, including without limitation, TEFRA, DEFRA, and REACT,
(c) such Sterling Benefit Plan has been administered in material compliance
with its terms and applicable law, (d) no event has occurred and there
exists no circumstance under which Sterling could, directly or indirectly
through a Commonly Controlled Entity, incur material liability under ERISA,
the Code or otherwise (other than routine claims for benefits), (e) there
are no actions, suits or claims pending (other than routine claims for
benefits) or, to Sterling's knowledge, threatened, with respect to any
Sterling Benefit Plan or against the assets of any Sterling Benefit Plan,
(f) no "accumulated funding deficiency" (as defined in ERISA section 302)
has occurred, (g) no "prohibited transaction" (as defined in ERISA section
406 or in Code section 4975) has occurred, (h) no "reportable event" (as
defined in ERISA section 4043) has occurred, (i) all contributions and PBGC
premiums or premiums due under an insurance contract that insures benefits
payable under a Sterling Benefit
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Plan, as applicable, have been made on a timely basis and (j) all
contributions made or required to be made under any Sterling Benefit Plan
which have been treated as deductible for purposes of one or more federal
income tax returns of Sterling meet the requirements for deductibility under
the Code and all contributions that have not been made have been properly
recorded on the books of Sterling or a Commonly Controlled Entity in
accordance with generally accepted accounting principles.
(iv) With respect to each Sterling Benefit Plan that is subject to Title
IV of ERISA, except as set forth on Schedule 5.15(iv), (a) as of the date
hereof and at the Effective Time, the market value of assets (exclusive of
any contribution due to such Sterling Benefit Plan) equals or exceeds the
present value of benefit liabilities as of the latest actuarial valuation
date shown for such plan (but not prior to 12 months prior to the date
hereof), determined on the basis of a shutdown of Sterling and termination
of such Sterling Benefit Plan in accordance with actuarial assumptions used
by the Pension Benefit Guaranty Corporation in single-employer plan
terminations and since its last valuation date, there have been no
amendments to such Sterling Benefit Plan that materially increased the
present value of benefit liabilities (determined as provided above) nor any
other material adverse changes in the funding status of such Sterling
Benefit Plan, and (b) Sterling has not incurred, directly or indirectly
through a Commonly Controlled Entity, any liability arising from a plan
termination or plan withdrawal from a multiemployer plan.
(v) With respect to each Sterling Benefit Plan that is a "welfare plan"
(as defined in ERISA section 3(1)), except as set forth on Schedule 5.15(v),
(a) no such plan provides medical or death benefits (whether or not insured)
with respect to current or former employees beyond their termination of
employment or the end of the month of their termination of employment (other
than coverage mandated by law), (b) there are no reserves, assets, surplus
or prepaid premiums under any such plan and (c) Sterling and any Commonly
Controlled Entity have materially complied with the requirements of Code
section 4980B.
(vi) With respect to each Sterling Benefit Plan that is a multiemployer
plan, (a) Schedule 5.15(vi) indicates the number of employees with respect
to whom Sterling or any Commonly Controlled Entity makes contributions to
each such plan and the most recent information available to Sterling or any
Commonly Controlled Entity with respect to the withdrawal liability of
Sterling or such Commonly Controlled Entity under each such plan, (b) each
such plan is not, as of the date hereof, insolvent or in reorganization, nor
does it have an accumulated funding deficiency, and Sterling does not know
of any reason why such plan would become insolvent or in reorganization or
have an accumulated funding deficiency in the foreseeable future, (c)
Sterling or any Commonly Controlled Entity has made all contributions to
each such plan due or accrued as of the date hereof and will have made all
such contributions as of the Effective Time and (d) the withdrawal liability
with respect to each such Plan if any Commonly Controlled Entity were to
withdraw from the plan at the Effective Time is less than or equal to $0.
(vii) Except as set forth on Schedule 5.15(vii), the consummation of the
transactions contemplated by this Agreement will not (a) entitle any
individual to severance pay, or (b) accelerate the time of payment, vesting
of benefits (including stock options and restricted stock) or increase the
amount of compensation due to any individual.
5.16 Taxes.
(a) Except as set forth on Schedule 5.16, (i) Sterling and each of its
subsidiaries timely has filed (after giving effect to any extensions of the
time to file which were obtained) prior to the date of this Agreement, and
will file prior to the Effective Time, all returns required to be filed
prior to the date of this Agreement and/or required to be filed prior to the
Effective Time by any of them with respect to, and has paid (or Sterling has
paid on its behalf), or has or will set up an adequate reserve for the
payment of, all Taxes required to be paid prior to the date of this
Agreement or the
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Effective Time, as the case may be, and the most recent financial statements
contained in the SEC Filings reflect an adequate reserve for all Taxes
payable by Sterling and its subsidiaries accrued through the date of such
financial statements and (ii) no deficiencies for any Taxes have been
proposed, asserted or assessed against Sterling or any of its subsidiaries
other than those which are being contested in good faith and by proper
proceedings by Sterling, except in the case of clauses (i) and (ii) above,
any of the foregoing which do not and will not have a Sterling Material
Adverse Effect.
(b) The Federal income tax returns of Sterling and each of its
subsidiaries consolidated in such returns have been examined by and settled
with the IRS, or the statute of limitations with respect to such years has
expired, for all years through 1990.
(c) Except as set forth on Schedule 5.16, none of Sterling, any
subsidiary of Sterling or, to Sterling's knowledge, any group of which
Sterling or any subsidiary of Sterling is now or ever was a member has filed
or entered into any election, consent or extension agreement that extends
any applicable statute of limitations or the time within which a return must
be filed which statute of limitations has not expired or return has not been
timely filed.
(d) Except as set forth on Schedule 5.16, (i) none of Sterling, any
subsidiary of Sterling or, to Sterling's knowledge, any group of which
Sterling or any subsidiary of Sterling is now or ever was a member, is a
party to any action or proceeding pending or, to Sterling's knowledge,
threatened by any governmental authority for assessment or collection of
Taxes, (ii) no unresolved claim for assessment or collection of Taxes has to
Sterling's knowledge been asserted, (iii) no audit or investigation by any
governmental authority is pending or, to Sterling's knowledge, threatened
and (iv) no such matters are under discussion with any governmental
authority which, in the case of clauses (i-iv), could have a Sterling
Material Adverse Effect.
5.17 Liabilities. Except (i) as expressly disclosed in the Sterling SEC
Filings or (ii) as set forth on Schedule 5.17, and in the case of (i) and (ii)
above, as does not and will not have a Sterling Material Adverse Effect,
Sterling and its subsidiaries do not have any direct or indirect Liabilities,
whether or not of a kind required by generally accepted accounting principles to
be set forth in a financial statement, other than Liabilities incurred since
December 31, 1994 in the ordinary course of business. Except as set forth on
Schedule 5.17 or reflected in the Sterling SEC Filings, Sterling and its
subsidiaries do not have (i) material obligations in respect of borrowed money,
(ii) material obligations evidenced by bonds, debentures, notes or other similar
instruments, (iii) material obligations which would be required by generally
accepted accounting principles to be classified as "capital leases", (iv)
material obligations to pay the deferred purchase price of property or services,
except trade accounts payable arising in the ordinary course of business and
payable not more than twelve (12) months from the date of incurrence, and (v)
any guaranties of any material obligations of any other person. Schedule 5.17
sets forth a list, dated as of the date hereof, of all unresolved "Claims" in
excess of $25,000, whether payable in cash or Sterling Common Stock, as defined
in and arising out of Sterling's Second Amended Joint Plan of Reorganization
dated February 5, 1992, specifying in reasonable detail the name of such
claimant and the amount and classification of each such Claim.
5.18 Environmental Protection. Except as disclosed on Schedule 5.18:
(i) Neither Sterling nor any of its subsidiaries is or has been in
violation in any material respect of any applicable Safety and Environmental
Law.
(ii) Sterling and its subsidiaries have all Permits required pursuant to
Safety and Environmental Laws that are material to the conduct of the
business of Sterling or any of its subsidiaries, all such Permits are in
full force and effect, no action or proceeding to revoke, limit or modify
any of such Permits is pending, and Sterling and each of its subsidiaries is
in compliance in all material respects with all terms and conditions
thereof.
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(iii) Neither Sterling nor any of its subsidiaries has received, or
expects to receive due to the consummation of the Sterling Merger, any
material Environmental Claim.
(iv) To Sterling's knowledge, Sterling and its subsidiaries have filed
all notices required under Safety and Environmental Laws indicating the past
or present Release, generation, treatment, storage or disposal of Hazardous
Substances.
(v) Neither Sterling nor any of its subsidiaries have entered into any
written agreement with any Governmental Body or any other person by which
Sterling or any of its subsidiaries has assumed responsibility, either
directly or as a guarantor or surety, for the remediation of any condition
arising from or relating to a Release or threatened Release of Hazardous
Substances into the Environment.
(vi) To Sterling's knowledge, there is not now and has not been at any
time in the past a Release or threatened Release of Hazardous Substances
into the Environment for which Sterling or any of its subsidiaries may be
directly or indirectly responsible.
(vii) To Sterling's knowledge, there is not now and has not been at any
time in the past at, on or in any of the real properties owned, leased or
operated by Sterling or any of its subsidiaries, and, to Sterling's
knowledge, was not at, on or in any real property previously owned, leased
or operated by Sterling or any of its subsidiaries or any predecessor: (A)
any generation, use, handling, Release, treatment, recycling, storage or
disposal of any Hazardous Substances, (B) any underground storage tank,
surface impoundment, lagoon or other containment facility (past or present)
for the temporary or permanent storage, treatment or disposal of Hazardous
Substances, (C) any landfill or solid waste disposal area, (D) any
asbestos-containing material in a condition requiring abatement, (E) any
polychlorinated biphenyls (PCBs) used in hydraulic oils, electrical
transformers or other equipment, (F) any Release or threatened Release, or
any visible signs of Releases or threatened Releases, of a Hazardous
Substance to the Environment in form or quantity requiring Remedial Action
(as hereafter defined) under Safety and Environmental Laws, or (G) any
Hazardous Substances present at such property, excepting such quantities as
are handled in accordance with all applicable manufacturer's instructions
and Safety and Environmental Laws and in proper storage containers, and as
are necessary for the operations of Sterling and its subsidiaries.
(viii) To Sterling's knowledge, there is no basis or reasonably
anticipated basis for any material Environmental Claim or material
Environmental Compliance Costs.
(ix) Neither Sterling nor any of its subsidiaries have transported,
stored, treated or disposed, nor have they allowed or arranged for any third
persons to transport, store, treat or dispose, any Hazardous Substance to or
at: (a) any location other than a site lawfully permitted to receive such
substances for such purposes, or (b) any location designated for Remedial
Action pursuant to Safety and Environmental Laws; nor have they performed,
arranged for or allowed by any method or procedure such transportation or
disposal in contravention of any Safety and Environmental Laws or in any
other manner which may result in Environmental Compliance Costs or in an
Environmental Claim. All locations at which Sterling or any of its
subsidiaries have disposed of any Hazardous Substance are listed on Schedule
5.18(ix).
5.19 Intellectual Property. Schedule 5.19 sets forth a list of all of
Sterling's and its subsidiaries' registered patents, registered trademarks,
registered service marks, registered trade names, registered copyrights for
filmed product in which Sterling or one of its consolidated subsidiaries is the
registered owner of such product, and not the licensee of distribution rights
for filmed product ("Sterling Copyrights") and franchises, all applications for
any of the foregoing and all permits, grants and licenses or other rights
running to or from Sterling and any of its subsidiaries relating to any of the
foregoing and Sterling has delivered or made available a true and correct
listing of availabilities of all
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filmed product to which Sterling or any of its consolidated subsidiaries has
licensed distribution rights that are material to the business of Sterling and
its subsidiaries taken as a whole. Except as set forth on Schedule 5.19, to
Sterling's knowledge (i) Sterling or one of its subsidiaries own, or are
licensed to, or otherwise have, the right to use all registered patents,
registered trademarks, registered service marks, registered trade names,
Sterling Copyrights and franchises set forth on Schedule 5.19, and (ii)
Sterling's rights in the property set forth on such list are free and clear of
any liens or other encumbrances and Sterling and its subsidiaries have not
received written notice of any adversely-held patent, invention, trademark,
service mark or trade name of any other person, or notice of any charge or claim
of any person relating to such intellectual property or any process or
confidential information of Sterling and its subsidiaries and to Sterling's
knowledge there is no basis for any such charge or claim, and (iii) Sterling,
its subsidiaries and their respective predecessors, if any, have not conducted
business at any time during the period beginning five years prior to the date
hereof under any corporate or partnership, trade or fictitious names other than
their current corporate or partnership names, except in the case of clauses (i),
(ii) and (iii) above, any of the foregoing which do not and will not have a
Sterling Material Adverse Effect.
5.20 Real Estate.
(a) Neither Sterling nor any of its subsidiaries owns any real property.
(b) Schedule 5.20(b) sets forth a true, correct and complete schedule of
all material leases, subleases, licenses or other agreements under which
Sterling or any of its subsidiaries uses or occupies, or has the right to
use or occupy, now or in the future, any real property or improvements
thereon (the "Sterling Real Property Leases"). Except for the matters listed
on Schedule 5.20(b), to Sterling's knowledge, Sterling holds the leasehold
estate under and interest in each Sterling Real Property Lease free and
clear of all material liens, encumbrances and other rights of occupancy. All
Sterling Real Property Leases are valid and binding on the lessors
thereunder in accordance with their respective terms and to Sterling's
knowledge, there is not under any such Sterling Real Property Leases any
existing default, or any condition, event or act which with notice or lapse
of time or both would constitute such a default, which in either case,
considered individually or in the aggregate with all such other Sterling
Real Property Leases under which there is such a default, condition, event
or act, do not or will not have a Sterling Material Adverse Effect.
5.21 Records. The respective minute books of Sterling and each of its
subsidiaries made available to each of Actava, Orion and MITI contain materially
accurate and complete records of all material corporate actions of the
respective stockholders and directors (and committees thereof).
5.22 Title to and Condition of Personal Property. Sterling and each of its
subsidiaries have good and marketable title to the material personal property
reflected in its or their financial statements or currently used in the
operation of their businesses (other than leased property), and such property is
free and clear of all liens, claims, charges, security interests, options, or
other title defects or encumbrances, except for those which would not have a
Sterling Material Adverse Effect. All such personal property is in good
operating condition and repair, ordinary wear and tear excepted, is suitable for
the use to which the same is customarily put, is free from defects and is
merchantable and is of a quality and quantity presently usable in the ordinary
course of the operation of the business of Sterling and its subsidiaries, other
than such matters as would not have a Sterling Material Adverse Effect.
5.23 No Adverse Actions. There is no existing, pending or, to Sterling's
knowledge, threatened termination, cancellation, modification or change in the
business relationship of Sterling or any of its subsidiaries, with any supplier,
customer or other person or entity except those which do not and will not have a
Sterling Material Adverse Effect. To Sterling's knowledge, none of Sterling, any
subsidiary of Sterling or any stockholder, director, officer, agent, employee or
other person associated with or acting on behalf of any of the foregoing has
used any corporate funds for unlawful contributions, payments,
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gifts, entertainment or other unlawful expenses relating to political activity,
or made any direct or indirect unlawful payments to governmental or regulatory
officials.
5.24 Labor Matters.
(a) Except as set forth on Schedule 5.24(a), neither Sterling nor any of
its subsidiaries has any material obligations, contingent or otherwise,
under any employment or consulting agreement (except if and as set forth in
the schedules hereto), collective bargaining agreement or other contract
with a labor union or other labor or employee group. There are no efforts
presently being made or, to Sterling's knowledge, threatened by or on behalf
of any labor union with respect to employees of Sterling or any subsidiary
of Sterling. No unfair labor practice complaint against Sterling or any
subsidiary of Sterling is pending or, to Sterling's knowledge, threatened
before the National Labor Relations Board; there is no labor strike,
dispute, slowdown or stoppage pending or, to Sterling's knowledge,
threatened against or involving Sterling or any subsidiary of Sterling; no
collective bargaining representation question exists respecting the
employees of Sterling or any subsidiary of Sterling; no grievance or
internal or informal complaint exists under any collective bargaining
agreement, no arbitration proceeding arising out of or under any collective
bargaining agreement is pending and no claim therefor has been asserted; no
collective bargaining agreement is currently being negotiated by Sterling or
any subsidiary of Sterling; and neither Sterling nor any subsidiary of
Sterling has experienced any labor difficulty, except as to each of the
foregoing, any matter which would not have a Sterling Material Adverse
Effect.
(b) Except as set forth on Schedule 5.24(b), in the last three years,
neither Sterling nor any of its subsidiaries has effectuated, nor will
Sterling or any of its subsidiaries at any time before the Effective Time,
effectuate (i) a "plant closing" (as defined in the WARN Act) affecting any
site of employment or one or more facilities or operating units within any
site of employment or facility of Sterling or its subsidiaries; or (ii) a
"mass layoff" (as defined in the WARN Act) affecting any site of employment
or facility of Sterling or its subsidiaries; nor has Sterling or its
subsidiaries been affected by any transaction or engaged in layoffs or
employment terminations sufficient in number to trigger application of any
similar state or local law.
(c) Except as set forth on Schedule 5.24(c), Sterling and all of its
subsidiaries are in compliance with all federal and state laws respecting
immigration, employment and employment practices, fair labor practices,
family and medical leave, terms and conditions of employment (including
nondiscrimination in race, age, sex, religion, disability, etc.), and wages
and hours except to the extent failure to comply would not have a Sterling
Material Adverse Effect.
5.25 Investment Company Act. Sterling and each of its subsidiaries either
(a) is not an "investment company," or a company "controlled" by, or an
"affiliated company" with respect to, an "investment company," within the
meaning of the Investment Company Act or (b) satisfies all conditions for an
exemption from the Investment Company Act, and, accordingly, neither Sterling
nor any of its subsidiaries is required to be registered under the Investment
Company Act.
5.26 Insurance. Except as set forth on Schedule 5.26, neither Sterling nor
any subsidiary of Sterling has received notice of default under, or intended
cancellation or nonrenewal of, any material policies of insurance which insure
the properties, business or liability of Sterling or any subsidiary of Sterling,
except any of the foregoing which do not and will not have a Sterling Material
Adverse Effect.
5.27 Products. (a) Except (i) as set forth on Schedule 5.27(a) and (ii) as
does not and will not have an Sterling Material Adverse Effect, there are no
product liability claims against or involving Sterling or any of its
subsidiaries or any product manufactured, marketed or distributed at any time by
Sterling or any of its subsidiaries ("Sterling Products") and no such claims
have been settled, adjudicated or otherwise disposed of since December 31, 1994.
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(b) Except (i) as set forth on Schedule 5.27(b) and (ii) as does not and
will not have a Sterling Material Adverse Effect, there are no statements,
citations or decisions by any Governmental Body specifically stating that any
Sterling Product is defective or unsafe or fails to meet any standards
promulgated by any such Governmental Body. Except (i) as set forth on Schedule
5.27(b) and (ii) does not and will not have a Sterling Material Adverse Effect,
there have been no recalls ordered by any such Governmental Body with respect to
any Sterling Product. Except (i) as set forth on Schedule 5.27(b) and (ii) as
does not and will not have a Sterling Material Adverse Effect, to Sterling's
knowledge, there is no (A) fact relating to any Sterling Product that may impose
upon Sterling or any of its subsidiaries a duty to recall any Sterling Product
or a duty to warn customers of a defect in any Sterling Product, (B) latent or
overt design, manufacturing or other defect in any Sterling Product or (C)
material liability for warranty claims or returns with respect to any Sterling
Product not fully reflected on Sterling's financial statements referred to in
Section 5.9 hereof.
ARTICLE 5A
FURTHER REPRESENTATIONS AND
WARRANTIES OF STERLING
Sterling represents and warrants to each of Actava, Orion and MITI that from
and after April 12, 1995 until the date hereof, Sterling has performed and
complied with in all material respects its obligations, agreements and covenants
under the Initial Merger Agreement which were required to be performed or
complied with by it at or prior to the date hereof.
ARTICLE 6
REPRESENTATIONS AND WARRANTIES OF MITI
MITI represents and warrants as of April 12, 1995 to each of Actava, Orion
and Sterling as follows (all references in this Article 6 to "as of the date of
this Agreement" or to "as of the date hereof" shall be deemed to refer to April
12, 1995):
6.1 Organization and Good Standing. MITI and each of its material United
States subsidiaries is a corporation duly organized, validly existing and in
good standing under the laws of the jurisdiction of its incorporation and has
all requisite corporate power and authority to own, lease and operate its
properties and to carry on its business as now being conducted. Each of the
foreign entities in which MITI or one of its United States subsidiaries owns an
interest is listed on Schedule 6.1(a) (collectively, the "Joint Venture
Entities") and each such Joint Venture Entity is duly organized under the laws
of its organization and has all requisite power and authority to own, lease and
operate its properties and to carry on its business as now being conducted.
Except as set forth on Schedule 6.1(b), the organizational documents for each
Joint Venture Entity were properly filed under the laws of the jurisdiction in
which such Joint Venture Entity was organized. MITI and each of its material
United States subsidiaries is duly qualified or licensed and in good standing to
do business in each jurisdiction in which the character of the property owned,
leased or operated by it or the nature of the business conducted by it makes
such qualification or licensing necessary, except where the failure to be so
duly qualified or licensed and in good standing would not have a MITI Material
Adverse Effect (as defined in Section 15.9). MITI has heretofore delivered or
made available to each of Actava, Orion and Sterling accurate and complete
copies of the Certificates of Incorporation and By-laws, or equivalent governing
instruments, as currently in effect, of MITI and each of its United States
subsidiaries and, subject to the exceptions set forth on Schedule 6.1(b), the
organizational documents for each of the Joint Venture Entities.
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6.2 Capitalization. The authorized capital stock of MITI consists of
2,500,000 shares of MITI Common Stock. As of March 31, 1995, 1,716,198 shares of
MITI Common Stock were issued and outstanding. No other capital stock of MITI is
authorized or issued. All issued and outstanding shares of MITI Common Stock are
validly issued, fully paid and non-assessable and were either issued free of
preemptive rights or in accordance with waivers of such preemptive rights and in
compliance with applicable federal and state securities laws and regulations.
Except as set forth on Schedule 6.2(a), at the date hereof there are not any
outstanding rights, subscriptions, warrants, calls, unsatisfied preemptive
rights, options or other agreements of any kind to purchase or otherwise receive
from MITI any of the outstanding, authorized but unissued, unauthorized or
treasury shares of the capital stock or any other security of MITI, and there is
no authorized or outstanding security of any kind convertible into or
exchangeable for any such capital stock. Except as set forth on Schedule 6.2(b),
since March 31, 1995, MITI has not (i) issued any shares of capital stock,
except pursuant to the exercise of then outstanding options or warrants in
accordance with their terms or (ii) repurchased any shares of MITI Common Stock.
6.3 Subsidiaries. Schedule 6.3 sets forth the name, jurisdiction of
incorporation or organization and percentages of outstanding capital stock or
other equivalent equity ownership owned, directly or indirectly, by MITI, with
respect to each United States subsidiary of MITI and each Joint Venture Entity.
Except as set forth on Schedule 6.3, MITI and its subsidiaries own no material
direct or indirect equity interest in any corporation (other than direct or
indirect subsidiaries of MITI), partnership, joint venture or other entity,
domestic or foreign. All of the outstanding shares of capital stock in each of
MITI's United States subsidiaries have been duly authorized and validly issued
and are fully paid and non-assessable. All of MITI's direct or indirect equity
interests in the Joint Venture Entities have been issued in accordance with the
law of the jurisdiction in which each such Joint Venture Entity was organized.
Except as set forth on Schedule 6.3, to MITI's knowledge, there are no
irrevocable proxies or similar obligations with respect to such capital stock
and no equity securities or other interests of any of the United States
subsidiaries or Joint Venture Entities are or may become required to be issued
by reason of any options, warrants, rights to subscribe to, calls or commitments
of any character whatsoever relating to, or securities or rights convertible
into or exchangeable for, shares of any capital stock of any United States
subsidiary or Joint Venture Entities, and there are no contracts, commitments,
understandings or arrangements by which any subsidiary is bound to issue
additional shares of its capital stock, or options, warrants or rights to
purchase or acquire any additional shares of its capital stock or securities
convertible into or exchangeable for such shares. Except as set forth on
Schedule 6.3, all of the shares of capital stock of MITI's United States
subsidiaries owned by MITI and each interest in a Joint Venture Entity owned
directly or indirectly by MITI are owned by it free and clear of any claim,
lien, encumbrance, security interest or agreement with respect thereto.
6.4 Authorization; Binding Agreement. MITI has the requisite corporate power
and authority to execute and deliver this Agreement and to consummate the
transactions contemplated hereby, subject to the approval and adoption of this
Agreement by the stockholders of MITI in accordance with the DGCL, the
Certificate of Incorporation and By-laws of MITI and the MITI Stockholders
Agreement (as defined in Section 12.1.1(iii) hereof). The execution and delivery
of this Agreement and the consummation of the transactions contemplated hereby,
including but not limited to the MITI Merger, have been duly and validly
authorized by MITI's Board of Directors and no other corporate proceedings on
the part of MITI are necessary to authorize the execution and delivery of this
Agreement or to consummate the transactions so contemplated (other than the
approval and adoption of this Agreement by the stockholders of MITI in
accordance with the DGCL, the Certificate of Incorporation and By-laws of MITI
and the MITI Stockholders Agreement (as defined in Section 12.1.1(iii) hereof)).
This Agreement has been duly and validly authorized, executed and delivered by
MITI and, subject to the approval and adoption of this Agreement by the
stockholders of MITI in accordance with the DGCL, the Certificate of
Incorporation and By-laws of MITI and the MITI Stockholders Agreement (as
defined in Section 12.1.1(iii) hereof), constitutes the legal, valid and binding
agreement of MITI,
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enforceable against it in accordance with its terms, except that enforceability
thereof may be limited by bankruptcy, insolvency, reorganization or other
similar laws affecting creditors' rights generally and by principles of equity
regarding the availability of remedies.
6.5 No Violations. The execution and delivery by MITI of this Agreement, the
consummation of the transactions contemplated hereby and compliance by MITI with
any of the provisions hereof will not (i) conflict with or result in a breach of
any of the provisions of the Articles or the Certificates of Incorporation or
By-laws or other governing instruments of MITI, any of its United States
subsidiaries or any of the Joint Venture Entities, (ii) except as set forth on
Schedule 6.5 and except for any of the following which does not and will not
have an MITI Material Adverse Effect, require any consent, approval or notice
under or result in a violation or breach of, or constitute (with or without due
notice or lapse of time or both) a default (or give rise to any right of
termination, cancellation or acceleration or augment the performance required)
under any of the terms, conditions or provisions of any note, bond, mortgage,
indenture, lease, license, agreement or other instrument or obligation to which
MITI, any of its United States subsidiaries or any of the Joint Venture Entities
is a party or by which any of them or any of their properties or assets may be
bound, (iii) result in the creation or imposition of any lien, charge or other
encumbrance of any kind upon any of the assets of MITI, any of its United States
subsidiaries or any of the Joint Venture Entities other than any such lien,
charge or other encumbrance which does not and will not have a MITI Material
Adverse Effect, or (iv) subject to the obtaining of the governmental and other
consents referred to in Section 6.7, contravene any material law, rule or
regulation of any state or of the United States or any political subdivision
thereof or therein or of any foreign country or political subdivision thereof or
therein, or any material order, writ, judgment, injunction, decree,
determination or award currently in effect to which MITI, any of its United
States subsidiaries or any of the Joint Venture Entities or any of their assets
or properties are subject.
6.6 Proxy Statement; Form S-4. None of the information relating to MITI, its
United States subsidiaries or any Joint Venture Entity included in the Proxy
Statement or the Form S-4 will be false or misleading with respect to any
material fact or will omit to state any material fact required to be stated
therein or necessary in order to make the statements therein, in light of the
circumstances under which they were made, not misleading.
6.7 Governmental Approvals. Except as set forth on Schedule 6.7, no consent,
approval or authorization of or declaration or filing with any governmental
agency or regulatory authority on the part of MITI, any of its United States
subsidiaries or any Joint Venture Entity is required in connection with the
execution or delivery by MITI of this Agreement or the consummation by MITI of
the transactions contemplated hereby other than (i) the filing of this Agreement
(or the Certificate of Merger in lieu thereof) with the Secretary of State of
Delaware in accordance with the DGCL, (ii) filings with the SEC and any
applicable national securities exchange, (iii) filings under state securities or
"Blue Sky" laws, (iv) federal, state or local regulatory approvals and consents
and (v) filings under the HSR Act.
6.8 Financial Statements. The consolidated balance sheets of MITI and its
predecessors, International Telcell, Inc., a Delaware corporation ("ITI") and
Metromedia International Inc., a Delaware corporation ("MII") as of December 31,
1993 and 1994 and the related consolidated statements of operations,
stockholders' equity and cash flows for the years then ended, including the
footnotes thereto, certified by KPMG Peat Marwick LLP, MITI's independent
certified public accountants, other than with respect to a "going concern"
qualification contained in KPMG Peat Marwick LLP's report for the fiscal year
ended December 31, 1994, which have been delivered to each of Actava, Orion and
Sterling, have been prepared in accordance with generally accepted accounting
principles applied on a consistent basis (except that during 1994 MITI changed
its policy of accounting for its Joint Venture Entities by recording its equity
interest in the losses of such Joint Venture Entities based on a three month
lag)
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during the periods involved and fairly present the financial position of MITI,
its consolidated subsidiaries and its investments in the Joint Venture Entities,
including but not limited to ITI and MII as of the dates thereof and the results
of their operations for the periods then ended.
6.9 Absence of Certain Changes or Events. Except as set forth on Schedule
6.9, since December 31, 1994 (September 30, 1994 with respect to the Joint
Venture Entities) there has not been: (i) any material adverse change in the
business, assets, prospects, condition (financial or other) or the results of
operations of MITI, its United States subsidiaries or any of the Joint Venture
Entities which are marked with a star on Schedule 6.1(a) (such Joint Venture
Entities marked with a star are referred to collectively as the "Operating Joint
Venture Entities") taken as a whole other than any such change caused by general
economic conditions, political or governmental instability or uncertainty, civil
disturbances or unrest, war or other similar acts of force majeure; (ii) any
declaration, payment or setting aside for payment of any dividend or any
redemption, purchase or other acquisition of any shares of capital stock or
securities of MITI; (iii) any return of any capital or other distribution of
assets to stockholders of MITI; (iv) any material investments of a capital
nature in excess of $10,000,000 in the aggregate by MITI, its United States
subsidiaries and the Joint Venture Entities, either by the purchase of any
property or assets or by any acquisition (by merger, consolidation or
acquisition of stock or assets) of any corporation, partnership or other
business organization or division thereof other than in accordance with the
aggregate amount provided for in MITI's budget for the year ended December 31,
1995 (the "MITI Budget"); (v) any sale, disposition or other transfer of assets
or properties of MITI, its United States subsidiaries or any Joint Venture
Entity in excess of $100,000 individually or $1,000,000 in the aggregate other
than investments (whether in the form of debt or equity) in any subsidiary of
MITI or any Joint Venture Entity in accordance with the aggregate amount
provided for in the MITI Budget; (vi) any employment or consulting agreement
entered into by MITI, its United States subsidiaries or any Joint Venture Entity
with any officer or consultant of MITI, its United States subsidiaries or any
Joint Venture Entity providing for annual salary or other annual payments in
excess of $100,000 or any amendment or modification to, or termination of, any
current employment or consulting agreement to which MITI, any of its United
States subsidiaries or any Joint Venture Entity is a party which provides for
annual salary or other annual payments in excess of $100,000; (vii) any
agreement to take, whether in writing or otherwise, any action which, if taken
prior to the date hereof, would have made any representation or warranty in this
Article 6 untrue, incomplete or incorrect in any material respect; (viii) any
change in accounting methods or practices or any change in depreciation or
amortization policies or rates (other than any such changes made in connection
with the initial audits of the Joint Venture Entities); or (ix) any failure by
MITI, its United States subsidiaries or any Operating Joint Venture Entity to
conduct their respective businesses only in the ordinary course consistent with
past practice (other than any changes made in connection with the initial audits
of the Joint Venture Entities or changes made in an effort to conduct operations
more effectively).
6.10 Compliance with Laws. Except as set forth on Schedule 6.10, the
businesses of MITI, its United States subsidiaries and the Joint Venture
Entities have been operated in compliance with all laws, ordinances, regulations
and orders of all governmental entities, domestic or foreign, except for any
instances of non-compliance which do not and will not have a MITI Material
Adverse Effect.
6.11 Permits. Except as set forth on Schedule 6.11, (i) MITI, its United
States subsidiaries and the Operating Joint Venture Entities have all permits,
certificates, licenses, approvals and other authorizations (collectively, "MITI
Permits") required in connection with the operation of their businesses, (ii)
none of MITI, any of its United States subsidiaries nor any of the Operating
Joint Venture Entities are in violation of any MITI Permit applicable to it or
to the operation of their businesses, and (iii) no proceedings are pending or,
to MITI's knowledge, threatened, to revoke or terminate any MITI Permit, except
in the case of clause (i), (ii) or (iii) above, those the absence or violation
of which do not and will not have a MITI Material Adverse Effect.
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6.12 Finders and Investment Bankers. Neither MITI nor any of its officers or
directors has employed any broker or finder or incurred any liability for any
brokerage fees, commissions or finders' fees in connection with the transactions
contemplated hereby except a fee payable to Gerard Klauer Mattison & Co., L.L.C.
("GKMC") pursuant to that certain engagement letter dated April 7, 1995 between
GKMC and MITI.
6.13 Employee Benefit Plans.
(i) Except as set forth on Schedule 6.13(i), there are no employee
benefit plans or arrangements of any type, including (i) plans described in
section 3(3) of ERISA and any other material plans, programs, practices or
policies, including, but not limited to, any pension, profit sharing,
retirement, thrift, stock purchase or stock option plan, or any other
compensation, welfare, fringe benefit or retirement plan, program, policy,
understanding or arrangement of any kind whatsoever, whether formal or
informal, providing for benefits for or the welfare of any or all of the
current or former employees or agents of MITI and their beneficiaries or
dependents, or (ii) multiemployer plans as defined in section 3(37) of
ERISA, or (iii) multiple employer plans as defined in Section 413 of the
Code, under which MITI has or in the future could have, directly or
indirectly through a "Commonly Controlled Entity" (within the meaning of
sections 414(b), (c), (m) and (o) of the Code), any liability with respect
to any current or former employee of MITI or any Commonly Controlled Entity
(collectively, "MITI Benefit Plans").
(ii) With respect to each MITI Benefit Plan (where applicable), MITI has
delivered to each of Orion, Actava and Sterling complete and accurate copies
or summaries of (a) all plan texts and material agreements, (b) all material
employee communications, (c) the most recent annual report, (d) the most
recent annual and periodic accounting of plan assets, (e) the most recent
determination letter received from the Internal Revenue Service and (f) the
most recent actuarial valuation.
(iii) With respect to each MITI Benefit Plan, except as set forth on
Schedule 6.13(iii), (a) if intended to qualify under Code sections 401(a) or
403(a), (i)such MITI Benefit Plan has received a favorable determination
letter from the Internal Revenue Service (the "Service") indicating that
such Plan meets such requirements, and such determination by the Service
includes any new or modified requirements under the Tax Reform Act of 1986
and subsequent legislation enacted thereafter through and including the
Omnibus Budget Reconciliation Act of 1993, or (ii) an application for a
favorable determination letter including such legislation was filed with the
Service prior to the expiration of the remedial amendment period (as defined
in Code section 401(b) and regulations thereunder, and as extended pursuant
to notices and revenue rulings of the Service) for filing such an
application and such Plan has been substantially amended to comply with the
Tax Reform Act of 1986 and subsequent legislation enacted through and
including the Omnibus Budget Reconciliation Act of 1993, or (iii) the
remedial amendment period (as defined in (ii) above) with respect to such
Plan has not yet expired, and an application for a favorable determination
letter including such legislation will be timely filed with the Service
prior to the expiration of such period and the Plan will be amended to
comply with the Tax Reform Act of 1986 and subsequent legislation enacted
thereafter through and including the Omnibus Budget Reconciliation Act of
1993 prior to the expiration of such period, (b) if intended to qualify
under Code sections 401(a) or 403(a) and if originally effective prior to
January 1, 1986, such MITI Benefit Plan has previously received a favorable
determination letter from the Service indicating that such Plan meets the
requirements of Code sections 401(a) or 403(a) as in effect on the date of
the letter, including without limitation, TEFRA, DEFRA, and REACT, (c) such
MITI Benefit Plan has been administered in material compliance with its
terms and applicable law, (d) no event has occurred and there exists no
circumstance under which MITI could, directly or indirectly through a
Commonly Controlled Entity, incur material liability under ERISA, the Code
or otherwise (other than routine claims for benefits), (e) there are no
actions, suits or claims pending (other than routine claims for benefits)
or, to MITI's knowledge, threatened, with respect to any MITI Benefit
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Plan or against the assets of any MITI Benefit Plan, (f) no "accumulated
funding deficiency" (as defined in ERISA section 302) has occurred, (g) no
"prohibited transaction" (as defined in ERISA section 406 or in Code section
4975) has occurred, (h) no "reportable event" (as defined in ERISA section
4043) has occurred, (i) all contributions and PBGC premiums or premiums due
under an insurance contract that insures benefits payable under an MITI
Benefit Plan, as applicable, have been made on a timely basis and (j) all
contributions made or required to be made under any MITI Benefit Plan which
have been treated as deductible for purposes of one or more federal income
tax returns of MITI meet the requirements for deductibility under the Code
and all contributions that have not been made have been properly recorded on
the books of MITI or a Commonly Controlled Entity in accordance with
generally accepted accounting principles.
(iv) With respect to each MITI Benefit Plan that is subject to Title IV
of ERISA, except as set forth on Schedule 6.13(iv), (a) as of the date
hereof and at the Effective Time, the market value of assets (exclusive of
any contribution due to such MITI Benefit Plan) equals or exceeds the
present value of benefit liabilities as of the latest actuarial valuation
date shown for such plan (but not prior to 12 months prior to the date
hereof), determined on the basis of a shutdown of MITI and termination of
such MITI Benefit Plan in accordance with actuarial assumptions used by the
Pension Benefit Guaranty Corporation in single-employer plan terminations
and since its last valuation date, there have been no amendments to such
MITI Benefit Plan that materially increased the present value of benefit
liabilities (determined as provided above) nor any other material adverse
changes in the funding status of such MITI Benefit Plan, and (b) MITI has
not incurred, directly or indirectly through a Commonly Controlled Entity,
any liability arising from a plan termination or plan withdrawal from a
multiemployer plan.
(v) With respect to each MITI Benefit Plan that is a "welfare plan" (as
defined in ERISA section 3(1)), except as set forth on Schedule 6.13(v), (a)
no such plan provides medical or death benefits (whether or not insured)
with respect to current or former employees beyond their termination of
employment or the end of the month of their termination of employment (other
than coverage mandated by law), (b) there are no reserves, assets, surplus
or prepaid premiums under any such plan and (c) MITI and any Commonly
Controlled Entity have materially complied with the requirements of Code
section 4980B.
(vi) With respect to each MITI Benefit Plan that is a multiemployer
plan, (a) Schedule 6.13(vi) indicates the number of employees with respect
to whom MITI or any Commonly Controlled Entity makes contributions to each
such plan and the most recent information available to MITI or any Commonly
Controlled Entity with respect to the withdrawal liability of MITI or such
Commonly Controlled Entity under each such plan, (b) each such plan is not,
as of the date hereof, insolvent or in reorganization, nor does it have an
accumulated funding deficiency, and MITI does not know of any reason why
such plan would become insolvent or in reorganization or have an accumulated
funding deficiency in the foreseeable future, (c) MITI or any Commonly
Controlled Entity has made all contributions to each such plan due or
accrued as of the date hereof and will have made all such contributions as
of the Effective Time and (d) the withdrawal liability with respect to the
Plan if any Commonly Controlled Entity were to withdraw from each such plan
at the Effective Time is less than or equal to $0.
(vii) Except as set forth on Schedule 6.13(vii), the consummation of the
transactions contemplated by this Agreement will not (a) entitle any
individual to severance pay, or (b) accelerate the time of payment, vesting
of benefits (including stock options and restricted stock) or increase the
amount of compensation due to any individual.
6.14 Taxes.
(a) Except as set forth on Schedule 6.14, (i) MITI, each of its United
States subsidiaries and, to MITI's knowledge after due inquiry, each Joint
Venture Entity timely has filed (after giving
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effect to any extensions of the time to file which were obtained) prior to
the date of this Agreement and will file prior to the Effective Time, all
returns required to be filed prior to the date of this Agreement and/or
required to be filed prior to the Effective Time by any of them with respect
to, and has paid (or MITI has paid on its behalf), or has or will set up an
adequate reserve for the payment of, all Taxes required to be paid prior to
the date of this Agreement or the Effective Time, as the case may be, and
the most recent financial statements of MITI reflect an adequate reserve for
all Taxes payable by MITI and its United States subsidiaries and each Joint
Venture Entity, to the extent that a reserve for taxes of Joint Venture
Entities is reflected in the "loss for equity investment" line appearing in
MITI's statements of operations referred to in Section 6.8 of this Agreement
accrued through the date of such financial statements and (ii) no
deficiencies for any Taxes have been proposed, asserted or assessed against
MITI, any of its United States subsidiaries or any Joint Venture Entity
other than those which are being contested in good faith and by proper
proceedings by MITI, except in the case of clauses (i) and (ii) above, any
of the foregoing which do not and will not have a MITI Material Adverse
Effect.
(b) None of the Federal income tax returns of MITI or its subsidiaries
have been examined by the IRS, and the statute of limitations with respect
to each of the years subject to such federal income tax returns has not
expired.
(c) Except as set forth on Schedule 6.14, none of MITI or any United
States subsidiary of MITI, or to MITI's knowledge any Operating Joint
Venture Entity or any group of which MITI or any subsidiary of MITI is now
or ever was a member, has filed or entered into any election, consent or
extension agreement that extends any applicable statute of limitations or
the time within which a return must be filed which statute of limitations
has not expired or return has not been timely filed.
(d) Except as set forth on Schedule 6.14, (i) none of MITI, any United
States subsidiary of MITI, any Operating Joint Venture Entity or, to MITI's
knowledge, any group of which MITI or any United States subsidiary of MITI
is now or ever was a member, is a party to any action or proceeding pending
or, to MITI's knowledge, threatened by any governmental authority for
assessment or collection of Taxes, (ii) no unresolved claim for assessment
or collection of Taxes has, to MITI's knowledge, been asserted, (iii) no
audit or investigation by any governmental authority is pending or, to
MITI's knowledge, threatened and (iv) no such matters are under discussion
with any governmental authority which, in the case of clauses (i-iv), could
have a MITI Material Adverse Effect.
6.15 Liabilities. Except (i) as set forth on Schedule 6.15 or (ii) as
reflected in the financial statements referred to in Section 6.8, and in the
case of (i) and (ii) above, as does not and will not have a MITI Material
Adverse Effect, MITI, its United States subsidiaries and the Joint Venture
Entities do not have any Liabilities, whether or not of a kind required by
generally accepted accounting principles to be set forth in a financial
statement, other than Liabilities incurred since December 31, 1994 in the
ordinary course of business. Except as set forth on Schedule 6.15 or reflected
in the financial statements referred to in Section 6.8, MITI, its United States
subsidiaries and the Joint Venture Entities do not have (i) material obligations
in respect of borrowed money, (ii) material obligations evidenced by bonds,
debentures, notes or other similar instruments, (iii) material obligations which
would be required by generally accepted accounting principles to be classified
as "capital leases," (iv) material obligations to pay the deferred purchase
price of property or services, except trade accounts payable arising in the
ordinary course of business and payable not more than twelve (12) months from
the date of incurrence, and (v) any guaranties of any material obligations of
any other person.
6.16 Environmental Protection. Except as disclosed on Schedule 6.16:
(i) Neither MITI nor any of its subsidiaries is or has been in violation
in any material respect of any applicable Safety and Environmental Law.
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(ii) MITI and its subsidiaries have all Permits required pursuant to
Safety and Environmental Laws that are material to the conduct of the
business of MITI or any of its subsidiaries, all such Permits are in full
force and effect, no action or proceeding to revoke, limit or modify any of
such Permits is pending, and MITI and each of its subsidiaries is in
compliance in all material respects with all terms and conditions thereof.
(iii) Neither MITI nor any of its subsidiaries has received, or expects
to receive due to the consummation of the MITI Merger, any material
Environmental Claim.
(iv) To MITI's knowledge, MITI and its subsidiaries have filed all
notices required under Safety and Environmental Laws indicating the past or
present Release, generation, treatment, storage or disposal of Hazardous
Substances.
(v) Neither MITI nor any of its subsidiaries has entered into any
written agreement with any Governmental Body or any other person by which
MITI or any of its subsidiaries has assumed responsibility, either directly
or as a guarantor or surety, for the remediation of any condition arising
from or relating to a Release or threatened Release of Hazardous Substances
into the Environment.
(vi) To MITI's knowledge, there is not now and has not been at any time
in the past a Release or threatened Release of Hazardous Substances into the
Environment for which MITI or any of its subsidiaries may be directly or
indirectly responsible.
(vii) To MITI's knowledge, there is not now and has not been at any time
in the past at, on or in any of the real properties owned, leased or
operated by MITI or any of its subsidiaries, and, to MITI's knowledge, was
not at, on or in any real property previously owned, leased or operated by
MITI or any of its subsidiaries or any predecessor: (A) any generation, use,
handling, Release, treatment, recycling, storage or disposal of any
Hazardous Substances, (B) any underground storage tank, surface impoundment,
lagoon or other containment facility (past or present) for the temporary or
permanent storage, treatment or disposal of Hazardous Substances, (C) any
landfill or solid waste disposal area, (D) any asbestos-containing material
in a condition requiring abatement, (E) any polychlorinated biphenyls (PCBs)
used in hydraulic oils, electrical transformers or other equipment, (F) any
Release or threatened Release, or any visible signs of Releases or
threatened Releases, of a Hazardous Substance to the Environment in form or
quantity requiring Remedial Action under Safety and Environmental Laws, or
(G) any Hazardous Substances present at such property, excepting such
quantities as are handled in accordance with all applicable manufacturer's
instructions and Safety and Environmental Laws and in proper storage
containers, and as are necessary for the operations of MITI and its
subsidiaries.
(viii) To MITI's knowledge, there is no basis or reasonably anticipated
basis for any material Environmental Claim or material Environmental
Compliance Costs.
(ix) Neither MITI nor any of its subsidiaries have transported, stored,
treated or disposed, nor have they allowed or arranged for any third persons
to transport, store, treat or dispose, any Hazardous Substance to or at: (a)
any location other than a site lawfully permitted to receive such substances
for such purposes, or (b) any location designated for Remedial Action
pursuant to Safety and Environmental Laws; nor have they performed, arranged
for or allowed by any method or procedure such transportation or disposal in
contravention of any Safety and Environmental Laws or in any other manner
which may result in Environmental Compliance Costs or in an Environmental
Claim. All locations at which MITI or any of its subsidiaries have disposed
of any Hazardous Substance are listed on Schedule 6.16(ix).
6.17 Intellectual Property. Schedule 6.17 sets forth a list of all of
MITI's, its United States subsidiaries' and the Joint Venture Entities'
registered patents, registered trademarks, registered service marks, registered
trade names, registered copyrights and franchises, all applications for any of
the
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foregoing and all permits, grants and licenses or other rights running to or
from MITI, any of its United States subsidiaries and the Joint Venture Entities
relating to any of the foregoing that are material to the business of MITI, its
United States subsidiaries and the Joint Venture Entities taken as a whole.
Except as set forth on Schedule 6.17, to MITI's knowledge (i) MITI, one of its
United States subsidiaries or one of the Joint Venture Entities owns, or is
licensed to, or otherwise has, the right to use all registered patents,
registered trademarks, registered service marks, registered trade names,
registered copyrights and franchises set forth on Schedule 6.17, (ii) MITI's
rights in the property set forth on such list are free and clear of any liens or
other encumbrances and MITI, its United States subsidiaries and the Joint
Venture Entities have not received written notice of any adversely-held patent,
invention, trademark, service mark or trade name of any other person, or notice
of any charge or claim of any person relating to such intellectual property or
any process or confidential information of MITI, its United States subsidiaries,
the Joint Venture Entities and MITI does not know of any basis for any such
charge or claim, and (iii) MITI, its United States subsidiaries, the Joint
Venture Entities and their respective predecessors, if any, have not conducted
business at any time during the period beginning five years prior to the date
hereof under any corporate or partnership, trade or fictitious name other than
their current corporate or partnership name, except in the case of clauses (i),
(ii) and (iii) above, any of the foregoing which do not and will not have a MITI
Material Adverse Effect.
6.18 Real Estate.
(a) Neither MITI nor any of its United States subsidiaries owns any real
property and to MITI's knowledge, none of the Joint Venture Entities owns
any real property.
(b) Schedule 6.18(b) sets forth a true, correct and complete schedule of
all material leases, subleases, licenses or other agreements under which
MITI, any of its United States subsidiaries or any Operating Joint Venture
Entity uses or occupies, or has the right to use or occupy, now or in the
future, any real property or improvements thereon (the "MITI Real Property
Leases"). Except for the matters listed on Schedule 6.18(b), to MITI's
knowledge, MITI or an Operating Joint Venture Entity holds the leasehold
estate under and interest in each MITI Real Property Lease free and clear of
all material liens, encumbrances and other rights of occupancy. All MITI
Real Property Leases are valid and binding on the lessors thereunder in
accordance with their respective terms and to MITI's knowledge, there is not
under any such MITI Real Property Leases any existing default, or any
condition, event or act which with notice or lapse of time or both would
constitute such a default, which in either case, considered individually or
in the aggregate with all such other MITI Real Property Leases under which
there is such a default, condition, event or act, does not or will not have
a MITI Material Adverse Effect.
6.19 Contracts. Schedule 6.19 sets forth each Contract to which MITI, its
United States subsidiaries or any Joint Venture Entity or their respective
assets or properties are bound or subject. Except as set forth on Schedule 6.19,
all such Contracts are valid and binding and are in full force and effect and
enforceable in accordance with their respective terms. Except as set forth in
Schedule 6.19, (i) no approval or consent of, or notice to, any person is needed
in order to ensure that any Contract shall continue in full force and effect in
accordance with its terms without penalty, acceleration or right of early
termination following the consummation of the transactions contemplated by this
Agreement and (ii)MITI, its United States subsidiaries or any Joint Venture
Entity is not in violation or breach of, or in default under, any Contract; nor,
to MITI's knowledge, is any other party in violation or breach of, or in default
under, any Contract, except in the case of clauses (i) and (ii) above, any of
the foregoing which do not and will not have a MITI Material Adverse Effect.
6.20 Litigation. Except as set forth in Schedule 6.20, there are no claims,
actions or proceedings (and, to MITI's knowledge, no investigations) pending by
or against, or to MITI's knowledge, threatened against MITI, any of its United
States subsidiaries or any Joint Venture Entity or any properties or rights of
MITI, any of its United States subsidiaries or any Joint Venture Entity, before
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any court or any administrative, governmental or regulatory authority or body
which have or will have a MITI Material Adverse Effect.
6.21 Records. The respective minute books of MITI, each of its United States
subsidiaries and the Joint Venture Entities made available to each of Actava,
Orion and Sterling contain materially accurate and complete records of all
material corporate actions of the respective stockholder and directors (and any
committees thereof).
6.22 Title to and Condition of Personal Property. MITI, each of its United
States subsidiaries and the Operating Joint Venture Entities have good and
marketable title to the material personal property reflected in its or their
financial statements or currently used in the operation of their businesses
(other than leased property), and such property is free and clear of all liens,
claims, charges, security interests, options, or other title defects or
encumbrances, except for those which would not have a MITI Material Adverse
Effect. All such personal property is in good operating condition and repair,
ordinary wear and tear excepted, is suitable for the use to which the same is
customarily put, is free from defects and is merchantable and is of a quality
and quantity presently usable in the ordinary course of the operation of the
business of MITI, its United States subsidiaries and the Operating Joint Venture
Entities, other than such matters as would not have a MITI Material Adverse
Effect.
6.23 No Adverse Actions. There is no existing, pending or, to MITI's
knowledge, threatened termination, cancellation, modification or change in the
business relationship of MITI, any of its United States subsidiaries or any
Operating Joint Venture Entity, with any supplier, customer or other person or
entity except those which do not and will not have a MITI Material Adverse
Effect. To MITI's knowledge, none of MITI, any United States subsidiary of MITI
or any Operating Joint Venture Entity or any stockholder, director, officer,
agent, employee or other person associated with or acting on behalf of any of
the foregoing has used any corporate funds for unlawful contributions, payments,
gifts, entertainment or other unlawful expenses relating to political activity,
or made any direct or indirect unlawful payments to governmental or regulatory
officials.
6.24 Labor Matters.
(a) Except as set forth on Schedule 6.24(a), none of MITI, any of its
United States subsidiaries nor any of the Joint Venture Entities has any
material obligations, contingent or otherwise, under any employment or
consulting agreement (except if and as set forth in the schedules hereto),
collective bargaining agreement or other contract with a labor union or
other labor or employee group. There are no efforts presently being made or,
to MITI's knowledge, threatened by or on behalf of any labor union with
respect to employees of MITI, any United States subsidiary of MITI or any of
the Joint Venture Entities. No unfair labor practice complaint against MITI
is pending or, to MITI's knowledge, threatened before the National Labor
Relations Board; there is no labor strike, dispute, slowdown or stoppage
pending or, to MITI's knowledge, threatened against or involving MITI, any
United States subsidiary of MITI or any of the Joint Venture Entities; no
collective bargaining representation question exists respecting the
employees of MITI, any United States subsidiary of MITI or any of the Joint
Venture Entities; no grievance or internal or informal complaint exists
under any collective bargaining agreement, no arbitration proceeding arising
out of or under any collective bargaining agreement is pending and no claim
therefor has been asserted; no collective bargaining agreement is currently
being negotiated by MITI, any United States subsidiary of MITI or any of the
Joint Venture Entities; and none of MITI, any United States subsidiary of
MITI or any of the Joint Venture Entities has experienced any labor
difficulty, except as to each of the foregoing, any matter which would not
have a MITI Material Adverse Effect.
(b) In the last three years, neither MITI nor any of its United States
subsidiaries has effectuated, nor will MITI or any of its United States
subsidiaries at any time before the Effective Time, effectuate (i) a "plant
closing" (as defined in the WARN Act) affecting any site of
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employment or one or more facilities or operating units within any site of
employment or facility of MITI or its subsidiaries; or (ii) a "mass layoff"
(as defined in the WARN Act) affecting any site of employment or facility of
MITI or its subsidiaries; nor has MITI or its United States subsidiaries
been affected by any transaction or engaged in layoffs or employment
terminations sufficient in number to trigger application of any similar
state or local law.
(c) Except as set forth on Schedule 6.24(c), MITI and all of its United
States subsidiaries are in compliance with all federal and state laws
respecting immigration, employment and employment practices, fair labor
practices, family and medical leave, terms and conditions of employment
(including nondiscrimination in race, age, sex, religion, disability, etc.)
and wages and hours except to the extent the failure to comply would not
have a MITI Material Adverse Effect.
6.25 Investment Company Act. MITI and each of its United States subsidiaries
either (a) is not an "investment company," or a company "controlled" by, or an
"affiliated company" with respect to, an "investment company," within the
meaning of the Investment Company Act or (b) satisfies all conditions for an
exemption from the Investment Company Act, and, accordingly, neither MITI nor
any of its United States subsidiaries is required to be registered under the
Investment Company Act.
6.26 Insurance. Except as set forth on Schedule 6.26, none of MITI, any
United States subsidiary of MITI nor any Joint Venture Entity has received
notice of default under, or intended cancellation or nonrenewal of, any material
policies of insurance which insure the properties, business or liability of
MITI, any United States subsidiary of MITI or any Joint Venture Entity, except
any of the foregoing as do not and will not have a MITI Material Adverse Effect.
6.27 Products. (a) Except (i) as set forth on Schedule 6.27(a) and (ii) as
does not and will not have an MITI Material Adverse Effect, there are no product
liability claims against or involving MITI, any of its United States
subsidiaries or any Joint Venture Entity or any product manufactured, marketed
or distributed at any time by MITI, any of its United States subsidiaries or any
Joint Venture Entity ("MITI Products") and no such claims have been settled,
adjudicated or otherwise disposed of since December 31, 1994.
(b) Except (i) as set forth on Schedule 6.27(b) and (ii) as does not and
will not have an MITI Material Adverse Effect, there are no statements,
citations or decisions by any Governmental Body specifically stating that any
MITI Product is defective or unsafe or fails to meet any standards promulgated
by any such Governmental Body. Except (i) as set forth on Schedule 6.27(b) and
(ii) as does not and will not have a MITI Material Adverse Effect, there have
been no recalls ordered by any such Governmental Body with respect to any MITI
Product. Except (i) as set forth on Schedule 6.27(b) and (ii) as does not and
will not have a MITI Material Adverse Effect, to MITI's knowledge, there is no
(A) fact relating to any MITI Product that may impose upon MITI or any of its
subsidiaries or any of the Joint Venture Entities a duty to recall any MITI
Product or a duty to warn customers of a defect in any MITI Product, (B) latent
or overt design, manufacturing or other defect in any MITI Product or (C)
material liability for warranty claims or returns with respect to any MITI
Product not fully reflected on MITI's financial statements referred to in
Section 6.8 hereof.
ARTICLE 6A
FURTHER REPRESENTATIONS AND
WARRANTIES OF MITI
MITI represents and warrants to each of Actava, Orion and Sterling that from
and after April 12, 1995 until the date hereof, MITI has performed and complied
with in all material respects its obligations, agreements and covenants under
the Initial Merger Agreement which were required to be performed or complied
with by it at or prior to the date hereof.
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ARTICLE 7
COVENANTS OF ACTAVA
Actava covenants and agrees that from and after the execution and delivery
of this Agreement to the Effective Time:
7.1 Conduct of Business of Actava. Except as expressly contemplated by this
Agreement, Actava shall, and it shall cause its subsidiaries to, conduct its and
their businesses in the ordinary course and consistent with past practice, and
Actava shall, and it shall cause its subsidiaries to, use its best efforts to
preserve intact its business organization, to keep available the services of its
officers and employees and to maintain satisfactory relationships with all
persons with which it does business. Without limiting the generality of the
foregoing, and except as otherwise expressly provided in this Agreement, prior
to the Effective Time, neither Actava nor any or its subsidiaries will, without
the prior written consent of Orion, Sterling and MITI:
(i) except as contemplated by this Agreement, amend or propose to amend
its Certificate of Incorporation or By-laws (or comparable governing
instruments);
(ii) authorize for issuance, issue, grant, sell, pledge, dispose of or
propose to issue, grant, sell, pledge or dispose of any shares of, or any
options, warrants, commitments, subscriptions or rights of any kind to
acquire any shares of, the capital stock of Actava or any securities
convertible into or exchangeable for shares of stock of any class of Actava
or any of its subsidiaries except for the issuance of shares of Common Stock
pursuant to the exercise of stock options or warrants or the conversion of
convertible securities described on Schedule 3.2(a) and outstanding on the
date hereof in accordance with their present terms;
(iii) split, combine, subdivide or reclassify any shares of its capital
stock or, except as contemplated by this Agreement and the Contribution
Agreement, issue or authorize the issuance of other securities in respect
of, in lieu of or in substitution for shares of its capital stock or
declare, pay or set aside any dividend or other distribution (whether in
cash, stock or property or any combination thereof) in respect of its
capital stock, or redeem, purchase or otherwise acquire or offer to acquire
any shares of its own capital stock or any of its subsidiaries or any other
securities thereof or any rights, warrants or options to acquire any such
shares or other securities;
(iv) (a) except for (I) indebtedness under the Finance and Security
Agreement, dated as of October 23, 1992 between ITT Commercial Finance Corp.
and Actava, as amended from time to time, (II) indebtedness (including
obligations in respect of capital leases) to be used to finance the
operations of Actava's Snapper Power Equipment Company division not in
excess of $10,000,000 and (III) other indebtedness (including obligations in
respect of capital leases) not in excess of $1,000,000, create, incur or
assume any short-term debt, long-term debt or obligations in respect of
capital leases; (b) assume, guarantee, endorse or otherwise become liable or
responsible (whether directly, indirectly, contingently or otherwise) for
the obligations of any other person except wholly-owned subsidiaries of
Actava, in the ordinary course of business consistent with past practice;
(c) make any capital expenditures or make any loans, advances or capital
contributions to, or investments in, any other person (other than customary
travel or business advances to employees, representatives, consultants,
directors or advisors or subsidiaries made in the ordinary course of
business consistent with past practice and currently committed, budgeted
capital expenditures and additional capital expenditures for use in the
operations of Actava's Snapper Power Equipment Company division not in
excess of $5,000,000); or (d) incur any material liability or obligation
(absolute, accrued, contingent or otherwise) other than in the ordinary and
usual course of business and consistent with past practice;
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(v) except in the ordinary course of business consistent with past
practice or as may be required by local law, sell, transfer, mortgage, or
otherwise dispose of, or encumber, or agree to sell, transfer, mortgage or
otherwise dispose of or encumber, any material assets or properties, real,
personal or mixed;
(vi) increase in any manner the compensation of any of its officers,
except in the ordinary course of business consistent with past practice; or
(vii) agree, commit or arrange to do any of the foregoing.
Notwithstanding the foregoing, nothing in this Agreement shall preclude
Actava from taking any or all of the following actions and actions incident
thereto or require the consent of Orion, Sterling and MITI with respect thereto:
(a) in accordance with and as required by the terms of the 6 1/2%
Convertible Debentures of Actava (the "Actava Convertible Debentures"), the
issuance of Common Stock upon the conversion by the holders thereof of the
Actava Convertible Debentures into Common Stock;
(b) grants of options having an exercise price at least equal to the
market price on the grant date of the underlying Common Stock to employees,
representatives, consultants, advisors or directors of Actava or its
subsidiaries pursuant to plans in effect on the date of this Agreement, and
consistent with past practice or issuances of shares pursuant to
authorization of the Actava Board of Directors of up to 280,000 shares of
Common Stock to advisors or consultants in return for the performance of
services for Actava, where Actava's obligation to any such advisors or
consultants is not in excess of the fair market value of the Common Stock
being issued in respect of such obligation for the performance of services;
(c) declaration and payment of dividends and other distributions to
Actava by its subsidiaries;
(d) draws and payments under and pursuant to the existing Actava credit
facility or facilities listed on Schedule 7.1;
(e) entering into severance, termination or retention agreements, and
terminating any employment agreements, with its officers and key employees
in the ordinary course of business and in accordance with past practice;
(f) payment of mandatory sinking fund payments under Actava indentures
existing on the date hereof; and
(g) ministerial amendments to the Certificate or Articles of
Incorporation or By-laws of Actava's subsidiaries not inconsistent with the
terms of this Agreement.
7.2 Notification of Certain Matters. Actava shall give prompt written notice
to Orion, Sterling and MITI specifying in reasonable detail: (i) any notice of,
or other communication relating to, a default or event which, with notice or
lapse of time or both, would become a default under any agreement, indenture or
instrument material to the business, assets, property, condition (financial or
otherwise) or the results of operations of Actava and its subsidiaries, taken as
a whole, to which Actava or any of its subsidiaries is a party or is subject;
(ii) any material notice or other communication from any third party alleging
that the consent of such third party is or may be required in connection with
the transactions contemplated by this Agreement including the Mergers; (iii) any
material notice or other communication from any regulatory authority (including
the SEC or the NYSE in connection with the transactions contemplated by this
Agreement; (iv) any event which has an Actava Material Adverse Effect or the
occurrence of an event which, so far as reasonably can be foreseen at the time
of its occurrence, would result in an Actava Material Adverse Effect; (v) any
claims, actions, proceedings or investigations commenced or, to Actava's
knowledge, threatened, involving or affecting Actava or any of
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its subsidiaries or any of its property or assets, or, to Actava's knowledge,
any employee, consultant, director or officer, in his or her capacity as such,
of Actava or any of its subsidiaries which, if pending on the date hereof, would
have been required to have been disclosed in a Schedule pursuant to this
Agreement or which relates to the consummation of the Mergers; and (vi) any
event or action which if known on the date hereof (a) would have caused a
representation or warranty set forth in Article 3 hereof to be untrue or
incomplete or incorrect in any material respect or (b) would have been required
to have been disclosed in a Schedule pursuant to this Agreement.
7.3 Access and Information.
(i) Actava will give each of Orion, Sterling and MITI and their
respective authorized representatives (including in each case their
financial advisors, accountants and legal counsel) at all reasonable times
and on reasonable advance notice access to all plants, offices, warehouses
and other facilities and to all contracts, agreements, commitments, books
and records (including tax returns) of it and its subsidiaries (except to
the extent any such agreements or contracts by their terms restrict access
to third parties and the consent of the other party(ies) thereto cannot be
obtained after reasonable efforts to do so), will permit Orion, Sterling or
MITI, as the case may be, to make such inspections as it may require and
will cause its officers and those of its subsidiaries promptly to furnish
Orion, Sterling or MITI, as the case may be, with (a) such financial and
operating data and other information with respect to the business and
properties of Actava and its subsidiaries as Orion, Sterling or MITI may
from time to time request, and (b) a copy of each report, schedule and other
document filed or received by Actava or any of its subsidiaries pursuant to
the requirements of federal or state securities laws or of the NYSE.
(ii) Each of Orion, Sterling and MITI will hold and will each cause its
respective affiliates, employees, representatives, consultants and advisors
to hold in strict confidence, unless compelled to disclose by judicial or
administrative process, or, in the opinion of its counsel, by other
requirements of law, all documents and information concerning the other
party hereto and its subsidiaries and affiliates furnished to Orion,
Sterling or MITI in connection with the transactions contemplated by this
Agreement (except to the extent that such information can be shown to have
been (a) previously known by Orion, Sterling or MITI, as the case may be, or
any affiliate of either of them, (b) in the public domain through no fault
of any of Orion, Sterling or MITI, as the case may be, or any of their
affiliates, employees, representatives, consultants or advisors or (c) later
lawfully acquired from other sources unless any of Orion, Sterling or MITI,
as the case may be, knew such information was obtained in violation of an
agreement of confidentiality) and will not release or disclose such
information to any other person, except its auditors, attorneys, financial
advisors, and other consultants and advisors and lending institutions
(including banks) in connection with this Agreement (it being understood
that such persons shall be informed by Orion, Sterling or MITI, as the case
may be, of the confidential nature of such information and shall be directed
by Orion, Sterling or MITI, as the case may be, to treat such information
confidentially). If the transactions contemplated by this Agreement are not
consummated, such confidence shall be maintained except to the extent such
information comes into the public domain under judicial or administrative
process or other requirements of law or through no fault of any of Orion,
Sterling or MITI, as the case may be, or any of their affiliates, employees,
representatives, consultants or advisors and, if requested by Actava, each
of Orion, Sterling and MITI, as the case may be, will promptly destroy or
return to Actava all copies of written information furnished by Actava or
its respective affiliates, agents, representatives or advisors and all
copies thereof and excerpts therefrom. If Orion, Sterling or MITI shall be
required to make disclosure of any such information by operation of law,
Orion, Sterling or MITI, as the case may be, shall give Actava prior written
notice of the making of such disclosure and shall use all reasonable efforts
to afford Actava an opportunity to contest the making of such disclosures.
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7.4 Stockholder Approval. As soon as practicable, Actava will take all steps
necessary to duly call, give notice of, convene and hold a meeting of its
stockholders (including filing with the SEC and mailing to its stockholders the
Proxy Statement) for the purpose of adopting and approving this Agreement and
the Mergers and for such other purposes as may be necessary or desirable in
connection with effectuating the transactions contemplated hereby and thereby.
Subject to the compliance by Orion, Sterling and MITI with the material terms
and conditions of this Agreement, the Board of Directors of Actava, subject to
applicable law and the fiduciary duties of loyalty and care, (i) will not change
its recommendation to the stockholders of Actava that they adopt and approve
this Agreement and the Mergers and (ii) will use its best efforts to obtain any
necessary approval by its stockholders of the transactions contemplated hereby.
7.5 Benefit Plans. Except as otherwise provided in this Agreement, no award
or grant of Actava securities under any of Actava's stock option plans or any
other benefit plan or program shall be made without the consent of Orion,
Sterling and MITI; nor shall Actava take any action or permit any action to be
taken to accelerate the vesting of any options or other restricted securities
previously granted pursuant to any stock option plans or other benefit plan.
Actava shall not make any material amendment to any (i) stock option plan or
options outstanding thereunder, (ii) any other option or warrant agreement or
other stock-based benefit plan, or (iii) the terms of any other security
convertible into or exchangeable for Common Stock without the consent of Orion,
Sterling and MITI.
7.6 No Inconsistent Activities. Subject to applicable law and the fiduciary
duties of loyalty and care of the Actava Board of Directors, Actava will not,
and will direct its officers, directors and other representatives (including,
without limitation, any financial advisor, attorney or accountant retained by
Actava) not to, directly or indirectly, solicit, encourage, or participate in
any way in discussions or negotiations with, or provide any information, data or
assistance to, any third party (other than Orion, Sterling and MITI) concerning
any acquisition of shares of capital stock of Actava or all or any significant
portion of the total assets of Actava or any material subsidiary or division of
Actava (in either case whether by merger, consolidation, purchase of assets,
tender offer or otherwise). Actava will promptly communicate to Orion, Sterling
and MITI in writing the terms of any proposal or contact it may receive in
respect of any such transaction. Actava agrees not to release any third party
from any confidentiality or standstill agreements to which Actava or any of its
subsidiaries is a party.
7.7 SEC and Stockholder Filings. Actava shall send to Orion, Sterling and
MITI copies of all public reports and materials as and when it sends the same to
its stockholders or the SEC.
7.8 Consents, Waivers, Authorizations, etc. Actava will use its best efforts
to obtain all consents, waivers, authorizations, orders and approvals of and
make all filings and registrations with, any governmental commission, board or
other regulatory body or any nongovernmental third party, required for, or in
connection with, the performance by it of this Agreement and the consummation by
it of the transactions contemplated hereby, or as may be required in order not
to accelerate, violate, breach or terminate any agreement to which Actava or any
of its subsidiaries may be subject, if the failure to obtain or make such
consent, waiver, authorization, order, approval, filing or registration would
have an Actava Material Adverse Effect. Actava will cooperate fully with each of
Orion, Sterling and MITI in assisting it to obtain such consents,
authorizations, orders and approvals. Actava will not take any action which
could reasonably be anticipated to have the effect of delaying, impairing or
impeding the receipt of any required approvals, regulatory or otherwise.
7.9 Roadmaster Approval of the Mergers. Actava shall use best efforts and
will cause its officers and directors to use best efforts to have the Board of
Directors of Roadmaster approve the Mergers in the manner provided in Section
203 of the DGCL.
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7.10 Related Agreements. Actava covenants and agrees that it will comply
with the terms and provisions of the Contribution Agreement and the Registration
Rights Agreement, dated as of the date hereof (the "Registration Rights
Agreement"), between the Metromedia Holders and certain of their affiliates and
Actava, substantially in the form of the copies attached hereto as Exhibits C-1
and C-2, respectively, including, without limitation, in the case of the
Registration Rights Agreement, using its best efforts to file with and have
declared effective by the SEC a Rule 415 Registration Statement on Form S-3
registering the shares of Common Stock owned by the Metromedia Holders and their
affiliates (the "Shelf Registration Statement").
7.11 Indemnification. From and after the Effective Time, Actava shall not
take any action nor permit any action to be taken which would have the effect of
eliminating or impairing the rights of current or former officers and directors
of Actava, Orion, Sterling or MITI, prior to the Effective Time, to be
indemnified by the Orion Merger Surviving Corporation, the Surviving Corporation
or the MITI Merger Surviving Corporation, as the case may be, for any actions
taken by such officers or directors in such capacities so long as such
indemnification would have been available to such parties at such time in
accordance with the respective By-laws and certificates of incorporation of
Actava, Orion, Sterling or MITI, as the case may be, and applicable law.
ARTICLE 8
COVENANTS OF ORION
Orion covenants and agrees that from and after the execution and delivery of
this Agreement to the Effective Time:
8.1 Conduct of Business of Orion. Except as expressly contemplated by this
Agreement, Orion shall, and it shall cause its subsidiaries to, conduct its and
their businesses in the ordinary course and consistent with past practice, and
Orion shall, and it shall cause its subsidiaries to, use its best efforts to
preserve intact its business organization, to keep available the services of its
officers and employees and to maintain satisfactory relationships with all
persons with which it does business. Without limiting the generality of the
foregoing, and except as otherwise expressly provided in this Agreement, prior
to the Effective Time, neither Orion nor any or its subsidiaries will, without
the prior written consent of Actava, Sterling and MITI:
(i) amend or propose to amend its Certificate of Incorporation or
By-laws (or comparable governing instruments);
(ii) authorize for issuance, issue, grant, sell, pledge, dispose of or
propose to issue, grant, sell, pledge or dispose of any shares of, or any
options, warrants, commitments, subscriptions or rights of any kind to
acquire any shares of, the capital stock of Orion or any securities
convertible into or exchangeable for shares of stock of any class of Orion
or any of its subsidiaries except for the issuance of shares of Orion Common
Stock pursuant to the exercise of stock options or warrants or the
conversion of convertible securities described on Schedule 4.2(a) and
outstanding on the date hereof in accordance with their present terms;
(iii) split, combine, subdivide or reclassify any shares of its capital
stock or issue or authorize the issuance of any other securities in respect
of, in lieu of or in substitution for shares of its capital stock or
declare, pay or set aside any dividend or other distribution (whether in
cash, stock or property or any combination thereof) in respect of its
capital stock, or redeem, purchase or otherwise acquire or offer to acquire
any shares of its own capital stock or any of its subsidiaries or any other
securities thereof or any rights, warrants or options to acquire any such
shares or other securities;
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(iv) (a) except for debt (including obligations in respect of capital
leases) not in excess of $3,000,000 or indebtedness which is non-recourse to
Orion and its Restricted Subsidiaries (as defined in Section 15.9), create,
incur or assume any short-term debt, long-term debt or obligations in
respect of capital leases; (b) assume, guarantee, endorse or otherwise
become liable or responsible (whether directly, indirectly, contingently or
otherwise) for the obligations of any other person except wholly-owned
subsidiaries of Orion, in the ordinary course of business consistent with
past practice; (c) make any capital expenditures or make any loans, advances
or capital contributions to, or investments in, any other person (other than
customary travel or business advances to employees, representatives,
consultants, directors or advisors or subsidiaries made in the ordinary
course of business consistent with past practice and currently committed,
budgeted capital expenditures and additional capital expenditures not in
excess of $1,000,000); or (d) incur any material liability or obligation
(absolute, accrued, contingent or otherwise) other than in the ordinary and
usual course of business and consistent with past practice;
(v) except in the ordinary course of business consistent with past
practice or as may be required by local law, sell, transfer, mortgage, or
otherwise dispose of, or encumber, or agree to sell, transfer, mortgage or
otherwise dispose of or encumber, any material assets or properties, real,
personal or mixed;
(vi) increase in any manner the compensation of any of its officers,
except in the ordinary course of business consistent with past practice; or
(vii) agree, commit or arrange to do any of the foregoing.
Notwithstanding the foregoing, nothing in this Agreement shall preclude
Orion from taking any or all of the following actions and actions incident
thereto or require the consent of Actava, Sterling and MITI with respect
thereto:
(a) declaration and payment of dividends and other distributions to
Orion by its subsidiaries;
(b) draws and payments under and pursuant to the existing Orion credit
facility or facilities or the other indebtedness listed on Schedule 8.1;
(c) entering into severance, termination or retention agreements, and
terminating any employment agreements, with its officers and key employees
in the ordinary course of business and in accordance with past practice;
(d) making payments in accordance with the terms of the Orion Pictures
Corporation Incentive Bonus Plan or the termination thereof; and
(e) ministerial amendments to the Certificate or Articles of
Incorporation or By-laws of Orion's subsidiaries not inconsistent with the
terms of this Agreement.
8.2 Notification of Certain Matters. Orion shall give prompt written notice
to Actava, Sterling and MITI specifying in reasonable detail: (i) any notice of,
or other communication relating to, a default or event which, with notice or
lapse of time or both, would become a default under any agreement, indenture or
instrument material to the business, assets, property, condition (financial or
otherwise) or the results of operations of Orion and its subsidiaries, taken as
a whole, to which Orion or any of its subsidiaries is a party or is subject;
(ii) any material notice or other communication from any third party alleging
that the consent of such third party is or may be required in connection with
the transactions contemplated by this Agreement including the Mergers; (iii) any
material notice or other communication from any regulatory authority (including
the SEC or the National Association of Securities Dealers (the "NASD") in
connection with the transactions contemplated by this Agreement; (iv) any event
which has an Orion Material Adverse Effect or the occurrence of an event which,
so far as
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reasonably can be foreseen at the time of its occurrence, would result in an
Orion Material Adverse Effect; (v) any claims, actions, proceedings or
investigations commenced or, to Orion's knowledge, threatened, involving or
affecting Orion or any of its subsidiaries or any of its property or assets, or,
to Orion's knowledge, any employee, consultant, director or officer, in his or
her capacity as such, of Orion or any of its subsidiaries which, if pending on
the date hereof, would have been required to have been disclosed in a Schedule
pursuant to this Agreement or which relates to the consummation of the Orion
Merger; and (vi) any event or action which if known on the date hereof (a) would
have caused a representation or warranty set forth in Article 4 hereof to be
untrue or incomplete or incorrect in any material respect or (b) would have been
required to have been disclosed on a Schedule pursuant to this Agreement.
8.3 Access and Information.
(i) Orion will give each of Actava, Sterling and MITI and their
respective authorized representatives (including in each case their
financial advisors, accountants and legal counsel) at all reasonable times
and on reasonable advance notice access to all plants, offices, warehouses
and other facilities and to all contracts, agreements, commitments, books
and records (including tax returns) of it and its subsidiaries (except to
the extent any such agreements or contracts by their terms restrict access
to third parties and the consent of the other party(ies) thereto cannot be
obtained after reasonable efforts to do so), will permit Actava, Sterling or
MITI, as the case may be, to make such inspections as it may require and
will cause its officers and those of its subsidiaries promptly to furnish
Actava, Sterling or MITI, as the case may be, with (a) such financial and
operating data and other information with respect to the business and
properties of Orion and its subsidiaries as Actava, Sterling or MITI may
from time to time request, and (b) a copy of each report, schedule and other
document filed or received by Orion, or any of its subsidiaries pursuant to
the requirements of federal or state securities laws or of the NASD.
(ii) Each of Actava, Sterling and MITI will hold and will each cause its
respective affiliates, employees, representatives, consultants and advisors
to hold in strict confidence, unless compelled to disclose by judicial or
administrative process, or, in the opinion of its counsel, by other
requirements of law, all documents and information concerning the other
party hereto and its subsidiaries and affiliates furnished to Actava,
Sterling or MITI in connection with the transactions contemplated by this
Agreement (except to the extent that such information can be shown to have
been (a) previously known by Actava, Sterling or MITI, as the case may be,
or any affiliate of either of them, (b) in the public domain through no
fault of any of Actava, Sterling or MITI, as the case may be, or any of
their affiliates, employees, representatives, consultants or advisors or (c)
later lawfully acquired from other sources unless any of Actava, Sterling or
MITI, as the case may be, knew such information was obtained in violation of
an agreement of confidentiality) and will not release or disclose such
information to any other person, except its auditors, attorneys, financial
advisors, and other consultants and advisors and lending institutions
(including banks) in connection with this Agreement (it being understood
that such persons shall be informed by Actava, Sterling or MITI, as the case
may be, of the confidential nature of such information and shall be directed
by Actava, Sterling or MITI, as the case may be, to treat such information
confidentially). If the transactions contemplated by this Agreement are not
consummated, such confidence shall be maintained except to the extent such
information comes into the public domain under judicial or administrative
process or other requirements of law or through no fault of any of Actava,
Sterling or MITI, as the case may be, or any of their affiliates, employees,
representatives, consultants or advisors and, if requested by Orion, each of
Actava, Sterling and MITI, as the case may be, will promptly destroy or
return to Actava all copies of written information furnished by Orion or its
respective affiliates, agents, representatives or advisors and all copies
thereof and excerpts therefrom. If Actava, Sterling or MITI shall be
required to make disclosure of any such information by operation of law,
Actava, Sterling or MITI, as the case may be, shall give Orion
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prior written notice of the making of such disclosure and shall use all
reasonable efforts to afford Orion an opportunity to contest the making of
such disclosures.
8.4 Stockholder Approval. As soon as practicable, Orion will take all steps
necessary to duly call, give notice of, convene and hold a meeting of its
stockholders (including filing with the SEC and mailing to its stockholders the
Proxy Statement) for the purpose of adopting and approving this Agreement and
the Orion Merger and for such other purposes as may be necessary or desirable in
connection with effectuating the transactions contemplated hereby. Subject to
the compliance by Actava, Sterling and MITI with the material terms and
conditions of this Agreement, the Board of Directors of Orion, subject to
applicable law and the fiduciary duties of loyalty and care, (i) will not change
its recommendation to the stockholders of Orion that they adopt and approve this
Agreement and the Orion Merger and (ii) will use its best efforts to obtain any
necessary approval by its stockholders of the transactions contemplated hereby.
8.5 Benefit Plans. Except as otherwise provided in this Agreement, no award
or grant under any of Orion's stock option plans or any other benefit plan or
program shall be made without the consent of Actava, Sterling and MITI; nor
shall Orion take any action or permit any action to be taken to accelerate the
vesting of any options or other restricted securities previously granted
pursuant to any stock option plans or other benefit plan. Orion shall not make
any material amendment to any (i) stock option plan or options outstanding
thereunder, (ii) any other option or warrant agreement or other stock-based
benefit plan, or (iii) the terms of any other security convertible into or
exchangeable for Orion Common Stock without the consent of Actava, Sterling and
MITI.
8.6 No Inconsistent Activities. Subject to applicable law and the fiduciary
duties of loyalty and care of the Orion Board of Directors, Orion will not, and
will direct its officers, directors and other representatives (including,
without limitation, any financial adviser, attorney or accountant retained by
Orion) not to, directly or indirectly, solicit, encourage, or participate in any
way in discussions or negotiations with, or provide any information, data or
assistance to, any third party (other than Actava, Sterling and MITI) concerning
any acquisition of shares of capital stock of Orion or all or any significant
portion of the total assets of Orion or any material subsidiary or division of
Orion (in either case whether by merger, consolidation, purchase of assets,
tender offer or otherwise). Orion will promptly communicate to Actava, Sterling
and MITI in writing the terms of any proposal or contact it may receive in
respect of any such transaction. Orion agrees not to release any third party
from any confidentiality or standstill agreements to which Orion or any of its
subsidiaries is a party.
8.7 SEC and Stockholder Filings. Orion shall send to Actava, Sterling and
MITI copies of all public reports and materials as and when it sends the same to
its stockholders or the SEC.
8.8 Consents, Waivers, Authorizations, etc. Orion will use its best efforts
to obtain all consents, waivers, authorizations, orders and approvals of and
make all filings and registrations with, any governmental commission, board or
other regulatory body or any nongovernmental third party, required for, or in
connection with, the performance by it of this Agreement and the consummation by
it of the transactions contemplated hereby, or as may be required in order not
to accelerate, violate, breach or terminate any agreement to which Orion or any
of its subsidiaries may be subject, if the failure to obtain or make such
consent, waiver, authorization, order, approval, filing or registration would
have an Orion Material Adverse Effect. Orion will cooperate fully with each of
Actava, Sterling and MITI in assisting it to obtain such consents,
authorizations, orders and approvals. Orion will not take any action which could
reasonably be anticipated to have the effect of delaying, impairing or impeding
the receipt of any required approvals, regulatory or otherwise.
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ARTICLE 9
COVENANTS OF STERLING
Sterling covenants and agrees that from and after the execution and delivery
of this Agreement to the Effective Time:
9.1 Conduct of Business of Sterling. Except as expressly contemplated by
this Agreement, Sterling shall, and it shall cause its subsidiaries to, conduct
its and their businesses in the ordinary course and consistent with past
practice, and Sterling shall, and it shall cause its subsidiaries to, use its
best efforts to preserve intact its business organization, to keep available the
services of its officers and employees and to maintain satisfactory
relationships with all persons with which it does business. Without limiting the
generality of the foregoing, and except as otherwise expressly provided in this
Agreement, prior to the Effective Time, neither Sterling nor any or its
subsidiaries will, without the prior written consent of Actava, Orion and MITI:
(i) amend or propose to amend its Certificate of Incorporation or
By-laws (or comparable governing instruments);
(ii) authorize for issuance, issue, grant, sell, pledge, dispose of or
propose to issue, grant, sell, pledge or dispose of any shares of, or any
options, warrants, commitments, subscriptions or rights of any kind to
acquire any shares of, the capital stock of Sterling or any securities
convertible into or exchangeable for shares of stock of any class of
Sterling or any of its subsidiaries except for the issuance of shares of
Sterling Common Stock pursuant to the exercise of stock options or warrants
or the conversion of convertible securities described on Schedule 5.2(a) and
outstanding on the date hereof in accordance with their present terms;
(iii) split, combine, subdivide or reclassify any shares of its capital
stock or issue or authorize the issuance of any other securities in respect,
in lieu of or in substitution for shares of its capital stock or declare,
pay or set aside any dividend or other distribution (whether in cash, stock
or property or any combination thereof) in respect of its capital stock, or
redeem, purchase or otherwise acquire or offer to acquire any shares of its
own capital stock or any of its subsidiaries or any other securities thereof
or any rights, warrants or options to acquire any such shares or other
securities;
(iv) (a) except for debt entered into in connection with the
transactions set forth on Schedule 5.10(v), which require the consent of
Orion pursuant to Section 9.1(v) hereof and debt (including obligations in
respect of capital leases) not in excess of $100,000 create, incur or assume
any short-term debt, long-term debt or obligations in respect of capital
leases; assume, guarantee, endorse or otherwise become liable or responsible
(whether directly, indirectly, contingently or otherwise) for the
obligations of any other person except wholly-owned subsidiaries of
Sterling, in the ordinary course of business consistent with past practice;
(c) make any capital expenditures or make any loans, advances or capital
contributions to, or investments in, any other person (other than customary
travel or business advances to employees, representatives, consultants,
advisors or directors or subsidiaries made in the ordinary course of
business consistent with past practice and currently committed, budgeted
capital expenditures and additional capital expenditures not in excess of
$100,000); or (d) incur any material liability or obligation (absolute,
accrued, contingent or otherwise) other than in the ordinary and usual
course of business and consistent with past practice;
(v) except in the ordinary course of business consistent with past
practice or as may be required by local law, sell, transfer, mortgage, or
otherwise dispose of, or encumber, or agree to sell, transfer, mortgage or
otherwise dispose of, or encumber, any material assets or properties, real,
personal or mixed or enter into any agreements with the Showtime Networks,
Inc. without the prior written consent of Orion;
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(vi) increase in any manner the compensation of any of its officers,
except in the ordinary course of business consistent with past practice; or
(vii) agree, commit or arrange to do any of the foregoing.
Notwithstanding the foregoing, nothing in this Agreement shall preclude
Sterling from taking any or all of the following actions and actions incident
thereto or require the consent of Actava, Orion and MITI with respect thereto:
(a) grants of up to 1,000,000 shares of Sterling Common Stock and cash
payments in an amount not to exceed $650,000 in the aggregate to employees
and consultants of Sterling in accordance with the MCEG Sterling
Incorporated Incentive Bonus Plan;
(b) declaration and payment of dividends and other distributions to
Sterling by its subsidiaries;
(c) draws and payments under and pursuant to the existing Sterling
credit facility or facilities listed on Schedule 9.1;
(d) entering into severance, termination or retention agreements, and
terminating any employment agreements, with its officers and key employees
in the ordinary course of business and in accordance with past practice; and
(e) ministerial amendments to the Certificate or Articles of
Incorporation or By-laws of Sterling's subsidiaries not inconsistent with
the terms of this Agreement.
9.2 Notification of Certain Matters. Sterling shall give prompt written
notice to Actava, Orion and MITI specifying in reasonable detail: (i) any notice
of, or other communication relating to, a default or event which, with notice or
lapse of time or both, would become a default under any agreement, indenture or
instrument material to the business, assets, property, condition (financial or
otherwise) or the results of operations of Sterling and its subsidiaries, taken
as a whole, to which Sterling or any of its subsidiaries is a party or is
subject; (ii) any material notice or other communication from any third party
alleging that the consent of such third party is or may be required in
connection with the transactions contemplated by this Agreement including the
Mergers; (iii) any material notice or other communication from any regulatory
authority (including the SEC or the NASD) in connection with the transactions
contemplated by this Agreement; (iv) any event which has a Sterling Material
Adverse Effect or the occurrence of an event which, so far as reasonably can be
foreseen at the time of its occurrence, would result in a Sterling Material
Adverse Effect; (v) any claims, actions, proceedings or investigations commenced
or, to Sterling's knowledge, threatened, involving or affecting Sterling or any
of its subsidiaries or any of its property or assets, or, to Sterling's
knowledge, any employee, consultant, director or officer, in his or her capacity
as such, of Sterling or any of its subsidiaries which, if pending on the date
hereof, would have been required to have been disclosed in a Schedule pursuant
to this Agreement or which relates to the consummation of the Sterling Merger;
and (vi) any event or action which if known on the date hereof (a) would have
caused a representation or warranty set forth in Article 5 hereof to be untrue
or incomplete or incorrect in any material respect or (b) would have been
required to have been disclosed in a Schedule pursuant to this Agreement.
9.3 Access and Information.
(i) Sterling will give each of Actava, Orion and MITI and their
respective authorized representatives (including in each case their
financial advisors, accountants and legal counsel) at all reasonable times
and on reasonable advance notice access to all plants, offices, warehouses
and other facilities and to all contracts, agreements, commitments, books
and records (including tax returns) of it and its subsidiaries (except to
the extent any such agreements or contracts by their terms restrict access
to third parties and the consent of the other party(ies) thereto cannot be
obtained after reasonable efforts to do so), will permit Actava, Orion or
MITI, as the case may be,
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to make such inspections as it may require and will cause its officers and
those of its subsidiaries promptly to furnish Actava, Orion or MITI, as the
case may be, with (a) such financial and operating data and other
information with respect to the business and properties of Sterling and its
subsidiaries as Actava, Orion or MITI may from time to time request, and (b)
a copy of each report, schedule and other document filed or received by
Sterling or any of its subsidiaries pursuant to the requirements of federal
or state securities laws.
(ii) Each of Actava, Orion and MITI will hold and will each cause its
respective affiliates, employees, representatives, consultants and advisors
to hold in strict confidence, unless compelled to disclose by judicial or
administrative process, or, in the opinion of its counsel, by other
requirements of law, all documents and information concerning the other
party hereto and its subsidiaries and affiliates furnished to Actava, Orion
or MITI in connection with the transactions contemplated by this Agreement
(except to the extent that such information can be shown to have been (a)
previously known by Actava, Orion or MITI, as the case may be, or any
affiliate of either of them, (b) in the public domain through no fault of
any of Actava, Orion or MITI, as the case may be, or any of their
affiliates, employees, representatives, consultants or advisors or (c) later
lawfully acquired from other sources unless any of Actava, Orion or MITI, as
the case may be, knew such information was obtained in violation of an
agreement of confidentiality) and will not release or disclose such
information to any other person, except its auditors, attorneys, financial
advisors, and other consultants and advisors and lending institutions
(including banks) in connection with this Agreement (it being understood
that such persons shall be informed by Actava, Orion or MITI, as the case
may be, of the confidential nature of such information and shall be directed
by Actava, Orion or MITI, as the case may be, to treat such information
confidentially). If the transactions contemplated by this Agreement are not
consummated, such confidence shall be maintained except to the extent such
information comes into the public domain under judicial or administrative
process or other requirements of law or through no fault of any of Actava,
Orion or MITI, as the case may be, or any of their affiliates, employees,
representatives, consultants or advisors and, if requested by Sterling, each
of Actava, Orion or MITI, as the case may be, will promptly destroy or
return to Sterling all copies of written information furnished by Sterling
or its respective affiliates, agents, representatives or advisors and all
copies thereof and excerpts therefrom. If Actava, Orion or MITI shall be
required to make disclosure of any such information by operation of law,
Actava, Orion and MITI, as the case may be, shall give Sterling prior
written notice of the making of such disclosure and shall use all reasonable
efforts to afford Sterling an opportunity to contest the making of such
disclosures.
9.4 Stockholder Approval. As soon as practicable, Sterling will take all
steps necessary to duly call, give notice of, convene and hold a meeting of its
stockholders (including filing with the SEC and mailing to its stockholders the
Proxy Statement) for the purpose of adopting and approving this Agreement and
the Sterling Merger and for such other purposes as may be necessary or desirable
in connection with effectuating the transactions contemplated hereby. Subject to
the compliance by Actava, Orion and MITI with the material terms and conditions
of this Agreement, the Board of Directors of Sterling, subject to applicable law
and the fiduciary duties of loyalty and care (and also subject to the
understanding that members of the Sterling Board of Directors who serve as
voting trustees of the Sterling Voting Trust, shall not be required as a result
of this Agreement to take any actions contrary to their fiduciary duties in
their capacities as trustees), (i) will not change its recommendation to the
stockholders of Sterling that they adopt and approve this Agreement and the
Sterling Merger and (ii) will use its best efforts to obtain any necessary
approval by its stockholders of the transactions contemplated hereby.
9.5 Benefit Plans. Except as otherwise provided in this Agreement, no award
or grant under any of Sterling's stock option plans or any other benefit plan or
program shall be made without the consent of Actava, Orion and MITI; nor shall
Sterling take any action or permit any action to be taken to accelerate the
vesting of any options or other restricted securities previously granted
pursuant to any
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stock option plans or other benefit plan. Sterling shall not make any material
amendment to any (i) stock option plan or options outstanding thereunder, (ii)
any other option or warrant agreement or other stock-based benefit plan, or
(iii) the terms of any other security convertible into or exchangeable for
Sterling Common Stock without the consent of Actava, Orion and MITI.
9.6 No Inconsistent Activities. Subject to applicable law and the fiduciary
duties of loyalty and care of the Sterling Board of Directors, Sterling will
not, and will direct its officers, directors and other representatives
(including, without limitation, any financial advisor, attorney or accountant
retained by Sterling) not to, directly or indirectly, solicit, encourage, or
participate in any way in discussions or negotiations with, or provide any
information, data or assistance to, any third party (other than Actava, Orion,
and MITI) concerning any acquisition of shares of capital stock of Sterling or
all or any significant portion of the total assets of Sterling or any material
subsidiary or division of Sterling (in either case whether by merger,
consolidation, purchase of assets, tender offer or otherwise). Sterling will
promptly communicate to Actava, Orion and MITI in writing the terms of any
proposal or contact it may receive in respect of any such transaction. Sterling
agrees not to release any third party from any confidentiality or standstill
agreements to which Sterling or any of its subsidiaries is a party.
9.7 SEC and Stockholder Filings. Sterling shall send to Actava, Orion and
MITI copies of all public reports and materials as and when it sends the same to
its stockholders or the SEC.
9.8 Consents, Waivers, Authorizations, etc. Sterling will use its best
efforts to obtain all consents, waivers, authorizations, orders and approvals of
and make all filings and registrations with, any governmental commission, board
or other regulatory body or any nongovernmental third party, required for, or in
connection with, the performance by it of this Agreement and the consummation by
it of the transactions contemplated hereby, or as may be required in order not
to accelerate, violate, breach or terminate any agreement to which Sterling or
any of its subsidiaries may be subject, if the failure to obtain or make such
consent, waiver, authorization, order, approval, filing or registration would
have a Sterling Material Adverse Effect. Sterling will cooperate fully with each
of Actava, Orion and MITI in assisting it to obtain such consents,
authorizations, orders and approvals. Sterling will not take any action which
could reasonably be anticipated to have the effect of delaying, impairing or
impeding the receipt of any required approvals, regulatory or otherwise.
ARTICLE 10
COVENANTS OF MITI
MITI covenants and agrees that from and after the execution and delivery of
this Agreement to the Effective Time:
10.1 Conduct of Business of MITI. Except as expressly contemplated by this
Agreement, MITI shall, and it shall use its best efforts to cause its United
States subsidiaries and Joint Venture Entities to, conduct its and their
businesses in the ordinary course and consistent with past practice (other than
any changes made in connection with the initial audits of the Joint Venture
Entities or changes made in an effort to conduct business operations more
effectively), and MITI shall, and it shall use its best efforts to cause each of
the United States subsidiaries and the Joint Venture Entities to, use its best
efforts to preserve intact its business organization, to keep available the
services of its officers and employees and to maintain, in accordance with past
practice, satisfactory relationships with all persons with which it does
business. Without limiting the generality of the foregoing, and except as
otherwise expressly provided in this Agreement, prior to the Effective Time,
none of MITI, any of its United States subsidiaries nor any Operating Joint
Venture Entity will, without the prior written consent of Actava, Orion and
Sterling:
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(i) amend or propose to amend its Certificate of Incorporation or
By-laws (or comparable governing instruments);
(ii) authorize for issuance, issue, grant, sell, pledge, dispose of or
propose to issue, grant, sell, pledge or dispose of any shares of, or any
options, warrants, commitments, subscriptions or rights of any kind to
acquire any shares of, the capital stock of MITI, any United States
subsidiary or any Operating Joint Venture Entity or any securities
convertible into or exchangeable for shares of stock of any class of MITI,
any of its United States subsidiaries or any Operating Joint Venture Entity
except for (A) the issuance of shares of MITI Common Stock pursuant to the
exercise of stock options or warrants or other rights or the conversion of
convertible securities described on Schedule 6.2(a) and outstanding on the
date hereof in accordance with their present terms or (B) issuances as
contemplated by Schedule 10.1(ii);
(iii) other than as contemplated on Schedules 6.2(a) and 6.2(b), split,
combine, subdivide or reclassify any shares of its capital stock or issue or
authorize the issuance of any other securities in respect of, in lieu of or
in substitution for shares of its capital stock or declare, pay or set aside
any dividend or other distribution (whether in cash, stock or property or
any combination thereof) in respect of its capital stock, or redeem,
purchase or otherwise acquire or offer to acquire any shares of its own
capital stock or any of its United States subsidiaries or any other
securities thereof or any rights, warrants or options to acquire any such
shares or other securities;
(iv) (a) except for (I) indebtedness which is contemplated by the MITI
Budget, (II) indebtedness (including obligations in respect of capital
leases) not in excess of $10,000,000 or (III) indebtedness owed or
guaranteed by MITI and its United States subsidiaries to the Overseas
Private Investment Corporation (the "OPIC Loan"), create, incur or assume
any short-term debt, long-term debt or obligations in respect of capital
leases; (b) assume, guarantee, endorse or otherwise become liable or
responsible (whether directly, indirectly, contingently or otherwise) for
the obligations of any other person except direct or indirect wholly-owned
subsidiaries of MITI or the Joint Venture Entities, in the ordinary course
of business consistent with past practice; (c) make any capital expenditures
or make any loans, advances or capital contributions to, or investments in,
any other person (other than (I) customary travel or business advances to
employees, directors, representatives, consultants or advisors or
subsidiaries made in the ordinary course of business consistent with past
practice, (II) loans, advances, capital contributions to or investments in
foreign entities in accordance with currently committed, budgeted capital
expenditures and (III) additional capital expenditures not in excess of
$10,000,000) or (d) incur any material liability or obligation (absolute,
accrued, contingent or otherwise) other than in the ordinary and usual
course of business and consistent with past practice;
(v) except in the ordinary course of business consistent with past
practice, as may be required by local law or except for liens and other
security interests granted by MITI and its United States subsidiaries to
secure the OPIC Loan or in connection with the incurrence of any
indebtedness by MITI which is permitted by the preceding clause (iv) hereof,
sell, transfer, mortgage, or otherwise dispose of, or encumber, or agree to
sell, transfer, mortgage or otherwise dispose of or encumber, any material
assets or properties, real, personal or mixed;
(vi) increase in any manner the compensation of any of its officers in
excess of $100,000, except in the ordinary course of business consistent
with past practice; or
(vii) agree, commit or arrange to do any of the foregoing.
Notwithstanding the foregoing, nothing in this Agreement shall preclude
MITI, any of its United States subsidiaries or any Operating Joint Venture
Entity from taking any or all of the following actions and actions incident
thereto or require the consent of Actava, Orion and Sterling with respect
thereto:
(a) grants of options to acquire up to 107,000 shares of MITI Common
Stock (subject to adjustment in accordance with the MITI 1994 Stock Option
Plan) to officers, directors, employees
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and consultants of MITI in accordance with the MITI 1994 Stock Option Plan
and grants of options having an exercise price at least equal to the market
price on the grant date of the underlying MITI Common Stock to employees,
directors, representatives, consultants or advisors of MITI or its United
States subsidiaries pursuant to plans in effect on the date of this
Agreement, as the same may be amended to increase the number of shares
available thereunder, and consistent with past practice;
(b) declaration and payment of dividends and other distributions to MITI
or its subsidiaries by their respective subsidiaries or any of the Joint
Venture Entities;
(c) draws under and pursuant to the existing MITI credit facility or
facilities listed on Schedule 10.1;
(d) entering into severance, termination or retention agreements, and
terminating any employment agreements, with its officers and key employees
in the ordinary course of business and in accordance with past practice;
(e) ministerial amendments to the Certificate or Articles of
Incorporation or By-laws of MITI's United States subsidiaries not
inconsistent with the terms of this Agreement; and
(f) amendments, modifications or restatements of the Certificate or
Articles of Incorporation or By-laws (or comparable governing instruments
and charter documents) of the Joint Venture Entities, so long as any of the
above would not have a MITI Material Adverse Effect.
10.2 Notification of Certain Matters. MITI shall give prompt written notice
to Actava, Orion and Sterling specifying in reasonable detail: (i) any notice
of, or other communication relating to, a default or event which, with notice or
lapse of time or both, would become a default under any agreement, indenture or
instrument material to the business, assets, property, condition (financial or
otherwise) or the results of operations of MITI, its United States subsidiaries
or any Joint Venture Entity, taken as a whole, to which MITI, any of its United
States subsidiaries or any Joint Venture Entity is a party or is subject; (ii)
any material notice or other communication from any third party alleging that
the consent of such third party is or may be required in connection with the
transactions contemplated by this Agreement including the Mergers; (iii) any
material notice or other communication from any regulatory authority in
connection with the transactions contemplated by this Agreement; (iv) any event
which has a MITI Material Adverse Effect, or the occurrence of an event which,
so far as reasonably can be foreseen at the time of its occurrence, would result
in any MITI Material Adverse Effect; (v) any claims, actions, proceedings or
investigations commenced or, to MITI's knowledge, threatened, involving or
affecting MITI, any of its United States subsidiaries or any Joint Venture
Entity or any of their respective property or assets, or, to MITI's knowledge,
any employee, consultant, director or officer, in his or her capacity as such,
of MITI or any of its subsidiaries which, if pending on the date hereof, would
have been required to have been disclosed in a Schedule pursuant to this
Agreement or which relates to the consummation of the MITI Merger; and (vi) any
event or action which if known on the date hereof (a) would have caused a
representation or warranty set forth in Article 6 hereof to be untrue or
incomplete or incorrect in any material respect or (b) would have been required
to have been disclosed in a Schedule pursuant to this Agreement.
10.3 Access and Information.
(i) MITI will give each of Actava, Orion and Sterling and their
respective authorized representatives (including in each case their
financial advisors, accountants and legal counsel) at all reasonable times
and on reasonable advance notice access to all plants, offices, warehouses
and other facilities and to all contracts, agreements, commitments, books
and records (including tax returns) of it and its subsidiaries (except to
the extent any such agreements or contracts by their terms restrict access
to third parties and the consent of the other party(ies) thereto cannot be
obtained after reasonable efforts to do so), will permit Actava, Orion or
Sterling, as the case may
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be, to make such inspections as it may require and will cause its officers
and those of its United States subsidiaries and will use its best efforts to
cause representatives of the Joint Venture Entities promptly to furnish
Actava, Orion or Sterling, as the case may be, with such financial and
operating data and other information with respect to the business and
properties of MITI, its United States subsidiaries and its Joint Venture
Entities as Actava, Orion, or Sterling may from time to time request.
(ii) Each of Actava, Orion and Sterling will hold and will each cause
its respective affiliates, employees, representatives, consultants and
advisors to hold in strict confidence, unless compelled to disclose by
judicial or administrative process, or, in the opinion of its counsel, by
other requirements of law, all documents and information concerning the
other party hereto and its subsidiaries and affiliates furnished to Actava,
Orion or Sterling in connection with the transactions contemplated by this
Agreement (except to the extent that such information can be shown to have
been (a) previously known by Actava, Orion or Sterling, as the case may be,
or any affiliate of either of them, (b) in the public domain through no
fault of any of Actava, Orion or Sterling, as the case may be, or any of
their affiliates, employees, representatives, consultants or advisors or (c)
later lawfully acquired from other sources unless any of Actava, Orion or
Sterling, as the case may be, knew such information was obtained in
violation of an agreement of confidentiality) and will not release or
disclose such information to any other person, except its auditors,
attorneys, financial advisors, and other consultants and advisors and
lending institutions (including banks) in connection with this Agreement (it
being understood that such persons shall be informed by Actava, Orion or
Sterling, as the case may be, of the confidential nature of such information
and shall be directed by Actava, Orion or Sterling, as the case may be, to
treat such information confidentially). If the transactions contemplated by
this Agreement are not consummated, such confidence shall be maintained
except to the extent such information comes into the public domain under
judicial or administrative process or other requirements of law or through
no fault of any of Actava, Orion or Sterling, as the case may be, or any of
their affiliates, employees, representatives, consultants or advisors and,
if requested by MITI, each of Actava, Orion and Sterling, as the case may
be, will promptly destroy or return to MITI all copies of written
information furnished by MITI or its respective affiliates, agents,
representatives or advisors and all copies thereof and excerpts therefrom.
If Actava, Orion or Sterling shall be required to make disclosure of any
such information by operation of law, Actava, Orion or Sterling, as the case
may be, shall give MITI prior written notice of the making of such
disclosure and shall use all reasonable efforts to afford MITI an
opportunity to contest the making of such disclosures.
10.4 Stockholder Approval. As soon as practicable, MITI will take all steps
necessary to duly call, give notice of, convene and hold a meeting of its
stockholders for the purpose of adopting and approving this Agreement and the
MITI Merger and for such other purposes as may be necessary or desirable in
connection with effectuating the transactions contemplated hereby unless MITI's
stockholders, in lieu of such a meeting, have acted by written consent pursuant
to the provisions of Section 228 of the DGCL, with respect to the foregoing in
which case MITI will have no obligation hereunder to convene and hold a meeting
of its stockholders. Subject to the compliance by Actava, Orion and Sterling
with the material terms and conditions of this Agreement, the Board of Directors
of MITI, subject to applicable law and the fiduciary duties of loyalty and care,
(i) will not change its recommendation to the stockholders of MITI that they
adopt and approve this Agreement and (ii) will use its best efforts to obtain
any necessary approval by its stockholders of the transactions contemplated
hereby.
10.5 Benefit Plans. Except as otherwise provided in this Agreement, no award
or grant under any of MITI's stock option plans or any other benefit plan or
program shall be made without the consent of Actava, Orion and Sterling; nor
shall MITI take any action or permit any action to be taken to accelerate the
vesting of any options or other restricted securities previously granted
pursuant to any stock option plans or other benefit plan. MITI shall not make
any material amendment to any (i) stock option plan or options outstanding
thereunder, (ii) any other option or warrant agreement or other
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stock-based benefit plan, or (iii) the terms of any other security convertible
into or exchangeable for MITI Common Stock without the consent of Actava, Orion
and Sterling.
10.6 No Inconsistent Activities. Subject to applicable law and the fiduciary
duties of loyalty and care of the MITI Board of Directors, MITI will not, and
will direct its officers, directors and other representatives (including,
without limitation, any financial advisor, attorney or accountant retained by
MITI) not to, directly or indirectly, solicit, encourage, or participate in any
way in discussions or negotiations with, or provide any information, data or
assistance to, any third party (other than Actava, Orion and Sterling)
concerning any acquisition of shares of capital stock of MITI or all or any
significant portion of the total assets of MITI or any material subsidiary or
division of MITI (in either case whether by merger, consolidation, purchase of
assets, tender offer or otherwise). MITI will promptly communicate to Actava,
Orion and Sterling in writing the terms of any proposal or contact it may
receive in respect of any such transaction. MITI agrees not to release any third
party from any confidentiality or standstill agreements to which MITI or any of
its subsidiaries is a party.
10.7 Stockholder Communications. MITI shall send or make available to
Actava, Orion and Sterling copies of all reports and materials sent by MITI to
all of its stockholders as and when it sends the same to its stockholders.
10.8 Consents, Waivers, Authorizations, etc. MITI will use its best efforts
to obtain all consents, waivers, authorizations, orders and approvals of and
make all filings and registrations with, any governmental commission, board or
other regulatory body or any nongovernmental third party, required for, or in
connection with, the performance by it of this Agreement and the consummation by
it of the transactions contemplated hereby, or as may be required in order not
to accelerate, violate, breach or terminate any agreement to which MITI or any
of its subsidiaries may be subject, if the failure to obtain or make such
consent, waiver, authorization, order, approval, filing or registration would
have a MITI Material Adverse Effect. MITI will cooperate fully with each of
Actava, Orion and Sterling in assisting it to obtain such consents,
authorizations, orders and approvals. MITI will not take any action which could
reasonably be anticipated to have the effect of delaying, impairing or impeding
the receipt of any required approvals, regulatory or otherwise.
ARTICLE 11
COVENANTS OF EACH OF ACTAVA, OPC MERGERCO,
MITI MERGERCO, ORION, STERLING AND MITI
11.1 Further Assurances. Subject to the terms and conditions herein
provided, each of Actava, OPC Mergerco, MITI Mergerco, Orion, Sterling and MITI
agrees to use its best efforts to take, or cause to be taken, all actions, and
to do, or cause to be done, all things reasonably necessary, proper or advisable
to consummate and make effective as promptly as practicable the transactions
contemplated by this Agreement, including (i) the defending of any lawsuits or
other legal proceedings, whether judicial or administrative, challenging this
Agreement or the consummation of the transactions contemplated hereby, (ii)
obtaining all governmental consents required for the consummation of the Mergers
and the transactions contemplated thereby, and (iii) making and causing their
stockholders, as applicable, to timely make all necessary filings under the HSR
Act. Upon the terms and subject to the conditions hereof, each of Actava, OPC
Mergerco, MITI Mergerco, Orion, Sterling and MITI agrees to use any and all best
efforts to take, or cause to be taken, all actions and to do, or cause to be
done, all things reasonably necessary to satisfy the other conditions of the
closing set forth herein. Each Merging Party will consult with counsel for the
other Merging Parties as to, and will permit such counsel to participate in, at
such other Merging Party's expense, any lawsuits or proceedings referred to in
clause (i) above brought against any Merging Party or Merging Parties but not
against any or all of the other Merging Parties. In case at any time after the
Effective Time any further action is necessary or desirable to carry out the
purposes of this Agreement, the officers and directors of the Surviving
Corporation shall take all such necessary action.
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11.2 Public Announcements. So long as this Agreement is in effect, each of
Actava, Orion, Sterling and MITI shall not, and shall cause their affiliates not
to, issue or cause the publication of any press release or any other
announcement with respect to the Mergers or the transactions contemplated by
this Agreement without the written consent of the other Merging Parties, except
where such release or announcement is required by applicable law or pursuant to
any listing agreement with, or the rules or regulations of the SEC or NYSE or
NASD or other national securities exchange in which case each of Actava, Orion,
Sterling and MITI will deliver simultaneously a copy of such release or
announcement to the other Merging Parties.
11.3 Exchange Act and Securities Act Compliance. In consummating the Mergers
and the transactions contemplated hereby, each Merging Party shall comply in all
material respects with the provisions of the Exchange Act and the Securities Act
and the rules and regulations thereunder.
11.4 Surviving Corporation Board of Directors.
(i) Subject to the proviso contained in Section 1.5.2 hereof, it is the
intention of the Merging Parties that the Surviving Corporation will obtain
the necessary director and/or stockholder approvals to fix, as of the
Effective Time, the number of directors constituting a full Board of
Directors of the Surviving Corporation at ten and to elect initially as
directors of the Surviving Corporation six individuals designated prior to
the Effective Time by the then Board of Directors of Orion and four
individuals designated prior to the Effective Time by the then Board of
Directors of Actava. Subject to the proviso contained in Section 1.5.2
hereof, each of the Merging Parties agrees to use its best efforts to
establish such a Board of Directors of the Surviving Corporation.
(ii) In the event that (a) at the Effective Time, Triton designates one
member of the Surviving Corporation's Board of Directors as provided in the
proviso contained in Section 1.5.2, and (b)(x) prior to the time that the
Surviving Corporation's Board of Directors nominates directors for election
at the first annual meeting of stockholders of the Surviving Corporation
next following the end of the Surviving Corporation's fiscal year ending
December 31, 1995, Triton loses or waives its right to designate one member
of the Surviving Corporation's Board of Directors and (y) the person
designated at the Effective Time by Triton to the Surviving Corporation's
Board of Directors resigns from the Surviving Corporation's Board of
Directors, then if the conditions set forth in clauses (a) and (b) above are
satisfied, each of Actava, Orion, MITI and Sterling agrees to use its best
efforts to cause the Board of Directors of the Surviving Corporation,
consistent with their fiduciary duties and applicable law, to increase the
size of the Board of Directors of the Surviving Corporation to ten persons
and to fill the two vacancies in the Surviving Corporation's Board of
Directors with the two persons listed on Schedule 1.5.2(b) under the caption
"Actava's Designees to the Surviving Corporation's Board of Directors," who,
pursuant to Section 1.5.2 hereof, were designated by Actava to serve on the
Surviving Corporation's Board of Directors but were unable to serve because
Triton did not waive its rights under the Triton Stockholder Agreement, each
of whom shall hold office until their respective successors are duly elected
or appointed and qualified in the manner provided in the Certificate of
Incorporation and By-laws of the Surviving Corporation.
(iii) Each of Actava, Orion, MITI and Sterling agrees to use its best
efforts to cause the Board of Directors of the Surviving Corporation to
adopt, consistent with its fiduciary duties and applicable law, a
stockholder rights plan or "poison pill," with such terms and conditions as
the Surviving Corporation's Board of Directors determines.
11.5 Listing of the Common Stock. Each of the Merging Parties shall use its
best efforts to take, or cause to be taken, all action, and to do, or cause to
be done, all things reasonably necessary, proper or advisable to cause the
Common Stock to be authorized for listing on the NYSE or the American Stock
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Exchange Inc. ("AMEX") or to be quoted on the National Market System of the
National Association of Securities Dealers, Inc. Automatic Quotations System
("NMS/NASDAQ").
11.6 Labor Matters. Each of the Merging Parties agrees to deliver to each of
the other Merging Parties any written communications which implicate the WARN
Act and relate to the transactions contemplated by this Agreement provided to
the employees of the Merging Parties during the period from the date hereof
until the Effective Time, understanding (a) that one or more of the Merging
Parties may be required by the WARN Act to give notices to some of its employees
of their imminent termination, (b) that one or more of the Merging Parties may
be required by applicable law to communicate with some of its employees
regarding their impending termination of employment and matters connected
therewith, and (c) that all of the Merging Parties have an interest in any
written communications made to their respective employees concerning the matters
contemplated by this Agreement.
11.7 Refinancing of Indebtedness. Each of the Merging Parties agrees to use
its best efforts and to take all necessary steps and actions to facilitate the
refinancing by Orion and Actava of the Orion Senior Indebtedness (as defined in
Section 15.9) and the Orion Subordinated Indebtedness (as defined in Section
15.9).
ARTICLE 12
CONDITIONS
12.1 Conditions to Each Merging Party's Obligations. The respective
obligations of each Merging Party to effect the Merger or Mergers to which it is
a party shall be subject to the fulfillment at or prior to the Effective Time of
the following conditions:
12.1.1 Stockholder Approval.
(i) This Agreement and the Orion Merger shall have been adopted at or
prior to the Effective Time by the requisite vote of the stockholders of
Actava and Orion in accordance with applicable law;
(ii) This Agreement and the Sterling Merger shall have been adopted at
or prior to the Effective Time by the requisite vote of the stockholders of
Actava and Sterling in accordance with applicable law; and
(iii) This Agreement and the MITI Merger shall have been adopted at or
prior to the Effective Time by the requisite vote of the stockholders of
Actava and MITI in accordance with applicable law and the terms of that
certain Stockholders Agreement, dated as of August 15, 1994, among MITI and
its stockholders (the "MITI Stockholders Agreement").
12.1.2 Consummation of the Mergers. Each of the Mergers shall have been
concurrently consummated.
12.1.3 No Injunction. No order, statute, rule, regulation, executive
order, stay, decree, judgment or injunction shall have been enacted,
entered, promulgated or enforced by any court or governmental authority
which prohibits or prevents the consummation of any of the Mergers and which
has not been stayed or vacated by the Effective Time. Actava, Orion,
Sterling and MITI shall use their best efforts and shall cooperate with each
other to have any such order, statute, rule, regulation, executive order,
stay, decree, judgment or injunction vacated or stayed.
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12.1.4 HSR Act. Any waiting period applicable to each of the Mergers
under the HSR Act shall have expired or earlier termination thereof shall
have been granted.
12.1.5 Required Consents. Any required consents or approvals of any
person to the Mergers or the transactions contemplated hereby shall have
been obtained and be in full force and effect, except for those the failure
of which to obtain will not have a material adverse effect on the business,
assets, properties, prospects, condition (financial or otherwise) or the
results of operations of the Surviving Corporation and its subsidiaries
taken as a whole.
12.1.6 Effective Form S-4. The Form S-4 shall have been declared
effective by the SEC and no stop order suspending the effectiveness of the
Form S-4 shall have been issued and no proceeding for that purpose shall
have been initiated or threatened by the SEC.
12.1.7 Appraisal Rights. There shall not have been either (i) Sterling
Dissenting Shares in excess of 25% of the Sterling Common Stock entitled to
vote at the meeting of Sterling stockholders held to vote on this Agreement
and the transactions contemplated hereby or (ii) MITI Dissenting Shares in
excess of 25% of the MITI Common Stock entitled to vote at the meeting, if
any, of MITI stockholders, or the action taken by consent pursuant to the
provisions of Section 228 of the DGCL held or undertaken to vote on this
Agreement and the transactions contemplated hereby.
12.2 Conditions to Obligations of Actava. The obligation of Actava to effect
the Mergers shall be subject to the fulfillment at or prior to the Effective
Time of the following additional conditions, any one or more of which may be
waived by Actava:
12.2.1 Obligations Performed. Each of Orion, Sterling and MITI shall
have performed and complied with in all material respects its obligations,
agreements and covenants under this Agreement which are required to be
performed or complied with by it at or prior to the Effective Time.
12.2.2 Representations and Warranties. As of the Effective Time as if
made as of the Effective Time, each of the representations and warranties
contained in (i) Article 4 or Article 4A of this Agreement which are
modified by "materiality" or an "Orion Material Adverse Effect" (an "Orion
Modified Representation"), (ii) Article 5 or Article 5A of this Agreement
which are modified by "materiality" or a "Sterling Material Adverse Effect"
(a "Sterling Modified Representation") and (iii) Article 6 or Article 6A of
this Agreement which are modified by "materiality" or a "MITI Material
Adverse Effect" (a "MITI Modified Representation") shall be true and correct
in all respects and each representation and warranty contained in (x)
Article 4 or Article 4A which is not so modified (an "Orion Non-Modified
Representation"), (y) Article 5 or Article 5A which is not so modified (a
"Sterling Non-Modified Representation") and (z) Article 6 or Article 6A
which is not so modified (a "MITI Non-Modified Representation") shall be
true and correct in all material respects (except in each case for such
changes that are caused by Orion's, Sterling's or MITI's compliance, as the
case may be, with the terms of this Agreement or are contemplated hereby).
12.2.3 Certificates Delivered. Each of Orion, Sterling and MITI shall
have delivered to Actava a certificate executed on its behalf by its
President or another authorized executive officer in their corporate
capacity to the effect that the conditions set forth in subsections 12.2.1
and 12.2.2 as such conditions apply to such officer's company have been
satisfied.
12.2.4 No Material Adverse Change. There shall not have occurred since
April 12, 1995 any material adverse change in the business, assets,
prospects, condition (financial or otherwise) and the results of operations
of any of (i) Orion and its subsidiaries, taken as a whole, (ii) Sterling
and
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its consolidated subsidiaries, taken as a whole or (iii) MITI, its United
States subsidiaries and Operating Joint Venture Entities, taken as a whole
(except in each such case for such changes that are caused by compliance
with the terms of this Agreement and are contemplated hereby).
12.2.5 Actava Stock Price. The Average Closing Price shall not be less
than $8.25 (subject to appropriate upward or downward adjustment in the
event of a stock split, stock dividend or recapitalization or other similar
event applicable to shares of Common Stock prior to the Determination Date).
12.2.6 Opinions of Counsel. Actava shall have received an opinion of (i)
Paul, Weiss, Rifkind, Wharton and Garrison, counsel to Orion, substantially
in the form of Exhibit D hereto (the "Paul Weiss Opinion"), (ii) Robinson
Brog Leinwand Greene Genovese & Gluck, P.C., counsel to Sterling,
substantially in the form of Exhibit E hereto (the "Robinson Brog Opinion")
and (iii) Rubin Baum Levin Constant & Friedman, counsel to MITI,
substantially in the form of Exhibit F hereto (the "Rubin Baum Opinion") and
(iv) an opinion of Long, Aldridge & Norman, counsel to Actava, substantially
to the effect that no gain or loss will be recognized for federal income tax
purposes by the Actava Stockholders as a result of the Mergers.
12.2.7 Fairness Opinion. The opinion of First Boston, dated as of the
date of the Proxy Statement, that as of such date the Orion Exchange Ratio,
the Sterling Exchange Ratio and the MITI Exchange Ratio, taken as a whole,
are fair from a financial point of view to the stockholders of Actava, shall
have not been withdrawn, amended or modified.
12.2.8 Listing. The shares of Common Stock shall have been accepted for
listing on the NYSE or the AMEX or accepted for quotation on the NMS/NASDAQ.
12.2.9 Refinancing of Orion Senior Indebtedness. The Orion Senior
Indebtedness shall have been refinanced on terms reasonably satisfactory to
Actava.
12.2.10 Refinancing of Orion Subordinated Indebtedness. The Orion
Subordinated Indebtedness shall have been refinanced on terms reasonably
satisfactory to Actava.
12.2.11 FIRPTA Certificate. Actava shall have received a certificate of
an executive officer of each of Orion, Sterling and MITI, sworn to under
penalty of perjury, setting forth the name, address and Federal tax
identification number of Orion, Sterling or MITI, as the case may be, and
stating that no interest in Orion, Sterling or MITI, as the case may be,
constitutes a "United States real property interest" within the meaning of
Section 897(c)(1) of the Code. If, on or before the Effective Time, Actava
shall not have received any such certificate, Actava may withhold from the
Common Stock payable at the Effective Time to the stockholders of the
company with respect to which such certificate was not received such amounts
as may be required to be withheld therefrom under Section 1445 of the Code.
12.3 Conditions to Obligations of Orion. The obligations of Orion to effect
the Orion Merger shall be subject to the fulfillment at or prior to the
Effective Time of the following additional conditions, any one or more of which
may be waived by Orion:
12.3.1 Obligations Performed. Each of Actava, OPC Mergerco, MITI
Mergerco, Sterling and MITI shall have performed and complied with in all
material respects its obligations, agreements and covenants under this
Agreement which are required to be performed or complied with by it at or
prior to the Effective Time.
12.3.2 Representations and Warranties. As of the Effective Time as if
made as of the Effective Time, each of (i) the representations and
warranties contained in Article 3, Article 3A or
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Article 3B of this Agreement which are modified by "materiality" or an
"Actava Material Adverse Effect" (an "Actava Modified Representation"), (ii)
the Sterling Modified Representations and (iii) the MITI Modified
Representations shall be true and correct in all respects and each
representation and warranty contained in (x) Article 3, Article 3A or
Article 3B which is not so modified (an "Actava Non-Modified
Representation"), (y) each Sterling Non-Modified Representation and (z) each
MITI Non-Modified Representation shall be true and correct in all material
respects (except in each case for such changes that are caused by Actava's,
Sterling's or MITI's compliance, as the case may be, with the terms of this
Agreement or are contemplated hereby).
12.3.3 Certificate. Each of Actava, Sterling and MITI shall have
delivered to Orion a certificate executed on its behalf by its President or
another duly authorized executive officer in their corporate capacity to the
effect that the conditions set forth in subsections 12.3.1 and 12.3.2 as
such conditions apply to such officer's company have been satisfied.
12.3.4 No Material Adverse Change. There shall not have occurred since
April 12, 1995 any material adverse change in the business, assets,
prospects, condition (financial or otherwise) or the results of operations
of (i) Actava, Roadmaster and their respective subsidiaries, taken as a
whole, (ii) Sterling and its consolidated subsidiaries, taken as a whole or
(iii) MITI, its United States subsidiaries and Operating Joint Venture
Entities, taken as a whole (except, in each such case, for such changes that
are caused by compliance with the terms of this Agreement and are
contemplated hereby).
12.3.5 Opinions of Counsel. Orion shall have received (i) the opinion of
Long, Aldridge & Norman substantially in the form of Exhibit G hereto (the
"Long Aldridge Opinion"), (ii) the Robinson Brog Opinion and (iii) the Rubin
Baum Opinion and (iv) an opinion of Paul, Weiss, Rifkind, Wharton &
Garrison, substantially to the effect that the Orion Merger will be treated
for federal income tax purposes as a reorganization within the meaning of
Section 368(a) of the Code.
12.3.6 Fairness Opinion. The opinion of Alex. Brown, dated as of the
date of the Proxy Statement, that the value of the consideration to be paid
to the stockholders of Orion in the Orion Merger is fair from a financial
point of view to the stockholders of Orion, shall have not been withdrawn,
amended or modified.
12.3.7 Refinancing of Orion Senior Indebtedness. The Orion Senior
Indebtedness shall have been refinanced on terms reasonably satisfactory to
Orion.
12.3.8 Refinancing of Orion Subordinated Indebtedness. The Orion
Subordinated Indebtedness shall have been refinanced on terms reasonably
satisfactory to Orion.
12.3.9 Refinancing of Other Indebtedness. The Other Indebtedness (as
defined in Section 15.9) shall have been refinanced or repaid in full.
12.3.10 Refinancing or Contribution of MetProductions Indebtedness and
MII Indebtedness. The MetProductions Indebtedness and the MII Indebtedness
shall have been refinanced or repaid in full or MetProductions Inc., a
Delaware corporation ("MetProductions"), or Met International, Inc., a
Delaware corporation ("Met International"), shall, at Orion's option,
contribute, assign or convey to the Surviving Corporation the MetProductions
Indebtedness and/or the MII Indebtedness, as the case may be, in exchange
for shares of Common Stock as provided for in the Contribution Agreement.
12.3.11 Ancillary Agreements; Shelf Registration Statement. Orion shall
have received a fully executed copy of the Contribution Agreement and the
Shelf Registration Statement shall have been declared effective by the SEC
and no stop order suspending the effectiveness of the Shelf
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Registration Statement shall have been issued and no proceeding for that
purpose shall have been initiated or threatened by the SEC.
12.4 Conditions to Obligations of Sterling. The obligation of Sterling to
effect the Sterling Merger shall be subject to the fulfillment at or prior to
the Effective Time of the following additional conditions, any one or more of
which may be waived by Sterling:
12.4.1 Obligations Performed. Each of Actava, OPC Mergerco, MITI
Mergerco, Orion and MITI shall have performed and complied with in all
material respects its obligations, agreements and covenants under this
Agreement which are required to be performed or complied with by it at or
prior to the Effective Time.
12.4.2 Representations and Warranties. As of the Effective Time as if
made as of the Effective Time, each of the Actava Modified Representations,
the Orion Modified Representations and the MITI Modified Representations
shall be true and correct in all respects and each Actava Non-Modified
Representation, each Orion Non-Modified Representation and each MITI Non-
Modified Representation shall be true and correct in all material respects
(except in each case for such changes that are caused by Actava's, Orion's
or MITI's compliance, as the case may be, with the terms of this Agreement
or are contemplated hereby).
12.4.3 Certificates Delivered. Each of Actava, Orion and MITI shall have
delivered to Sterling a certificate executed on its behalf by its President
or another authorized executive officer in their corporate capacity to the
effect that the conditions set forth in subsections 12.4.1 and 12.4.2 as
such conditions apply to such officer's company have been satisfied.
12.4.4 No Material Adverse Change. There shall not have occurred since
April 12, 1995 any material adverse change in the business, assets,
prospects, condition (financial or otherwise) or the results of operations
of (i) Actava, Roadmaster or Orion and their respective subsidiaries, taken
as a whole, respectively or (ii) MITI, its United States subsidiaries and
Operating Joint Venture Entities, taken as a whole (except, in each such
case, for such changes that are caused by compliance with the terms of this
Agreement and are contemplated hereby).
12.4.5 Opinions of Counsel. Sterling shall have received the Long
Aldridge Opinion, the Paul Weiss Opinion and the Rubin Baum Opinion and an
opinion of Robinson Brog Leinwand Greene Genovese & Gluck P.C. substantially
to the effect that the Sterling Merger will be treated for federal income
tax purposes as a reorganization within the meaning of Section 368(a) of the
Code.
12.4.6 Fairness Opinion. The opinion of Houlihan Lokey, dated as of the
date of the Proxy Statement, that the value of the consideration to be paid
to the stockholders of Sterling in the Sterling Merger is fair from a
financial point of view to the stockholders of Sterling, shall have not been
withdrawn, amended or modified.
12.5 Conditions to Obligations of MITI. The obligation of MITI to effect the
MITI Merger shall be subject to the fulfillment at or prior to the Effective
Time of the following additional conditions, any one or more of which may be
waived by MITI.
12.5.1 Obligations Performed. Each of Actava, OPC Mergerco, MITI
Mergerco, Orion and Sterling shall have performed and complied with in all
material respects its obligations, agreements and covenants under this
Agreement which are required to be performed or complied with by it at or
prior to the Effective Time.
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12.5.2 Representations and Warranties. As of the Effective Time as if
made as of the Effective Time, each of the Actava Modified Representations,
the Orion Modified Representations and the Sterling Modified Representations
shall be true and correct in all respects and each of the Actava
Non-Modified Representations, the Orion Non-Modified Representations and the
Sterling Non-Modified Representations shall be true and correct in all
material respects (except in each case for such changes that are caused by
Actava's, Orion's or MITI's compliance, as the case may be, with the terms
of this Agreement or are contemplated hereby).
12.5.3 Certificates Delivered. Each of Actava, Orion and Sterling shall
have delivered to MITI a certificate executed on its behalf by its President
or another authorized executive officer in their corporate capacity to the
effect that the conditions set forth in subsections 12.5.1 and 12.5.2 as
such conditions apply to such officer's company have been satisfied.
12.5.4 No Material Adverse Change. There shall not have occurred since
April 12, 1995 any material adverse change in the business, assets,
prospects, condition (financial or otherwise) or the results of operation of
(i) Actava, Roadmaster and their respective subsidiaries, taken as a whole,
(ii) Orion and its respective subsidiaries, taken as a whole or (iii)
Sterling and its consolidated subsidiaries, taken as a whole (except, in
each such case, for such changes that are caused by compliance with the
terms of this Agreement and are contemplated hereby).
12.5.5 Opinions of Counsel. MITI shall have received the Long Aldridge
Opinion, the Paul Weiss Opinion and the Robinson Brog Opinion and an opinion
of Rubin Baum Levin Constant and Friedman, substantially to the effect that
the MITI Merger will be treated for federal income tax purposes as a
reorganization within the meaning of Section 368(a) of the Code.
12.5.6 Fairness Opinion. The opinion of GKMC, dated as of the date of
the Proxy Statement, that the value of the consideration to be paid to the
stockholders of MITI in the MITI Merger is fair from a financial point of
view to the stockholders of MITI, shall not have been amended, withdrawn or
modified.
12.5.7 Listing. The shares of Common Stock shall have been accepted for
listing on the NYSE or the AMEX or accepted for quotation on the NMS/NASDAQ.
ARTICLE 13
CLOSING
13.1 Time and Place. The closing of the Mergers (the "Closing") shall take
place as soon as practicable after each of the conditions set forth in Article
12 have been satisfied or waived by the party or parties entitled to the benefit
of such conditions at 10:00 a.m. at the offices of Paul, Weiss, Rifkind, Wharton
& Garrison, 1285 Avenue of the Americas, New York, New York 10019-6064; or at
such time and place as the Merging Parties mutually agree. The date on which the
Closing actually occurs is herein referred to as the "Closing Date."
13.2 Filing of Certificates of Merger, Etc. At the Closing, (i) Actava, OPC
Mergerco, MITI Mergerco, Orion, Sterling and MITI shall cause the Orion
Certificate of Merger, the Sterling Certificate of Merger and the MITI
Certificate of Merger to be executed and filed with the Secretary of State of
Delaware as provided in the DGCL and (ii) Actava, OPC Mergerco, MITI Mergerco,
Orion, Sterling and MITI shall take any and all other lawful actions and do any
and all other lawful things necessary to cause the Mergers to become effective.
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12.5.7 Listing. The shares of Common Stock shall have been accepted for
listing on the NYSE or the AMEX or accepted for quotation on the NMS/NASDAQ.
ARTICLE 13
CLOSING
13.1 Time and Place. The closing of the Mergers (the "Closing") shall take
place as soon as practicable after each of the conditions set forth in Article
12 have been satisfied or waived by the party or parties entitled to the benefit
of such conditions at 10:00 a.m. at the offices of Paul, Weiss, Rifkind, Wharton
& Garrison, 1285 Avenue of the Americas, New York, New York 10019-6064; or at
such time and place as the Merging Parties mutually agree. The date on which the
Closing actually occurs is herein referred to as the "Closing Date."
13.2 Filing of Certificates of Merger, Etc. At the Closing, (i) Actava, OPC
Mergerco, MITI Mergerco, Orion, Sterling and MITI shall cause the Orion
Certificate of Merger, the Sterling Certificate of Merger and the MITI
Certificate of Merger to be executed and filed with the Secretary of State of
Delaware as provided in the DGCL and (ii) Actava, OPC Mergerco, MITI Mergerco,
Orion, Sterling and MITI shall take any and all other lawful actions and do any
and all other lawful things necessary to cause the Mergers to become effective.
ARTICLE 14
TERMINATION AND ABANDONMENT
14.1 Termination. This Agreement may be terminated and the Mergers
contemplated hereby may be abandoned at any time prior to the Effective Time,
whether before or after approval by the stockholders of Actava, Orion, Sterling
and MITI:
(i) by a majority of the members of each of the Boards of Directors of
Actava, Orion, Sterling and MITI;
(ii) by any of Actava, Orion, Sterling or MITI if the Mergers shall not
have been consummated on or before December 31, 1995 (or such later date as
may be agreed to by Actava, Orion, Sterling or MITI); provided, that, none
of Actava, Orion, Sterling or MITI may terminate this Agreement under this
Section 14.1(ii) if the failure has been caused by such party's material
breach or default of its obligations under this Agreement;
(iii) by Actava, Orion or Sterling if (x) there are any inaccuracies,
misrepresentations or breaches of any MITI Modified Representations, (y)
there are any material inaccuracies, misrepresentations or breaches of any
MITI Non-Modified Representations or (z) MITI has breached or failed to
perform any of its material obligations, covenants or agreements contained
herein as to which written notice has been given to MITI and MITI has failed
to cure or otherwise resolve the same to the reasonable satisfaction of
Actava, Orion and Sterling within 30 days after receipt of such notice;
(iv) by Actava, Orion or MITI if (x) there are any inaccuracies,
misrepresentations or breaches of any Sterling Modified Representations, (y)
there are any material inaccuracies, misrepresentations or breaches of any
Sterling Non-Modified Representations or (z) Sterling has breached or failed
to perform any of its material obligations, covenants or agreements
contained herein as to which written notice has been given to Sterling and
Sterling has failed to cure or
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otherwise resolve the same to the reasonable satisfaction of Actava, Orion
and MITI within 30 days after receipt of such notice;
(v) by Actava, Sterling or MITI if (x) there are any inaccuracies,
misrepresentations or breaches of any Orion Modified Representations, (y)
there are any material inaccuracies, misrepresentations or breaches of any
Orion Non-Modified Representations or (z) Orion has breached or failed to
perform any of its material obligations, covenants or agreements contained
herein as to which written notice has been given to Orion and Orion has
failed to cure or otherwise resolve the same to the reasonable satisfaction
of Actava, Sterling and MITI within 30 days after receipt of such notice;
(vi) by Orion, Sterling or MITI if (x) there are any inaccuracies,
misrepresentations or breaches of any Actava Modified Representations, (y)
there are any material inaccuracies, misrepresentations or breaches of any
Actava Non-Modified Representations or (z) Actava has breached or failed to
perform any of its material obligations, covenants or agreements contained
herein as to which written notice has been given to Actava and Actava has
failed to cure or otherwise resolve the same to the reasonable satisfaction
of Orion, Sterling and MITI within 30 days after receipt of such notice; or
(vii) by Actava, Orion, Sterling or MITI if a court of competent
jurisdiction or other governmental body shall have issued an order, decree
or ruling or taken any other action restraining, enjoining or otherwise
prohibiting any of the Mergers and such order, decree, ruling or other
action shall have become final and nonappealable.
14.2 Procedure and Effect of Termination. In the event of termination and
abandonment of any of the Mergers by Actava, Orion, Sterling or MITI pursuant to
Section 14.1, written notice thereof shall forthwith be given to each of the
other parties hereto and this Agreement shall terminate and the Mergers shall be
abandoned without further action by any of the parties hereto. If this Agreement
is terminated as provided herein no party hereto shall have any liability or
further obligation to any other party under the terms of this Agreement except
for a willful breach, violation or default by any party hereto of any provision
of this Agreement and except as stated in Sections 7.3(ii), 8.3(ii), 9.3(ii),
10.3(ii) and 15.6.
ARTICLE 15
MISCELLANEOUS
15.1 Amendment and Modification. Subject to applicable law, this Agreement
may be amended, modified or supplemented only by a written instrument among
Actava, Orion, Sterling and MITI, at any time prior to the Effective Time with
respect to any of the terms contained herein.
15.2 Waiver of Compliance; Consents. Any failure of any Merging Party to
comply with any obligation, covenant, agreement or condition contained herein
may be waived by the other Merging Parties, only by a written instrument signed
by the Merging Party or Merging Parties granting such waiver, but such waiver
with or failure to insist upon strict compliance with such obligation, covenant,
agreement or condition shall not operate as a waiver of, or estoppel with
respect to, any subsequent or other failure by any Merging Party to comply with
any obligation, agreement or condition contained herein. Whenever this Agreement
requires or permits consent by or on behalf of any Merging Party, such consent
shall be given in writing in a manner consistent with the requirements for a
waiver of compliance as set forth in this Section 15.2.
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15.3 Survival of Representations and Warranties. The respective
representations and warranties of Actava, OPC Mergerco, MITI Mergerco, Orion,
Sterling and MITI contained herein or in any certificates or other documents
delivered prior to or at the Closing by such parties pursuant to the terms of
this Agreement shall survive the execution and delivery of this Agreement but
shall terminate upon the consummation of the Mergers.
15.4 Notices. All notices and other communications hereunder shall be in
writing and shall be deemed to have been duly given when delivered in person, by
facsimile, receipt confirmed, or on the next business day when sent by overnight
courier or on the second succeeding business day when sent by registered or
certified mail (postage prepaid, return receipt requested) to the respective
parties at the following addresses (or at such other address for a party as
shall be specified by like notice).
(i) if to Actava, OPC Mergerco or MITI Mergerco, to:
The Actava Group Inc.
945 East Paces Ferry Road,
Suite 2210
Atlanta, Georgia 30326
Attention: John D. Phillips
Telecopy: (404) 233-6865
with a copy to:
Long, Aldridge & Norman
One Peachtree Center, Suite 5300
303 Peachtree Street
Atlanta, Georgia 30308
Attention: Clay C. Long, Esq.
Telecopy: (404) 527-4198
(ii) if to Orion, to:
Orion Pictures Corporation
1888 Century Park East
Los Angeles, California 90067
Attention: Leonard White
Telecopy: (310) 282-9902
with a copy to:
Paul, Weiss, Rifkind, Wharton & Garrison
1285 Avenue of the Americas
New York, New York 10019-6064
Attention: James M. Dubin, Esq.
Telecopy: (212) 757-3990
(iii) if to Sterling, to:
MCEG Sterling Incorporated
1888 Century Park East
Suite 1777
Los Angeles, California 90067-1721
Attention: John Hyde
Telecopy: (310) 282-8303
with a copy to:
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Robinson Brog Leinwand Greene Genovese & Gluck,
P.C.
1345 Avenue of the Americas
New York, New York 10105-0143
Attention: Avron I. Brog, Esq.
Telecopy: (212) 956-2164
and
(iv) if to MITI, to:
Metromedia International Telecommunications,
Inc.
41 West Putnam Avenue
Greenwich, Connecticut 06830
Attention: Richard J. Sherwin
Telecopy: (203) 862-9225
with a copy to:
Rubin Baum Levin Constant & Friedman
30 Rockefeller Plaza
New York, New York 10112
Attention: Barry A. Adelman, Esq.
Telecopy: (212) 698-7825
15.5 Assignment. This Agreement and all of the provisions hereof shall be
binding upon and inure to the benefit of the parties hereto and their respective
successors (including but not limited to the Sterling Corporation) and permitted
assigns. Neither this Agreement nor any of the rights, interests or obligations
hereunder shall be assigned by any of the parties hereto prior to the Effective
Time without the prior written consent of the other parties hereto. This
Agreement is not intended to confer upon any other person except the parties
hereto any rights or remedies hereunder.
15.6 Expenses. If the Mergers are not consummated, all costs and expenses
incurred in connection with this Agreement and the transactions contemplated
hereby shall be paid by the party incurring such costs or expenses, subject to
the rights of such party contemplated under Section 14.2 with respect to a
willful breach, violation or default by another party hereto.
15.7 GOVERNING LAW. THIS AGREEMENT SHALL BE GOVERNED BY THE LAWS OF THE
STATE OF DELAWARE, APPLICABLE TO AGREEMENTS MADE AND TO BE PERFORMED ENTIRELY
WITHIN SUCH STATE.
15.8 Counterparts. This Agreement may be executed in one or more
counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same instrument.
15.9 Interpretation; Definitions. The article and section headings contained
in this Agreement are solely for the purpose of reference, are not part of the
agreement of the parties and shall not in any way affect the meaning or
interpretation of this Agreement. As used in this Agreement,
(i) the term "person" means and includes an individual, a partnership, a
joint venture, a corporation, a trust, an unincorporated organization and a
government or any department or agency thereof;
(ii) the term "affiliate," with respect to any person, shall mean and
include any person directly or indirectly controlling, controlled by or
under common control with such person;
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(iii) the term "Actava Material Adverse Effect" means a material adverse
effect on the business, assets, prospects, condition (financial or
otherwise) or the results of operation of Actava and its subsidiaries, taken
as a whole;
(iv) the term "Orion Material Adverse Effect" means a material adverse
effect on the business, assets, prospects, condition (financial or
otherwise) or the results of operation of Orion and its subsidiaries, taken
as a whole;
(v) the term "Sterling Material Adverse Effect" means a material adverse
effect on the business, assets, prospects, condition (financial or
otherwise) or the results of operation of Sterling and its consolidated
subsidiaries, taken as a whole;
(vi) the term "MITI Material Adverse Effect" means a material adverse
effect on the business, assets, prospects, condition (financial or
otherwise) or the results of operation of MITI, its United States
subsidiaries and the Operating Joint Venture Entities, taken as a whole;
(vii) the "Orion Exchange Ratio," if the Average Closing Price is
greater than or equal to $10.50, shall be equal to a fraction, the numerator
of which is 11,428,572 and the denominator of which is the number of shares
of Orion Common Stock outstanding on the business day immediately preceding
the Determination Date; provided, that, if the Average Closing Price is less
than $10.50, the Orion Exchange Ratio shall instead have the meaning set
forth in and shall be determined in accordance with Schedule 15.9(viii);
(viii) the "MITI Exchange Ratio," if the Average Closing Price is
greater than or equal to $10.50, shall be equal to a fraction, the numerator
of which is 9,523,810 and the denominator of which is the number of shares
of MITI Common Stock outstanding on the business day immediately preceding
the Determination Date; provided, that, if the Average Closing Price is less
than $10.50, the MITI Exchange Ratio shall instead have the meaning set
forth in and shall be determined in accordance with Schedule 15.9(ix);
(ix) the "Sterling Exchange Ratio," if the Average Closing Price is
greater than or equal to $10.50, but less than or equal to $14.875, shall be
equal to a fraction, the numerator of which is 571,428 and the denominator
of which is the number of shares of Sterling Common Stock outstanding on the
business day immediately preceding the Determination Date; provided, that,
if the Average Closing Price is less than $10.50, the Sterling Exchange
Ratio shall instead have the meaning set forth in and shall be determined in
accordance with Schedule 15.9(x)(a); provided, further, that if the Average
Closing Price is greater than $14.875, the Sterling Exchange Ratio shall
instead have the meaning set forth in and shall be determined in accordance
with Schedule 15.9(x)(b);
(x) the term "Orion Senior Indebtedness" means (a) Orion's indebtedness
to Chemical Bank, as Agent and the banks (the "Banks") parties to the Third
Amended and Restated Credit Agreement, dated as of October 20, 1992 among
Orion, the Agent and the Banks (the "Credit Agreement") and (b) its
indebtedness to Sony Pictures Entertainment Inc. ("Sony") pursuant to that
certain letter agreement between Orion and Sony attached as Exhibit F to
Orion's Disclosure Statement for its Modified Third Amended Joint
Consolidated Plan of Reorganization (the "Sony Letter");
(xi) the term "Orion Subordinated Indebtedness" means Orion's Talent
Notes due 1999, Orion's Creditor Notes due 1999 and Orion's 10% Subordinated
Debentures due 2001;
(xii) the term "Restricted Subsidiary" shall have the meaning assigned
thereto in the Credit Agreement;
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<PAGE>
(xiii) the term "Other Indebtedness" means (a) all outstanding Bank
Reimbursable Amounts (as defined in the Reimbursement Agreement, dated as of
October 20, 1992 (the "Reimbursement Agreement") between Orion and
Metromedia Company), (b) all outstanding Sony Reimbursable Amounts (as
defined in the Reimbursement Agreement) payable to Metromedia Company, (c)
all amounts owed to Metromedia Company by Sterling and its subsidiaries and
(d) all amounts owed by MITI to Metromedia Company (other than the MII
Indebtedness), plus in the case of (a), (b), (c) and (d) above, all accrued,
but unpaid interest thereon;
(xiv) the term "MII Indebtedness" means all of the indebtedness of MII
to Met International at the Effective Time, plus all accrued, but unpaid
interest thereon;
(xv) the term "MetProductions Indebtedness" means the amounts described
in Section 4.28, any other indebtedness of Orion and its subsidiaries to
MetProductions incurred prior to the Effective Time in accordance with this
Agreement and all accrued and unpaid interest on such amounts;
(xvi) the term "subsidiary" of any specified person means any
corporation 50 percent or more of the outstanding voting power of which, or
any partnership, joint venture or other entity 50 percent or more of the
total equity interest of which, is directly or indirectly owned by such
specified person. For purposes of this Agreement, all references to
"subsidiaries" of a person shall be deemed to mean "subsidiary" if such
person has only one subsidiary.
(xvii) the term "Sterling Voting Trust" shall mean the trust created by
the Voting Trust Agreement dated March 30, 1992 by and among Sterling, the
voting trustees specified therein and the Liquidation Estate.
15.10 Entire Agreement. This Agreement and the documents or instruments
referred to herein, embodies the entire agreement and understanding of the
parties hereto in respect of the subject matter contained herein. There are no
restrictions, promises, representations, warranties, agreements, covenants, or
undertakings, other than those expressly set forth or referred to herein. This
Agreement supersedes all prior agreements and the understandings between the
parties with respect to such subject matter.
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<PAGE>
IN WITNESS WHEREOF, Actava, Orion, Sterling, MITI, OPC Mergerco and MITI
Mergerco have caused this Agreement to be signed by their respective duly
authorized officers as of the date first above written.
THE ACTAVA GROUP INC.
By: /s/ JOHN D. PHILLIPS
..................................
Name: John D. Phillips
Title: President and
Chief Executive Officer
ORION PICTURES CORPORATION
By: /s/ LEONARD WHITE
..................................
Name: Leonard White
Title: President and
Chief Executive Officer
MCEG STERLING INCORPORATED
By: /s/ ANN K. JACOBUS
..................................
Name: Ann K. Jacobus
Title: Executive Vice President
METROMEDIA INTERNATIONAL
TELECOMMUNICATIONS, INC.
By: /s/ RICHARD J. SHERWIN
..................................
Name: Richard J. Sherwin
Title: Co-President
OPC MERGER CORP.
By: /s/ JOHN D. PHILLIPS
..................................
Name: John D. Phillips
Title: President
MITI MERGER CORP.
By: /s/ JOHN D. PHILLIPS
..................................
Name: John D. Phillips
Title: President
A-83
<PAGE>
SCHEDULE 1.5.2(A)
DIRECTORS
ORION'S DESIGNEES TO THE
SURVIVING CORPORATION'S BOARD OF DIRECTORS
John W. Kluge
Stuart Subotnick
Silvia Kessel
Richard J. Sherwin
Arnold L. Wadler
Leonard White
ACTAVA'S DESIGNEES TO THE
SURVIVING CORPORATION'S BOARD OF DIRECTORS
John D. Phillips
Carl E. Sanders
John P. Imlay
Clark A. Johnson
<PAGE>
SCHEDULE 1.5.2(B)
DIRECTORS
ORION'S DESIGNEES TO THE
SURVIVING CORPORATION'S BOARD OF DIRECTORS
John W. Kluge
Stuart Subotnick
Silvia Kessel
Richard J. Sherwin
Arnold L. Wadler
Leonard White
ACTAVA'S DESIGNEES TO THE
SURVIVING CORPORATION'S BOARD OF DIRECTORS
John D. Phillips
and one of Carl E. Sanders,
John P. Imlay
and Clark A. Johnson
TRITON'S DESIGNEE TO THE
SURVIVING CORPORATION'S BOARD OF DIRECTORS
Richard Nevins
<PAGE>
SCHEDULE 15.9(VIII)
ORION EXCHANGE RATIO
If the Average Closing Price is less than $10.50, the Orion Exchange Ratio
shall be determined by solving for "Y" in the following formula and dividing "Y"
by the number of shares of Orion Common Stock outstanding on the business day
immediately preceding the Determination Date:
120,000,000 = "Y" x Average Closing Price
<PAGE>
SCHEDULE 15.9(IX)
MITI EXCHANGE RATIO
If the Average Closing Price is less than $10.50, the MITI Exchange Ratio
shall be determined by solving for "Y" in the following formula and dividing "Y"
by the number of shares of MITI Common Stock outstanding on the business day
immediately preceding the Determination Date:
100,000,000 = "Y" x Average Closing Price
<PAGE>
SCHEDULE 15.9(X)(A)
ADJUSTMENT TO STERLING EXCHANGE RATIO
If the Average Closing Price is less than $10.50, the Sterling Exchange
Ratio shall be determined by solving for "Y" in the following formula and then
dividing "Y" by the number of shares of Sterling Common Stock outstanding on the
business day immediately preceding the Determination Date:
6,000,000 = "Y" x Average Closing Price
<PAGE>
SCHEDULE 15.9(X)(B)
ADJUSTMENT TO STERLING EXCHANGE RATIO
If the Average Closing Price is greater than $14.875, the Sterling Exchange
Ratio shall be determined by solving for "Y" in the following formula and then
dividing "Y" by the number of shares of Sterling Common Stock outstanding on the
business day immediately preceding the Determination Date:
8,500,000 = "Y" x Average Closing Price
<PAGE>
Appendix B
CS FIRST BOSTON
September 28, 1995
Board of Directors
The Actava Group Inc.
Suite 2210 Resurgens Plaza
945 E. Paces Ferry Road
Atlanta, Georgia 30326
Dear Sirs:
You have asked us to advise you with respect to the fairness to
the stockholders of The Actava Group Inc., a Delaware corporation (the
"Company"), from a financial point of view, of the Exchange Ratio (as
hereinafter defined), taken as a whole, contemplated by the Amended and
Restated Agreement and Plan of Merger, dated as of September 27, 1995 (the
"Merger Agreement"), among the Company, Orion Pictures Corporation, a
Delaware corporation ("Orion"), MCEG Sterling Incorporated, a Delaware
corporation ("Sterling"), Metromedia International Telecommunications,
Inc., a Delaware corporation ("MITI"), OPC Merger Corp., a Delaware
corporation and wholly owned subsidiary of the Company ("OPC Merger Co.")
and MITI Merger Corp., a Delaware corporation and wholly owned subsidiary
of the Company ("MITI Merger Co.", and together with the Company, Orion,
Sterling, MITI and OPC Merger Co., sometimes referred to herein as the
"Merging Parties"). As more fully described in the Merger Agreement,
(i)(a) Orion will be merged with and into OPC Merger Co., (b) Sterling will
be merged with and into the Company, (c) MITI will be merged with and into
MITI Merger Co. (collectively, the "Merger") and (d) the Company, as the
surviving corporation of the Merger, will be renamed Metromedia
International Group, Inc. ("MIGI") and (ii) (a) each outstanding share of
common stock, par value $1.00 per share, of the surviving corporation of
the Merger (the "MIGI Common Stock") will remain outstanding, (b) each
outstanding share of the common stock, par value $0.25 per share, of Orion
will be converted into the right to receive that number of shares of MIGI
Common Stock equal to the Orion Exchange Ratio (as defined in the Merger
Agreement), (c) each outstanding share of common stock, par value $.001 per
share, of Sterling will be converted into the right to receive that number
of shares of MIGI Common Stock equal to the Sterling Exchange Ratio (as
defined in the Merger Agreement) and (d) each outstanding share of common
stock, par value of $.001 per share, of MITI will be converted into the
right to receive that number of shares of MIGI Common Stock equal to the
MITI Exchange Ratio (as defined in the Merger Agreement). The Orion
Exchange Ratio, Sterling Exchange Ratio and MITI Exchange Ratio are
collectively referred to herein as the "Exchange Ratio."
In arriving at our opinion, we have reviewed the Merger
Agreement, the Joint Proxy Statement/Prospectus dated September 28, 1995 of
the Merging Parties (the "Proxy Statement/Prospectus") and certain publicly
available business and financial information relating to the Merging
Parties. We have also reviewed certain other information, including
financial forecasts, provided to us by the Merging Parties, and have met
with the Merging Parties' respective managements to discuss the respective
business and prospects of each of the Merging Parties.
We have also considered certain financial and stock market data
of the Merging Parties, and we have compared that data with similar data
for publicly held companies in businesses similar to those of the Merging
Parties, and we have considered, to the extent publicly
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<PAGE>
available, the financial terms of certain other business combinations and
other transactions which have recently been effected. We have held
discussions with the respective managements of the Merging Parties
concerning certain strategic and operating benefits anticipated from the
Merger. We have also held discussions with the Company's management
regarding the proposed terms of certain financing arrangements relating to
the Merger and described in the Proxy Statement/ Prospectus. We also
considered such other information, financial studies, analyses and
investigations and financial, economic and market criteria which we deemed
relevant.
We have assumed, with your permission, that MITI has obtained all
material governmental permits and authorizations for the conduct of its
existing operations in Eastern Europe and Russia, and that such permits and
authorizations are valid and enforceable. Although we have made no
independent investigation with respect to such permits and authorizations,
have assumed no responsibility with respect to the existence, validity and
enforceability thereof and have relied upon management of the Company,
management of MITI and their respective representatives with respect to all
such matters, nothing has come to our attention during the course of our
engagement that caused us to believe that the foregoing assumptions are
unreasonable. With respect to MITI's pre-operational and prospective
operations, we have considered, based upon discussions with management of
the Company, management of MITI and their respective representatives, the
risks of obtaining all material governmental permits and authorizations,
and the risks with respect to the validity and enforceability thereof. We
have also considered, based upon discussions with management of the
Company, management of MITI and their respective representatives, the risk
of the loss by MITI of its right to conduct its operations, either through
the loss of permits or authorizations or through some other form of
expropriation of its businesses or assets. The opinion expressed herein is
being rendered during a period of volatility in Eastern Europe and Russia,
and there can be no assurance that the analysis of any such risks will be
accurate. This opinion is also necessarily subject to the absence of
further material developments with respect to the financial, economic,
monetary, political, market and other conditions in Eastern Europe and
Russia from those prevailing on the date hereof.
In connection with our review, we have not assumed any
responsibility for independent verification of any of the foregoing
information and have relied on its being complete, accurate and fair in all
respects. With respect to the financial forecasts and other data reviewed
by us, we have assumed with your permission that such forecasts and other
data have been reasonably prepared on bases reflecting the best currently
available estimates and good faith judgments of the Merging Parties'
respective managements as to the future financial performance of the
Merging Parties and the strategic and operating benefits anticipated from
the Merger. We have been informed by the management of Orion that
fundamental assumptions inherent in such management's projections for Orion
include (i) management's plan to renew Orion's production and development
of motion pictures, an activity in which Orion is currently substantially
restricted in pursuing under the existing provisions of certain agreements
to which Orion is a party and (ii) the termination of provisions in certain
agreements to which Orion is a party which require Orion to deposit and
distribute its net cash flow in a specified manner. The termination of
these existing provisions is a condition to consummation of the Merger, and
we have assumed with your permission that such provisions will no longer be
in effect following the Merger. We have also assumed with your permission
that the Merger will be treated as a tax-free reorganization for federal
income tax purposes. In addition, we have not made an independent
evaluation or appraisal of the assets or liabilities (contingent or
otherwise) of any of the Merging Parties, nor have we been furnished with
any such evaluations or appraisals. Our opinion is necessarily based upon
information available to us and financial, economic, monetary, political,
market and other conditions as they exist and can be evaluated on the date
hereof. We are not expressing any opinion as to what the value of the MIGI
Common Stock actually will be, or the prices at which such MIGI Common
Stock will trade, subsequent to the Merger. We have made no independent
investigation of any legal matters affecting any of the Merging Parties and
assume the correctness
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<PAGE>
of all legal advice given to the Merging Parties. We did not participate
in negotiating the terms of the Merger, and our opinion does not in any
manner address the Company's underlying business decision to effect the
Merger. In connection with our engagement, we approached third parties to
solicit indications of interest in a possible acquisition of the Company
and held preliminary discussions with certain of these parties prior to the
date hereof.
As you are aware, we will receive a fee for rendering this
opinion. In the ordinary course of our business, CS First Boston and its
affiliates may actively trade the debt and equity securities of the
Company, Orion and Sterling for their own account and for the accounts of
customers and, accordingly, may at any time hold a long or short position
in such securities.
It is understood that this letter is for the information of the
Board of Directors of the Company in connection with its consideration of
the Merger and does not constitute a recommendation to any stockholder as
to how such stockholder should vote on the proposed Merger. We are
expressing no opinion as to the consideration to be received by any
stockholder of Orion, Sterling or MITI in the Merger. This letter is not
to be quoted or referred to, in whole or in part, in any registration
statement, prospectus or proxy statement, or in any other document used in
connection with the offering or sale of securities, nor shall this letter
be used for any other purpose, without CS First Boston's prior written
consent.
Based upon and subject to the foregoing, it is our opinion that,
as of the date hereof, the Exchange Ratio, taken as a whole, is fair to the
stockholders of the Company from a financial point of view.
Very truly yours,
CS FIRST BOSTON CORPORATION
B-3
<PAGE>
Appendix C
ALEX. BROWN & SONS
Dated as of September 28, 1995
Special Committee of the Board of Directors
of Orion Pictures Corporation
c/o Henry L. King, Esq.
Davis Polk & Wardwell
450 Lexington Avenue
New York, NY 10017
Dear Sirs:
Orion Pictures Corporation ("Orion" or the "Company") has entered
into an Amended and Restated Agreement and Plan of Merger dated as of
September 27, 1995 (the "Merger Agreement") by and among the Company, MCEG
Sterling Incorporated ("MCEG"), Metromedia International
Telecommunications, Inc. ("MITI") and The Actava Group Inc. ("Actava", and
together with MCEG and MITI, the "Other Corporations"), which Merger
Agreement amends and restates in its entirety the Agreement and Plan of
Merger dated as of April 12, 1995 among the Company and the Other
Corporations. Pursuant to the Merger Agreement, the Company will merge
with and into OPC Merger Corp., a wholly owned subsidiary of Actava, MITI
will merge with and into MITI Merger Corp., a wholly owned subsidiary of
Actava, and MCEG will merge with and into Actava (all such mergers
together, the "Merger"). The stockholders of the Company other than John
W. Kluge, Stuart Subotnick, and Met International, Inc. Met Telcell, Inc.
and Met Productions, Inc. all Delaware corporations controlled by Messrs.
Kluge and Subotnick (the "Metromedia Holders"; such stockholders of the
Company other than the Metromedia Holders, the "Public Stockholders") will
receive, depending on the last sales price for the Actava Common Stock on
the New York Stock Exchange for the period prior to the effective time of
the Merger, between .5714 and .7273 shares of Actava Common Stock (based
upon the Company having 20,000,000 shares of common stock outstanding at
the effective time of the Merger). Upon consummation of the Merger, Actava
will be renamed Metromedia International Group, Inc. ("MIG"). There are a
number of conditions to the consummation of the Merger, including the
refinancing of certain debt of the Company. You have requested our opinion
as to whether the consideration to be received by the Public Stockholders
in the Merger is fair, from a financial point of view, to the Public
Stockholders.
Alex. Brown & Sons Incorporated, as a customary part of its
investment banking business, is engaged in the valuation of businesses and
their securities in connection with mergers and acquisitions, negotiated
underwritings, private placements and valuations for estate, corporate and
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<PAGE>
Special Committee of the Board of Directors
September 28, 1995
Page 2
other purposes. In addition, Alex. Brown & Sons Incorporated regularly
publishes research reports regarding the media and communications
industries, and businesses and securities of publicly owned companies in
those industries. We are rendering the opinion set forth herein to the
Special Committee of the Board of Directors of the Company in connection
with the Merger and will receive a fee for our services.
In connection with our opinion, we have reviewed the Merger
Agreement, certain publicly available financial information concerning the
Company, MCEG, and Actava, certain non-public information, including
financial forecasts, furnished to us concerning the Company, MCEG, MITI and
Actava, and the Preliminary Joint Proxy Statement filed with the Securities
and Exchange Commission on September 8, 1995 (the "Preliminary Proxy
Statement"). We have also held discussions with members of the senior
management of the Company, MCEG, MITI and Actava regarding their respective
businesses and prospects. In addition, we have (i) reviewed the reported
price and trading activity for the common stock of the Company and Actava,
(ii) reviewed certain financial and stock market information for the
Company and Actava, and certain financial information for MITI and MCEG,
and similar information for certain other companies whose securities are
publicly traded, (iii) reviewed the financial terms of certain recent
business combinations which we deemed comparable in whole or in part, and
(iv) performed such other studies and analyses, and considered such other
factors, as we deemed appropriate.
We have not independently verified the information described
above, and for purposes of this opinion, and with your consent, have
assumed the accuracy, completeness and fairness thereof. With respect to
financial forecasts and other information relating to the prospects of the
Company, MCEG, MITI, Actava and MIG, we have assumed that such forecasts
and other information were reasonably prepared and reflect the best
currently available estimates and good faith judgments of the managements
of the Company, MCEG, MITI and Actava, respectively, as to the likely
future financial performance of the Company, MCEG, MITI, Actava and MIG.
In addition, we have not conducted a physical inspection of the properties
or facilities or made an independent evaluation or appraisal of the assets
of the Company, MCEG, Actava or MITI, nor have we been furnished with any
such evaluation or appraisal. Alex. Brown & Sons Incorporated has also
assumed that MITI and its affiliates have obtained or will obtain necessary
and material governmental permits and authorizations for the conduct of
their operations in Eastern Europe, Russia, the former Soviet Republics,
and elsewhere, and that the existing permits and authorizations are valid
and enforceable and that the new permits and authorizations will be valid
and enforceable. Our opinion is based on financial, economic, monetary,
political, market, and other conditions as they exist and can be evaluated
as of the date of this letter. We are not expressing any opinion as to the
prices at which MIG Common Stock will trade subsequent to the Merger. We
have made no independent investigation of any legal matters affecting any
of the Company, MITI, MCEG or Actava, and have
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<PAGE>
Special Committee of the Board of Directors
September 28, 1995
Page 3
assumed the correctness of all legal advice given to such parties and the
Special Committee, including advice as to the tax consequences of the
Merger to the Company and the Public Stockholders.
Alex. Brown & Sons Incorporated did not participate in
negotiating the terms of the Merger or any other aspect of the Merger, and
received no instruction to, and did not, seek or solicit alternative
transactions.
In rendering the opinion set forth below, and in connection with
our analysis we have, with your consent, assumed (i) that certain of
Orion's indebtedness will be refinanced according to terms similar to those
set forth on the Preliminary Proxy Statement, and (ii) that the current
restrictions on the Company's engaging in the production and development of
motion pictures, both by express provision and by required payments of
available cash flow under certain agreements to which the Company is a
party, will terminate in connection with the Merger. In addition, Alex.
Brown & Sons Incorporated also assumed, with your consent, that absent the
Merger, there would be a likely event of default in 1995 under certain of
Orion's indebtedness requiring the restructuring of those obligations.
Based upon and subject to the foregoing, it is our opinion that
as of the date of this letter, the consideration to be received by the
Public Stockholders in the Merger pursuant to the Merger Agreement is fair,
from a financial point of view, to the Public Stockholders.
Very truly yours,
/s/ Alex. Brown & Sons Incorporated
Alex. Brown & Sons Incorporated
C-3
<PAGE>
Appendix D
Gerard Klauer Mattison
September 28, 1995
The Board of Directors
Metromedia International Telecommunications, Inc.
41 West Putnam Avenue
Greenwich, CT 06830
Members of the Board:
Metromedia International Telecommunications, Inc. ("MITI"), The Actava
Group Inc. ("Actava"), Orion Pictures Corporation ("Orion") and MCEG
Sterling Incorporated ("Sterling") have entered into an Agreement and Plan
of Merger, dated April 12, 1995, as amended and restated by that certain
Amended and Restated Agreement and Plan of Merger, dated September 27, 1995
(as amended and restated, the "Merger Agreement"), pursuant to which, among
other things, MITI and Orion will be merged with and into newly formed
subsidiaries of Actava (the "MITI Merger" and the "Orion Merger,"
respectively) and Sterling will be merged with and into Actava (the
"Sterling Merger" and together with the MITI Merger and the Orion Merger,
the "Mergers"). Terms not otherwise defined herein shall have the meanings
assigned to them in the Joint Proxy Statement/Prospectus (the "Proxy
Statement") filed with the Securities and Exchange Commission.
As more fully described in the Merger Agreement, upon consummation of
the merger of MITI with and into Actava's newly formed subsidiary, MITI
Merger Corp., each issued and outstanding share of the common stock, $.001
par value, of MITI (the "MITI Common Stock") will be converted into the
right to receive a number of shares of common stock, par value $1.00 per
share, of Actava (the "Actava Common Stock") equal to the product of one
share of Actava Common Stock multiplied by a fraction, the numerator of
which is 9,523,810 and the denominator of which is the number of shares of
MITI Common Stock outstanding on the business day immediately preceding the
day which is five calendar days prior to the day of the Meetings, or if
such day is not a business day, as of the business day immediately
preceding such day (the "Determination Date") (the "Merger Consideration");
provided, however, that if the average of the closing sale prices of the
- -------- -------
Actava Common Stock as officially reported on the New York Stock Exchange
for the last 20 consecutive trading days ending on the business day
immediately prior to the Determination Date (the "Average Closing Price")
is less than $10.50, the Merger Consideration shall be determined by
dividing $100,000,000 by the Average Closing Price and then dividing such
number by the number of shares of MITI Common Stock outstanding on the
business day immediately prior to the Determination Date.
You have requested our opinion as to the fairness, from a financial
point of view, to the holders of the outstanding shares of MITI Common
Stock of the consideration to be received by
D-1
<PAGE>
such holders pursuant to the terms and subject to the conditions set forth
in the Merger Agreement.
In arriving at our opinion set forth below, we have, among other
things:
(i) Reviewed certain internal business, operating and financial
information, including financial forecasts, furnished to us by MITI;
(ii) Discussed the past and current operations and financial condition
and the prospects of MITI with members of senior management of MITI;
(iii) Compared the financial performance of MITI with that of
certain comparable publicly traded companies;
(iv) Reviewed the financial terms, to the extent publicly available,
of certain comparable acquisition transactions;
(v) Reviewed the Merger Agreement, drafts of the Joint Proxy
Statement/Prospectus, certain other documents related to the Mergers
and MITI's arrangements with its joint venture partners; and
(vi) Conducted such other analyses, performed such other
investigations and considered such other matters as we deemed
necessary to arrive at our opinion, including, but not limited to, our
assessment of general economic, market and monetary conditions in the
United States and, in particular, in those foreign countries in which
MITI operates, in light of the political and social risks associated
with foreign investments.
We have relied upon and assumed, without independent verification, the
accuracy and completeness of all financial and other information supplied
or otherwise made available to us by MITI and have relied upon the
assurances of the management of MITI that all financial information and
financial forecasts provided to us by MITI were reasonably prepared on
bases which reflected the best currently available estimates and judgments
of the management of MITI as to the financial performance and expected
future operating and financial performance of MITI. We did not
independently verify such information or assumptions, conduct a physical
inspection of the properties or facilities of MITI or undertake an
independent appraisal or evaluation of the assets or liabilities of MITI.
D-2
<PAGE>
In rendering our opinion, we have assumed as instructed by you, that
the aggregate value of the Merger Consideration is $100,000,000. In
accordance with your instructions, we have not independently investigated
or valued Actava, Orion, Sterling, any of the surviving corporations of the
Mergers, the Merger Consideration or the Actava Common Stock, and express
no opinion concerning the values thereof. In addition, we express no
opinion as what the value of the Actava Common Stock actually will be when
issued to the holders of MITI Common Stock pursuant to the MITI Merger or
the price at which the Actava Common Stock will trade at any time in the
future.
We have not been asked to opine to, and our opinion does not in any
manner address, the relative merits of the MITI Merger as compared to any
other business plan or opportunity that might be presented to MITI, or the
effect of any other arrangement in which MITI might engage. We were not
requested to, and did not, solicit third party indications of interest in
acquiring all or any part of MITI. Our opinion is necessarily based upon
economic, market and other conditions as in effect, and the information
made available to us, on the date hereof.
Our opinion as expressed herein is provided for the information of the
Board of Directors of MITI in its evaluation of the MITI Merger and our
opinion is not intended to be and does not constitute a recommendation to
any stockholder as to how such stockholder should vote on the MITI Merger.
Our opinion may not be published or otherwise used or referred to, nor
shall any public reference to Gerard Klauer Mattison & Co., LLC be made,
without our written consent; provided, however, that we hereby consent to
--------- -------
the inclusion of our opinion in its entirety in the Proxy Statement.
As you know, we have been engaged to render this opinion to the Board
of Directors of MITI in connection with the MITI Merger and will receive a
fee for rendering our opinion. We also received a retainer fee upon our
engagement.
Based upon and subject to the foregoing and based upon such other
factors as we consider relevant, we are of the opinion that, as of the date
hereof, the Merger Consideration to be received by the holders of MITI
Common Stock is fair to such holders from a financial point of view.
Very truly yours,
/s/ GERARD KLAUER MATTISON & CO., L.L.C.
GERARD KLAUER MATTISON & CO., L.L.C.
D-3
<PAGE>
Appendix E
HOULIHAN LOKEY HOWARD & ZUKIN
September 28, 1995
To The Board of Directors of MCEG Sterling Incorporated
Ladies and Gentlemen:
We understand that MCEG Sterling Incorporated ("Sterling" or the "Company"
hereinafter) has entered into an agreement, pursuant to the Amended and
Restated Agreement and Plan of Merger, dated September 27, 1995, by and
among Sterling, The Actava Group Inc. ("Actava" hereinafter), Orion
Pictures Corporation ("Orion" hereinafter), and Metromedia International
Telecommunications, Inc. ("MITI" hereinafter) ("Merger Agreement") pursuant
to which Sterling will merge with and into Actava, Sterling's separate
corporate existence will terminate and Actava, renamed "Metromedia
International Group, Inc." ("Metromedia" hereinafter) will continue as the
surviving corporation ("Sterling Merger" hereinafter). Upon consummation
of the Sterling Merger each share of common stock in Sterling ("Sterling
Common Stock" hereinafter) will be converted into the right to receive a
certain number of shares of common stock in Metromedia ("Common Stock").
The exact number of shares of Common Stock each holder of Sterling Common
Stock will be entitled to receive in exchange for a share of Sterling
Common Stock will be determined on the last business day five days prior to
the close of the Sterling Merger utilizing one of three methods depending
upon the Actava Average Closing Price (as defined in the Merger Agreement)
but will have a minimum guarantee of $6,000,000 for the Sterling exchange
ratio.
It is also our understanding that upon the Effective Time (as defined
in the Merger Agreement), Orion will merge with and into OPC Merger Corp.,
a newly formed and wholly-owned subsidiary of Actava (the "Orion Merger")
with New Orion being the surviving corporation of the Orion Merger which
will change its name to "Orion Pictures Corporation". MITI will merge with
and into MITI Merger Corp., a newly formed and wholly-owned subsidiary of
Actava, (the "MITI Merger"), with New MITI being the surviving corporation
of the MITI Merger. The Sterling Merger, the Orion Merger and the MITI
Merger are collectively referred to as the Mergers. The Mergers and other
related transactions disclosed to Houlihan Lokey are referred to
collectively herein as the "Transaction." Immediately following the
consummation of the Sterling Merger, Metromedia will transfer all of its
assets that were owned by Sterling immediately prior to the effective time
to New Orion, which will continue the business and operations of Orion and
Sterling.
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Board of Directors of
MCEG Sterling Incorporated
September 28, 1995
You have requested our opinion (the "Opinion") as to the matters set forth
below. The Opinion does not address the Company's underlying business
decision to effect the Transaction. We have not been requested to, and did
not, solicit third party indications of interest in acquiring all or any
part of the Company. Furthermore, we were not retained to negotiate the
Transaction nor to advise you with respect to alternatives to it.
In connection with this Opinion, we have made such reviews, analyses and
inquiries as we have deemed necessary and appropriate under the
circumstances. Among other things, we have:
1. reviewed the Company's annual reports to shareholders on Form 10-K
for the fiscal years ended 1994 and quarterly report on Form 10-Q for
the quarter ended June 30, 1995;
2. reviewed the Amended and Restated Agreement and Plan of Merger by and
among The Actava Group Inc., Orion Pictures Corporation, MCEG
Sterling Incorporated, OPC Merger Corp., MITI Merger Corp. and
Metromedia International Telecommunications, Inc. and its exhibits
dated September 27, 1995;
3. reviewed the draft Form S-4 Registration Statement for The Actava
Group dated September 8, 1995;
4. met with certain members of the senior management of the Company to
discuss the operations, financial condition, future prospects and
projected operations and performance of the Company;
5. reviewed forecasts and projections prepared by the Company's
management with respect to the Company for the years ended March 31,
1996 through 2000;
6. reviewed certain other publicly available financial data for certain
companies that we deem comparable to the Company, and publicly
available prices and premiums paid in other transactions that we
considered similar to the Transaction;
7. reviewed drafts of certain documents to be delivered at the closing
of the Transaction; and
8. conducted such other studies, analyses and inquiries as we have
deemed appropriate.
We have relied upon and assumed, without independent verification, that the
financial forecasts and projections provided to us have been reasonably
prepared and reflect the best currently available estimates of the future
financial results and condition of the Company, and that there has
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Board of Directors of
MCEG Sterling Incorporated
September 28, 1995
been no material change in the assets, financial condition, business or
prospects of the Company since the date of the most recent financial
statements made available to us. We have also made the following key
assumptions:
1) We have assumed that the market price of Orion of
$1191,380,000 (based upon its 20-day average closing price as of
September 20, 1995) is a reasonable estimate for its fair market
value as of that date;
2) We have assumed that the market price of Actava of
$287,454,000 (based upon its 20-day average closing price as of
September 20, 1995) is a reasonable estimate for its fair market
value as of that date;
3) We have assumed that the fair market value of MITI is reasonably
stated in that amount implied by its share exchange ratio of
$100,000,000;
4) We have assumed that the stated value of Sterling for purposes of
calculating the Sterling exchange ratio is $6,000,000; and
5) We have assumed that the refinancing of the Orion and Actava debt
will not have a negative impact on the public shareholders of
Sterling.
We have not independently verified the accuracy and completeness of the
information supplied to us with respect to the Company and do not assume
any responsibility with respect to it. We have not made any physical
inspection or independent appraisal of any of the properties or assets of
the Company. Our opinion is necessarily based on business, economic,
market and other conditions as they exist and can be evaluated by us at the
date of this letter.
Based upon the foregoing, and in reliance thereon, and assuming that the
Transaction were to close as of the date of this letter, it is our opinion
that the consideration to be received by the Sterling Stockholders in
connection with the Transaction is fair to them from a financial point of
view.
HOULIHAN, LOKEY, HOWARD & ZUKIN, INC.
/S/ Houlihan, Lokey, Howard & Zukin, Inc.
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APPENDIX F
SEC.262. APPRAISAL RIGHTS.
(a) Any stockholder of a corporation of this State who holds shares of stock
on the date of the making of a demand pursuant to subsection (d) of this section
with respect to such shares, who continuously holds such shares through the
effective date of the merger or consolidation, who has otherwise complied with
subsection (d) of this section and who has neither voted in favor of the merger
or consolidation nor consented thereto in writing pursuant to Sec.228 of this
title shall be entitled to an appraisal by the Court of Chancery of the fair
value of his shares of stock under the circumstances described in subsections
(b) and (c) of this section. As used in this section, the word "stockholder"
means a holder of record of stock in a stock corporation and also a member of
record of a nonstock corporation; the words "stock" and "share" mean and include
what is ordinarily meant by those words and also membership or membership
interest of a member of a nonstock corporation; and the words "depository
receipt" mean a receipt or other instrument issued by a depository representing
an interest in one or more shares or fractions thereof, solely of stock of a
corporation, which stock is deposited with the depository.
(b) Appraisal rights shall be available for the shares of any class or
series of stock of a constituent corporation in a merger or consolidation to be
effected pursuant to Sec.251, 252, 254, 257, 258, 263 or 264 of this title:
(1) Provided, however, that no appraisal rights under this section shall
be available for the shares of any class or series of stock, which stock, or
depository receipts in respect thereof, at the record date fixed to
determine the stockholders entitled to receive notice of and to vote at the
meeting of stockholders to act upon the agreement of merger or
consolidation, were either (i) listed on a national securities exchange or
designated as a national market system security on an interdealer quotation
system by the National Association of Securities Dealers, Inc. or (ii) held
of record by more than 2,000 stockholders; and further provided that no
appraisal rights shall be available for any shares of stock of the
constituent corporation surviving a merger if the merger did not require for
its approval the vote of the stockholders of the surviving corporation as
provided in subsection (f) of Sec.251 of this title.
(2) Notwithstanding paragraph (1) of this subsection, appraisal rights
under this section shall be available for the shares of any class or series
of stock of a constituent corporation if the holders thereof are required by
the terms of an agreement or merger or consolidation pursuant to
Sec.Sec.251, 252, 254, 257, 258, 263 and 264 of this title to accept for
such stock anything except:
a. Shares of stock of the corporation surviving or resulting from
such merger or consolidation, or depository receipts in respect thereof;
b. Shares of stock of any other corporation, or depository receipts
in respect thereof, which shares of stock or depository receipts at the
effective date of the merger or consolidation will be either listed on a
national securities exchange or designated as a national market system
security on an interdealer quotation system by the National Association
of Securities Dealers, Inc. or held of record by more than 2,000 holders;
c. Cash in lieu of fractional shares or fractional depository
receipts described in the foregoing subparagraphs a. and b. of this
paragraph; or
d. Any combination of the shares of stock, depository receipts and
cash in lieu of fractional shares or fractional depository receipts
described in the foregoing subparagraphs a., b. and c. of this paragraph.
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(3) In the event all of the stock of a subsidiary Delaware corporation
party to a merger effected under Sec.253 of this title is not owned by the
parent corporation immediately prior to the merger, appraisal rights shall
be available for the shares of the subsidiary Delaware corporation.
(c) Any corporation may provide in its certificate of incorporation that
appraisal rights under this section shall be available for the shares of any
class or series of its stock as a result of an amendment to its certificate of
incorporation, any merger or consolidation in which the corporation is a
constituent corporation or the sale of all or substantially all of the assets of
the corporation. If the certificate of incorporation contains such a provision,
the procedures of this section, including those set forth in subsections (d) and
(e) of this section, shall apply as nearly as is practicable.
(d) Appraisal rights shall be perfected as follows:
(1) If a proposed merger or consolidation for which appraisal rights are
provided under this section is to be submitted for approval at a meeting of
stockholders, the corporation, not less than 20 days prior to the meeting,
shall notify each of its stockholders who was such on the record date for
such meeting with respect to shares for which appraisal rights are available
pursuant to subsections (b) or (c) hereof that appraisal rights are
available for any or all of the shares of the constituent corporations, and
shall include in such notice a copy of this section. Each stockholder
electing to demand the appraisal of his shares shall deliver to the
corporation, before the taking of the vote on the merger or consolidation, a
written demand for appraisal of his shares. Such demand will be sufficient
if it reasonably informs the corporation of the identity of the stockholder
and that the stockholder intends thereby to demand the appraisal of his
shares. A proxy or vote against the merger or consolidation shall not
constitute such a demand. A stockholder electing to take such action must do
so by a separate written demand as herein provided. Within 10 days after the
effective date of such merger or consolidation, the surviving or resulting
corporation shall notify each stockholder of each constituent corporation
who has complied with this subsection and has not voted in favor of or
consented to the merger or consolidation of the date that the merger or
consolidation has become effective; or
(2) If the merger or consolidation was approved pursuant to Sec.228 or
253 of this title, the surviving or resulting corporation, either before the
effective date of the merger or consolidation or within 10 days thereafter,
shall notify each of the stockholders entitled to appraisal rights of the
effective date of the merger or consolidation and that appraisal rights are
available for any or all of the shares of the constituent corporation, and
shall include in such notice a copy of this section. The notice shall be
sent by certified or registered mail, return receipt requested, addressed to
the stockholder at his address as it appears on the records of the
corporation. Any stockholder entitled to appraisal rights may, within 20
days after the date of mailing of the notice, demand in writing from the
surviving or resulting corporation the appraisal of his shares. Such demand
will be sufficient if it reasonably informs the corporation of the identity
of the stockholder and that the stockholder intends thereby to demand the
appraisal of his shares.
(e) Within 120 days after the effective date of the merger or consolidation,
the surviving or resulting corporation or any stockholder who has complied with
subsections (a) and (d) hereof and who is otherwise entitled to appraisal
rights, may file a petition in the Court of Chancery demanding a determination
of the value of the stock of all such stockholders. Notwithstanding the
foregoing, at any time within 60 days after the effective date of the merger or
consolidation, any stockholder shall have the right to withdraw his demand for
appraisal and to accept the terms offered upon the merger or consolidation.
Within 120 days after the effective date of the merger or consolidation, any
stockholder who has complied with the requirements of subsections (a) and (d)
hereof, upon written request, shall be entitled to receive from the corporation
surviving the merger or resulting from the consolidation a statement setting
forth the aggregate number of shares not voted in favor of the merger or
consolidation and with respect to which demands for appraisal have been received
and the aggregate number of
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holders of such shares. Such written statement shall be mailed to the
stockholder within 10 days after his written request for such a statement is
received by the surviving or resulting corporation or within 10 days after
expiration of the period for delivery of demands for appraisal under subsection
(d) hereof, whichever is later.
(f) Upon the filing of any such petition by a stockholder, service of a copy
thereof shall be made upon the surviving or resulting corporation, which shall
within 20 days after such service file in the office of the Register in Chancery
in which the petition was filed a duly verified list containing the names and
addresses of all stockholders who have demanded payment for their shares and
with whom agreements as to the value of their shares have not been reached by
the surviving or resulting corporation. If the petition shall be filed by the
surviving or resulting corporation, the petition shall be accompanied by such a
duly verified list. The Register in Chancery, if so ordered by the Court, shall
give notice of the time and place fixed for the hearing of such petition by
registered or certified mail to the surviving or resulting corporation and to
the stockholders shown on the list at the addresses therein stated. Such notice
shall also be given by 1 or more publications at least 1 week before the day of
the hearing, in a newspaper of general circulation published in the City of
Wilmington, Delaware or such publication as the Court deems advisable. The forms
of the notices by mail and by publication shall be approved by the Court, and
the costs thereof shall be borne by the surviving or resulting corporation.
(g) At the hearing on such petition, the Court shall determine the
stockholders who have complied with this section and who have become entitled to
appraisal rights. The Court may require the stockholders who have demanded an
appraisal for their shares and who hold stock represented by certificates to
submit their certificates of stock to the Register in Chancery for notation
thereon of the pendency of the appraisal proceedings; and if any stockholder
fails to comply with such direction, the Court may dismiss the proceedings as to
such stockholder.
(h) After determining the stockholders entitled to an appraisal, the Court
shall appraise the shares, determining their fair value exclusive of any element
of value arising from the accomplishment or expectation of the merger or
consolidation, together with a fair rate of interest, if any, to be paid upon
the amount determined to be the fair value. In determining such fair value, the
Court shall take into account all relevant factors. In determining the fair rate
of interest, the Court may consider all relevant factors, including the rate of
interest which the surviving or resulting corporation would have had to pay to
borrow money during the pendency of the proceeding. Upon application by the
surviving or resulting corporation or by any stockholder entitled to participate
in the appraisal proceeding, the Court may, in its discretion, permit discovery
or other pretrial proceedings and may proceed to trial upon the appraisal prior
to the final determination of the stockholder entitled to an appraisal. Any
stockholder whose name appears on the list filed by the surviving or resulting
corporation pursuant to subsection (f) of this section and who has submitted his
certificates of stock to the Register in Chancery, if such is required, may
participate fully in all proceedings until it is finally determined that he is
not entitled to appraisal rights under this section.
(i) The Court shall direct the payment of the fair value of the shares,
together with interest, if any, by the surviving or resulting corporation to the
stockholders entitled thereto. Interest may be simple or compound, as the Court
may direct. Payment shall be so made to each such stockholder, in the case of
holders of uncertificated stock forthwith, and the case of holders of shares
represented by certificates upon the surrender to the corporation of the
certificates representing such stock. The Court's decree may be enforced as
other decrees in the Court of Chancery may be enforced, whether such surviving
or resulting corporation be a corporation of this State or of any state.
(j) The costs of the proceeding may be determined by the Court and taxed
upon the parties as the Court deems equitable in the circumstances. Upon
application of a stockholder, the Court may order all or a portion of the
expenses incurred by any stockholder in connection with the appraisal
proceeding,
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including, without limitation, reasonable attorney's fees and the fees and
expenses of experts, to be charged pro rata against the value of all the shares
entitled to an appraisal.
(k) From and after the effective date of the merger or consolidation, no
stockholder who has demanded his appraisal rights as provided in subsection (d)
of this section shall be entitled to vote such stock for any purpose or to
receive payment of dividends or other distributions on the stock (except
dividends or other distributions payable to stockholders of record at a date
which is prior to the effective date of the merger or consolidation); provided,
however, that if no petition for an appraisal shall be filed within the time
provided in subsection (e) of this section, or if such stockholder shall deliver
to the surviving or resulting corporation a written withdrawal of his demand for
an appraisal and an acceptance of the merger or consolidation, either within 60
days after the effective date of the merger or consolidation as provided in
subsection (e) of this section or thereafter with the written approval of the
corporation, then the right of such stockholder to an appraisal shall cease.
Notwithstanding the foregoing, no appraisal proceeding in the Court of Chancery
shall be dismissed as to any stockholder without the approval of the Court, and
such approval may be conditioned upon such terms as the Court deems just.
(l) The shares of the surviving or resulting corporation to which the shares
of such objecting stockholders would have been converted had they assented to
the merger or consolidation shall have the status of authorized and unissued
shares of the surviving or resulting corporation.
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PROXY
ORION PICTURES CORPORATION
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS
Special Meeting of Stockholders
November 1, 1995
The undersigned hereby appoints Leonard White and John
W. Hester, and each of them, with full power of substitution, the true and
lawful attorneys-in-fact, agents and proxies of the undersigned to vote at the
Special Meeting (the "Special Meeting") of Stockholders of Orion Pictures
Corporation ("Orion"), to be held on November 1, 1995, commencing at 9:00 a.m.,
local time, in the Concourse Level, 1285 Avenue of the Americas, New York, New
York 10019, and any and all adjournments thereof, all of the shares of Common
Stock, $.25 par value, of Orion ("Orion Common Stock") according to the number
of votes which the undersigned would possess if personally present, for the
purposes of considering and taking action upon the following, as more fully set
forth in the Joint Proxy Statement/Prospectus of Orion, The Actava Group Inc.
("Actava"), MCEG Sterling Incorporated ("Sterling") and Metromedia
International Telecommunications, Inc. ("MITI"), dated September 28, 1995:
<PAGE>
PLEASE MARK, DATE, SIGN AND RETURN THIS PROXY CARD PROMPTLY USING THE ENCLOSED
ENVELOPE. IN ADDITION, PROXY CARDS MAY BE GIVEN OR REVOKED BY DELIVERING TO
CHEMICAL MELLON SHAREHOLDER SERVICES, BY MEANS OF FACSIMILE AT (201)296-4956,
BOTH SIDES OF AN EXECUTED PROXY CARD.
1. To approve and adopt the Amended and Restated Agreement and Plan of Merger,
dated as of September 27, 1995, by and among Actava, Orion, Sterling, MITI, OPC
Merger Corp. and MITI Merger Corp. pursuant to which each of Orion and MITI
will merge with and into OPC Merger Corp. and MITI Merger Corp., respectively,
and Sterling will merge with and into Actava.
FOR AGAINST ABSTAIN
[ ] [ ] [ ]
2. To transact such other business as may properly come before the Special
Meeting or any adjournment thereof.
THIS PROXY, WHEN PROPERLY EXECUTED, WILL BE VOTED IN THE MANNER DIRECTED HEREIN
BY THE UNDERSIGNED STOCKHOLDER(S). IF NO DIRECTION IS GIVEN HEREIN, THIS PROXY
WILL BE VOTED "FOR" PROPOSAL 1 LISTED ABOVE.
Dated:___________________________________, 1995
_______________________________________________
Signature
_______________________________________________
Signature if held jointly
Please sign exactly as name(s) appear on this Proxy Card. When Shares are held
by joint tenants, both should sign. When signing as attorney-in-fact,
executor, administrator, personal representative, trustee, or guardian, please
give full title as such. If a corporation, please sign in full corporate name
by President or other authorized officer. If a partnership , please sign in
partnership name by authorized person.
