SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
(Mark One)
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended: AUGUST 31, 1995
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ____________ to ____________
Commission File Number: 1-5979
ORION PICTURES CORPORATION
(Exact name of registrant as specified in its charter)
DELAWARE 13-1680528
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) identification no.)
1888 CENTURY PARK EAST, LOS ANGELES, CALIFORNIA 90067
(Address of principal executive offices)
Registrant's telephone number, including area code:
(310) 282-0550
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities and Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE PRECEDING FIVE YEARS:
Indicate by check mark whether the registrant has filed all documents and
reports required to be filed by Sections 12, 13 or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court. Yes X No
Number of shares of Common Stock outstanding as of October 14, 1994:
20,000,000
<PAGE>
ORION PICTURES CORPORATION
INDEX TO
QUARTERLY REPORT ON FORM 10-Q
PART I - FINANCIAL INFORMATION
Item 1. Condensed Consolidated Financial Statements
Condensed Consolidated Statements of Operations
Condensed Consolidated Balance Sheets
Condensed Consolidated Statements of Cash Flows
Notes to Condensed Consolidated Financial Statements
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations
PART II - OTHER INFORMATION
<PAGE>
Page 3
PART I - FINANCIAL INFORMATION
ORION PICTURES CORPORATION
Condensed Consolidated Statements of Operations
(in thousands, except per-share amounts)
(unaudited)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
August 31, August 31,
---------- ----------
1995 1994 1995 1994
---- ---- ---- ----
<S> <C> <C> <C> <C>
Revenues $ 31,187 $ 29,487 $ 73,419 $ 113,244
Cost of rentals 27,631 32,844 66,532 114,935
-------- -------- -------- ----------
Gross profit (loss) 3,556 (3,357) 6,887 (1,691)
Other costs and expenses:
Selling, general and
administrative 5,822 5,257 11,787 11,572
Interest, net 6,744 7,266 13,671 14,421
-------- -------- -------- ---------
Loss before provision for
income taxes (9,010) (15,880) (18,571) (27,684)
Provision for income taxes 100 400 300 700
------ ------ ------ ------
Net loss $(9,110) $(16,280) $(18,871) $(28,384)
======= ======== ======== ========
Loss per common share: $ (0.46) $(0.81) $(0.94) $(1.42)
======= ======== ======== ========
Average shares outstanding 20,000 20,000 20,000 20,000
======= ======== ======== ========
</TABLE>
See accompanying Notes to Condensed Consolidated Financial Statements
<PAGE>
Page 4
ORION PICTURES CORPORATION
Condensed Consolidated Balance Sheets
(in thousands)
(unaudited)
August 31, February 28,
1995 1995
---------- ------------
ASSETS:
Cash and cash equivalents $ 18,504 $ 26,190
Accounts receivable, net 67,139 59,710
Film inventories 207,191 249,674
Other assets 14,271 16,014
-------- --------
$ 307,105 $ 351,588
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY:
Accounts payable $ 1,906 $ 1,107
Accrued expenses 25,341 32,455
Participations and residuals 47,310 45,927
Notes and subordinated debt (including $20,332
and $19,544 due to majority shareholder,
respectively) 197,536 212,079
Deferred revenues 62,350 68,487
Shareholders' equity (capital deficiency):
Common stock 5,000 5,000
Paid-in surplus 265,811 265,811
Accumulated deficit (298,149) (279,278)
--------- ---------
Total shareholders' equity (capital deficiency) (27,338) (8,467)
--------- ---------
$ 307,105 $ 351,588
========= =========
See accompanying Notes to Condensed Consolidated Financial Statements
<PAGE>
Page 5
ORION PICTURES CORPORATION
Condensed Consolidated Statements of Cash Flows
(in thousands)
(unaudited)
Six Months Ended
August 31,
1995 1994
---- ----
Operations:
Net loss $ (18,871) $ (28,384)
Adjustments to reconcile net loss
to cash provided by operations:
Amortization of film costs 45,462 89,435
(Increase)Decrease in accounts receivable (7,429) 3,209
Decrease in accounts payable and accrued expenses (5,166) (3,801)
Accrual of participations and residuals 9,813 14,855
Payments of participations and residuals (8,430) (19,048)
Decrease in deferred revenues (6,137) (15,924)
Other, net 7,486 8,664
--------- --------
Cash provided by operations 16,728 49,006
Investment activities:
Investment in film inventories (2,979) (19,041)
Other 75 67
--------- --------
Cash used in investment activities (2,904) (18,974)
Financing activities:
Payments on notes and subordinated debt (21,510) (45,566)
--------- --------
Cash used in financing activities (21,510) (45,566)
Net decrease in cash and cash equivalents (7,686) (15,534)
Cash and cash equivalents at beginning of period 26,190 37,114
--------- --------
Cash and cash equivalents at end of period $ 18,504 $ 21,580
========= ========
See accompanying Notes to Condensed Consolidated Financial Statements
<PAGE>
Page 6
ORION PICTURES CORPORATION
Notes to Condensed Consolidated Financial Statements
(unaudited)
1. INTRODUCTION
The accompanying interim condensed consolidated financial statements of Orion
Pictures Corporation and its subsidiaries (the "Company") have been prepared
without audit pursuant to the rules and regulations of the Securities and
Exchange Commission. Certain information and footnote disclosures normally
included in financial statements prepared in accordance with generally accepted
accounting principles have been condensed or omitted pursuant to such rules and
regulations, although the Company believes that the disclosures made are
adequate to make the information presented not misleading. These financial
statements should be read in conjunction with the consolidated financial
statements and related footnotes included in the Company's latest Annual Report
on Form 10-K (the "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 August 31, 1995, the
results of its operations for the three and six-month periods ended August 31,
1995 and 1994 and its cash flows for the six-month periods ended August 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 in
future periods are likely to exceed gross profit recognized in each period,
which will result in the reporting of net losses for financial reporting
purposes for the foreseeable future.
2. BASIS OF PRESENTATION
On December 11 and 12, 1991 (the "Filing Date"), the Company and substantially
all of its subsidiaries filed petitions for relief under chapter 11 of Title 11
of the United States Code (the "Bankruptcy Code") in the United States
Bankruptcy Court for the Southern District of New York (the "Court"). 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).
<PAGE>
Page 7
3. FILM INVENTORIES
The following is an analysis of film inventories (in thousands):
August 31, February 28,
1995 1995
---------- ------------
Theatrical films:
Released $ 200,602 $240,330
Television programs:
Released 6,589 9,344
--------- --------
$ 207,191 $249,674
========= ========
The Company has made substantial writeoffs to its released product. As a
result, approximately two-thirds of the film inventories shown above at August
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 August 31,
1998. As of August 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.
<PAGE>
Page 8
4. NOTES AND SUBORDINATED DEBT
Notes and subordinated debt is comprised of the following (in thousands):
August 31, February 28,
1995 1995
---------- ------------
Notes payable to banks pursuant to the Third
Amended and Restated Credit Agreement ("Third
Restated Credit Agreement") $ 42,074 $ 58,619
Obligation to Metromedia under Reimbursement
Agreement 20,332 19,544
Talent Notes due 1999, net of unamortized discounts
of $8,107 and $8,488 28,059 26,057
Creditor Notes due 1999, net of unamortized discounts
of $18,400 and $21,745 43,975 40,630
Non-interest bearing payment obligation to Sony,
net of unamortized discount of $812 and $1,191 11,067 16,756
Other guarantees and contracts payable, net of
unamortized discounts of $2,605 and $2,943 7,942 8,124
------ ------
Total notes payable $ 153,449 $ 169,730
========= =========
10% Subordinated Debentures due 2001,
net of unamortized discounts of $6,721 and $8,097 44,087 42,349
--------- ---------
Total notes and subordinated debt $ 197,536 $ 212,079
========= =========
Approximately $190,826,000 was outstanding under the Third Restated Credit
Agreement on the Effective Date of the Plan (Note 2). Such amount has been
reduced through repayments by the Company and the Guarantors (as defined below)
to approximately $33,616,000 at September 30, 1995 which amount matures in full
on October 20, 1995.
Notwithstanding the above maturity schedule, and to the extent that the Company
generates positive net cash flow (as defined in the Third Restated Credit
Agreement) ("Net Cash Flow") for the immediately preceding period, the Company
is required to make principal payments of amounts outstanding under the Third
Restated Credit Agreement at least quarterly during the period from the
Effective Date to October 20, 1995, in amounts approximating 62% of the
Company's Net Cash Flow. In addition, in connection with consummation of the
Plan, Metromedia Company ("Metromedia"), the Company's principal shareholder,
and an affiliate of Metromedia (collectively, the "Guarantors") guaranteed the
payment of substantially all of the Company's payment obligations under the
Third Restated Credit Agreement pursuant to a bank guarantee (the "Bank
Guarantee"). On October 20, 1994 the Guarantors made a payment of $14,041,000
to the Banks under the Bank Guarantee as the Company had not generated
sufficient Net Cash Flow to such date to make the required principal payments
to the Banks. In addition, the Company will not generate enough Net Cash Flow
by the October 20, 1995 maturity date to satisfy the amount outstanding to the
Banks. As a result, the
<PAGE>
Page 9
Company currently anticipates that the Guarantors will be required to make the
final payment of all amounts outstanding under the Third Restated Credit
Agreement ($33,616,000 at September 30, 1995) pursuant to the Bank Guarantee on
October 20, 1995. 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, such Guarantors become subrogated to the rights
of the banks. The Company has agreed to reimburse such Guarantors, for all
such payments made under the Bank Guarantee or as cure payment (as
described below) to Sony Pictures Entertainment Inc. ("Sony") plus interest on
all such guaranteed payments made by such Guarantors at the rate of LIBOR plus
1.75%, out of the portion of Net Cash Flow allocated to the Banks (62%) and
Sony (23%) following payment in full of the Banks and Sony. In accordance with
the terms of the Reimbursement Agreement approximately $403,000, $385,000 and
$344,000, respectively, of interest due July 21, 1995, April 21, 1995 and
January 21, 1995, related to amounts owed to the Guarantors, 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 was backed by a letter of credit
issued pursuant to the Third Restated Credit Agreement.
To the extent that the Company generated positive Net Cash Flow for the
immediately preceding period, the Company was required to make principal
payments of amounts outstanding for the obligation to Sony at least quarterly
during the period from the Effective Date to September 23, 1995 in an amount
approximating 23% of the Company's Net Cash Flow. The agreement with Sony also
gave the Guarantors the right to cure any payment shortfalls by the Company to
Sony prior to Sony being able to draw under the letter of credit issued by the
banks pursuant to the Third Restated Credit Agreement. The Guarantors cured
shortfalls by the Company in its payments to Sony by making payments to Sony on
November 5, 1994, and October 10, 1995 of $5,159,000 and $8,776,446,
respectively. 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. All amounts owed to Metromedia by the
Company pursuant to the Reimbursement Agreement will be refinanced upon
consummation of the mergers described below in Note 9.
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 Minimums") 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 Guarantors 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
<PAGE>
Page 10
May 31, 1995. In addition, as more fully discussed in Note 10 below, utilizing
the Company's Interpretation, the Company did not generate enough Net Cash Flow
through the fiscal quarter ended August 31, 1995 to satisfy the Mandatory
Minimums. Accordingly, as more fully described in Note 10, the Trustee under
the Indenture or the Holders of Talent Notes or Creditor Notes may elect to
accelerate such notes. No such notification has been received by the Company.
All outstanding Talent Notes, Creditor Notes and 10% Subordinated Debentures
will be redeemed upon consummation of the merger described in Note 9 below.
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 twelve 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, June 1995, and September 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>
Sept. June Mar. Fiscal Fiscal 11/5/92
1995 1995 1995 1995 1994 to 2/28/93 Total
-------- ------- -------- -------- -------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
Third Restated Credit Agreement $8,458 $4,391 $12,154 $50,202 $39,345 $28,619 $143,169
Metromedia Obligation -- -- -- -- -- -- --
Sony Obligation 3,102 1,611 4,458 18,413 17,984 10,497 $56,065
Talent Notes (principal and interest) 1,156 600 1,661 6,861 5,733 3,910 $19,921
Creditor Notes -- -- -- 164 1,046 1,498 $2,708
10% Subordinated Debentures
due 2001 -- -- -- -- -- 977 $977
Interest on 10% Subordinated
Debentures due 2001 884 459 1,270 5,083 3,339 519 $11,554
------- ----- ------- ------- ------- ------ --------
$13,600 $7,061 $19,543 $80,723 $67,447 $46,020 $234,394
======= ====== ======= ======= ======= ======= ========
</TABLE>
<PAGE>
Page 11
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 eleven of the twelve 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 $1,193,000, $362,000, $525,000 and $898,000,
respectively, of the interest due October 1, 1995, 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 or a portion of the interest due for the three-month periods
ended August 31, 1995, 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 $566,000, $212,000, $393,000, $410,000 and $405,000,
respectively).
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.
5. INCOME TAXES
The provision for income taxes for the three and six months ended August 31,
1995 and 1994 consists of the following (in thousands):
Three Months Ended Six Months Ended
August 31 August 31
------------------ ----------------
1995 1994 1995 1994
-------- -------- ------- -------
Federal $ -- $ -- $ -- $ --
State andlocal $ -- -- 100 100
Foreign 100 400 200 600
----- ---- ---- ----
$ 100 $ 400 $ 300 $ 700
===== ===== ===== =====
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
and six-month periods ended August 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 August 31, 1995 and 1994, the Company generated revenues of $9,489,000
and $11,898,000, respectively, from foreign distribution of such
<PAGE>
Page 12
product. During the six-month period ended August 31, 1995 and 1994, the
Company generated foreign distribution revenues of $20,517,000 and $27,319,000,
respectively.
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.
As previously disclosed in the registrant's prior filings including the Annual
Report on Form 10-K for the fiscal year ended February 28, 1995, 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. As more fully discussed in Part II
Legal Proceedings, on or about September 13, 1995 the Court issued an order
approving a settlement of the subject claims. The Company had previously made
provisions for settlements or judgments related to this litigation and other
claims. As the actual settlement amount of this claim was adequately provided
for in the above stated provision, the net loss for the six-month period ended
August 31, 1995 was not affected.
9. MERGER AGREEMENT
On April 12, 1995, the Company entered into a Merger Agreement (the "Initial
Merger Agreement") which was amended and restated on September 27, 1995 (the
"Merger Agreement") with The Actava Group Inc. ("Actava"), MCEG Sterling
Incorporated ("Sterling") and Metromedia International Telecommunications
("MITI"), an affiliate of Metromedia. The Merger Agreement provides that at
the effective time of the mergers, the Company, and MITI will be merged in
newly-formed subsidiaries of Actava and Sterling will merge with and into
Actava. In connection with the merger, Actava will be renamed "Metromedia
International Group, Inc.," ("MIG"). 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 date (the "Determination Date") which is five calendar days prior
to the day of the Stockholder Meetings (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 Determination Date 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 Determination Date:
"Y" = 120,000,000
Average Closing Price
<PAGE>
Page 13
Assuming that the Determination Date was September 20, 1995, the Company's
shareholders would have exchanged each share of the Company's common stock for
.5714 shares of Actava common stock and collectively the Company's shareholders
would have been entitled to receive approximately 28.2% of the surviving
corporation's common stock. The Actava common stock to be issued to the
Company's, Sterling's and MITI's shareholders in connection with the mergers
will be identical to the shares of Actava common stock outstanding.
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 MIG.
As previously announced by the Company, Actava, MITI, Sterling and the Company
amended and restated on September 27, 1995, the Initial Merger Agreement. The
Initial Merger Agreement had provided for among other things, the simultaneous
merger of each of the Company, MITI and Sterling with and into Actava, with
Actava being the surviving corporation of the mergers. Under the Initial
Merger Agreement, in connection with the mergers, Metromedia and certain of its
affiliates (together with Metromedia, the "Metromedia Holders"), who are the
majority shareholders of the Company and MITI and whose designees constitute
more than a majority of the members of the Board of Directors of the Company
and one-half of the members of the Board of Directors of MITI, were to exchange
(the "Share Exchange") the shares of Actava's common stock, to be received by
them in the mergers for an equivalent number of shares of Class A common stock
of the surviving corporation of the mergers, and were to contribute to the
surviving corporation certain amounts owed to the Metromedia Holders by the
Company and its affiliate and an affiliate of MITI in exchange for additional
shares of Class A common stock. The shares of Class A common stock were to be
entitled to three votes per share and were to be entitled to vote as a separate
class to elect six of ten directors to the surviving corporation's Board of
Directors.
Actava, the Company, MITI and Sterling have, in the Merger Agreement, amended
certain terms of the Initial Merger Agreement and have amended certain related
ancillary agreements (such amendments are referred to collectively as the
"Amendments") to, among other things, effect the following changes:
(i) the elimination of the Share Exchange with the result that each
shareholder of Actava, the Company, MITI and Sterling will retain or receive
the same class of Actava's common stock with the same voting rights (the
Initial Merger Agreement provided for the Share Exchange pursuant to which the
Metromedia Holders would have received shares of Class A common stock);
(ii) the merger of the Company and MITI with and into newly formed
subsidiaries of Actava (the Initial Merger Agreement had provided for the
merger of the Company and MITI directly into Actava);
(iii) establishing the exchange ratios which determine the number of shares
of Actava's common stock that the shareholders of each company will receive in
the mergers contemplated by the Merger Agreement on the Determination Date (the
Initial Merger Agreement provided that the exchange ratios would be fixed on
the business day immediately prior to the special shareholder's meetings);
(iv) providing for the following changes to the governance of MIG: (a)
dividing the Board of Directors into three classes, with each class to be
elected for a staggered three-year term, (b) prohibiting shareholder action by
written consent in lieu of a meeting, (c) limiting the right to call special
meetings of shareholders to the Chairman or Vice Chairman of the Board, and (d)
establishing certain procedures that shareholders must follow to nominate
directors for election to MIG's Board of Directors and to make certain business
proposals at MIG's annual shareholders meetings (the Initial Merger Agreement
did not provide for any of the foregoing governance provisions); and
(v) the inclusion of a covenant providing for the adoption, within 30 days
following the consummation of the mergers contemplated by the Merger Agreement,
of a shareholder rights plan by the MIG's Board of Directors (the Initial
Merger Agreement did not provide for the adoption of a shareholder rights
plan).
As a result of the Amendments, following the consummation of the transactions
contemplated by the Merger Agreement, the Metromedia Holders will receive the
same class of stock and will have the same voting rights as all other
shareholders of MIG. No shares of Class A common stock with enhanced
<PAGE>
Page 14
voting rights will be authorized or issued. Following consummation of the
transactions contemplated by the Merger Agreement, the Metromedia Holders will
collectively be the largest shareholders of MIG and will control approximately
33.3% of the outstanding shares of common stock of MIG (assuming (i) that the
Determination Date occurred on September 20, 1995, (ii) that certain amounts
owed by the Company and its affiliate and an affiliate of MITI to the
Metromedia Holders as of such date will be contributed to MIG by the Metromedia
Holders in exchange for shares of common stock of MIG and (iii) that all
options to acquire shares of MIG's common stock are exercised). In addition,
upon consummation of the transactions contemplated by the Merger Agreement, the
Company will initially be entitled to designate six of ten directors to MIG's
Board of Directors and Actava will initially be entitled to designate four of
ten directors to MIG's Board of Directors. The size of MIG's Board of
Directors is subject to adjustment under certain circumstances. Thereafter,
members of MIG's Board of Directors will be elected by its shareholders in
accordance with Delaware law. Under the terms of the Merger Agreement, the
Metromedia Holders have retained the right to contribute to MIG certain
indebtedness of the Company and its affiliate and an affiliate of MITI owed to
the Metromedia Holders if such indebtedness is not refinanced or repaid in
full; however; under the Merger Agreement, such contribution will be in
exchange for shares of common stock, not for shares of Class A common stock, as
was the case under the Initial Merger Agreement.
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 Directors' view that in light of the
Share Exchange 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 September 13, 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.
On September 7, 1995, the Company and Chemical Bank 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 the Company
following consummation of the mergers ("New Orion") as described below.
Chemical has committed to fund the entire amount of the facility, but a portion
of the commitment may be syndicated to other financial institutions either
before or after the effective time of the mergers. Pursuant to the commitment
letter with Chemical, at the effective time of the mergers, 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 million (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 Company's obligations to the Banks or the
Guarantors and the Plan Debt 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 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
<PAGE>
Page 15
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. Subject to certain
conditions, such guarantee may be terminated after five years from the date of
commencement of the New Orion Credit Facility. In addition, Metromedia
has agreed to guarantee the payment, by the Company to Chemical, of certain
fees payable in connection with the execution of the commitment letter with
Chemical for the New Orion Credit Facility, and may guarantee the payment of
certain of New Orion's accounts receivable included in the borrowing base for
the Term Loan.
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 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 maintenance 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 occurrence 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 MIG (defined
to mean if the Metromedia Holders do not control at least 25% of the
outstanding common stock of MIG or if a third party controls more common stock
than the Metromedia Holders or is entitled to designate a majority of the
members of MIG'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
of MIG.
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 following
consummation of the mergers to MIG's other subsidiaries, satisfaction with the
results of Chemical's due diligence investigation of New Orion
<PAGE>
Page 16
and MIG, satisfaction with New Orion's management and the investment in New
Orion by MIG 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 of the Company's obligations to the Banks or Metromedia
and the Plan Debt. In addition, the special meeting of shareholders of
the Company has been set for November 1, 1995 where the shareholders
will be asked to vote on a proposal to approve and adopt 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 shareholders 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 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 shareholders of the Company, MITI and Sterling pursuant to Actava's
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 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 the direction and operation of MIG
as a result of their ability to designate a majority of the members of the
Board of Directors of MIG and will be the largest shareholders of MIG. Due to
the existence of common control of the Company and MITI, their respective
combination will be accounted for as a combination of entities under common
control. As a result, the combination of the Company and MITI will be effected
utilizing historical costs for the ownership interests of Metromedia
shareholders. The remaining ownership interests of MITI, will be accounted for
based on current fair value, as determined by the value of shares received by
such holder, in accordance with the purchase method of accounting. The merger
of Sterling into the Company will be accounted for as a purchase using the
estimated fair value of the shares received by the previous holders of Sterling
shares. For accounting purposes only, the Company is deemed to be the acquiror
of Actava and Sterling and accordingly the Actava acquisition will be accounted
for at fair value. As a result of the reverse acquisition, operations of MIG
prior to the merger will be those of the Company rather than Actava.
As discussed elsewhere herein, 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 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
<PAGE>
Page 17
obligations under the Third Restated Credit Agreement and to Sony, as discussed
below, in fiscal 1995 and 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, was obligated to make certain principal payments to Sony
pursuant to the Sony obligation in September 1995, and is obligated to make the
final principal payments to its Bank lenders under the terms of the Third
Restated Credit Agreement on October 20, 1995. 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 to Sony in September 1995, 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 payment
to the Banks, on October 20, 1995. The payments made by the Guarantors in
October and November 1994, and in September 1995 and any such additional
payments made by the Guarantors under the Bank Guarantee on behalf of the
Company to the Bank 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 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 the Plan Debt
does not exceed the Mandatory Minimum amounts 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
<PAGE>
Page 18
occurred. 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 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 did not generate sufficient Net
Cash Flow to satisfy such reformed quarterly Mandatory Minimums at the quarter
ended August 31, 1995. Because the Company did not satisfy the Mandatory
Minimum thresholds at the quarter ended August 31, 1995, an Event of Default
occurred under the Indentures on such date. As a result the Trustee or Holders
of such Notes could cause an acceleration of such Notes as described above. No
notification has been received by the Company. 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 obligations to the Banks or the Guarantors, so as
to ease the cash flow burden on MIG and avoid an acceleration of the Notes
pursuant to the Indentures. The Company will use the proceeds of the Term
Loan, cash provided by Actava, and its own cash on hand to repay all its senior
obligations to the Banks or the Guarantors and redeem all of the Plan Debt.
The Talent Notes and Creditor Notes would be redeemed at 100% of their
principal amount and the 10% Subordinated Debentures at 95% of their principal
amount (plus accrued interest, if any) at the effective time of the mergers.
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 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 acceleration of the Talent Notes and
Creditor Notes in fiscal 1996.
<PAGE>
Page 19
ORION PICTURES CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
On December 11 and 12, 1991 (the "Filing Date"), the Company and certain of its
subsidiaries filed petitions for relief under chapter 11 of Title 11 of the
United States Code (the "Bankruptcy Code") in the United States Bankruptcy
Court for the Southern District of New York (the "Court"). The Company filed
its "Debtors' Joint Consolidated Plan of Reorganization" as amended July 24,
August 7, September 3 and October 20, 1992 (the "Plan") with the Court on July
13, 1992. On October 20, 1992, the Court confirmed the Plan which became
effective on November 5, 1992 (the "Effective Date"). The Plan and the
Company's reorganization activities are more fully described in "Liquidity and
Capital Resources" below. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations" in the Company's Annual Report
on Form 10-K for the year ended February 28, 1995 (the "1995 Annual M,D & A")
for a further discussion of the Company's Plan of Reorganization and the
implications thereof.
On September 27, 1995, the Company, the Actava Group Inc. ("Actava"), MCEG
Sterling Incorporated ("Sterling"), International Tell, Inc. ("ITI") and
Metromedia International Inc. ("MITI"; and together with ITI, "MITI") signed an
Amended and Restated Agreement and Plan of Merger dated September 27, 1995 to
combine the foregoing companies (the "Merger Agreement") into a new company to
be called "Metromedia International Group, Inc.", as is more fully described in
Note 9 of Notes to Condensed Consolidated Financial Statement ("Note 9").
RESULTS OF OPERATIONS
During the second quarter of the fiscal year ending February 29, 1996 ("fiscal
1996"), the Company recorded a net loss of $9,110,000 on revenues of
$31,187,000. During the second quarter of the preceding year ("fiscal 1995"),
the Company recorded a net loss of $16,280,000 on revenues of $29,487,000.
For the first six months of fiscal 1996, the Company reported a net loss of
$18,871,000 on revenues of $73,419,000. For the first six months of fiscal
1995 the Company reported a net loss of $28,384,000 on revenue of $113,244,000.
Certain factors should be considered when evaluating the Company's results of
operations in the second quarter of both fiscal 1996 and fiscal 1995. First,
as previously disclosed, approximately two-thirds of the Company's film
inventories are stated at amounts approximating their estimated net realizable
value and do not result in the recording of gross profit upon recognition of
related revenues. A significant portion of recorded revenues in the second
quarter of both fiscal 1996 and fiscal 1995 related to such inventory product.
In addition, the Company recorded approximately $4,000,000, and $7,900,000
respectively, of writedowns on this product in the second quarter of fiscal
1996 and 1995 including in the second quarter of fiscal 1995, $2,600,000 of
writedowns to net realizable value on certain then unreleased product. Thus,
gross profit from profitable pictures (before the effect of the writedowns in
the second quarter of both fiscal 1996 and 1995 described above), was
insufficient to cover selling, general and administrative and interest costs
recognized during each quarter.
<PAGE>
Page 20
THREE MONTHS ENDED AUGUST 31 (1995 VS 1994)
REVENUES
The following table sets forth the sources of the Company's revenues from
operations by market during the second quarter of fiscal 1996 and 1995 (in
thousands):
Three Months Ended
August 31,
------------------
1995 1994
-------- --------
Theatrical distribution $ 1,216 $ 1,171
Television and video distribution:
Home video direct distribution 7,663 7,838
Home video subdistribution 2,111 1,785
Pay television 3,284 2,394
Free television and other 16,913 16,299
------- -------
Total television and video distribution 29,971 28,316
------- -------
$31,187 $29,487
======= =======
THEATRICAL REVENUES
During the current quarter, the Company released two titles in the domestic
theatrical marketplace that were acquired utilizing non-recourse financing
under the restrictions of the Plan. These titles did not contribute
significant revenues during the current quarter.
The Company's ability to produce or acquire additional product for distribution
is limited, therefore, revenues from theatrical distribution after the third
quarter of fiscal 1995 will depend entirely on the Company's ability to produce
or acquire additional product.
HOME VIDEO REVENUES
The distribution of product that was acquired utilizing non-recourse financing
or acquired for distribution on a fee only basis in the domestic home video
rental market through Orion Home Video ("OHV") accounted for over one-half of
the Company's home video direct distribution revenues during the current year's
second quarter. A substantial portion of the remaining revenues were derived
from "sell-thru" (i.e. lower priced) sales of the Company's library titles.
Approximately one quarter of the Company's home video direct distribution
revenues in the previous year's second quarter was derived from the release of
one of the Company's theatrical releases in the domestic home video rental
market. No individual picture generated significant home video subdistribution
revenues during the second quarter of fiscal 1996 or 1995.
Furthermore, the Company's reduced theatrical release schedule beginning in
fiscal 1992, and the limitations of the Plan with regard to the investment in
the production of new theatrical product, are likely to continue to have an
adverse effect on quarterly revenues in both the home video direct distribution
and subdistribution market for the foreseeable future.
PAY TELEVISION REVENUES
During the second quarter of both fiscal 1996 and 1995, no titles became
available for exclusive exhibition in the pay cable market pursuant to a
settlement (the "Showtime Settlement") reached with Showtime Networks Inc.
("Showtime") as described in Note 4 of Notes to Condensed Consolidated
Financial Statements ("Note 4").
<PAGE>
Page 21
The majority of the remainder of the Company's revenue in this market in each
quarter was recorded upon the availability of various titles under certain
foreign pay television agreements.
Furthermore, the reduced license fees under the Showtime Settlement, as
described in Note 4, the Company's reduced theatrical release schedule
beginning in fiscal 1992, and the limitations of the Plan with regard to the
investment in the production of new theatrical product, are likely to have an
adverse effect on quarterly revenues in this market for the foreseeable future.
FREE TELEVISION REVENUES
The Company's free television revenues in the three months ended August 31,
1995 and 1994 included approximately $4,700,000 and $7,200,000, respectively,
of license fees recognized from the availability in a number of foreign
territories of certain of the Company's theatrical titles. Free television
revenues in the current quarter also include fees from the availability to
Lifetime of six pictures under the Company's two major agreements with that
basic cable network compared to seven pictures in the prior year's second
quarter.
GROSS PROFIT (LOSS)
No film generated significant gross profit in either the current or prior
year's second quarter. Furthermore, as previously disclosed, approximately two-
thirds of the Company's film inventories are stated at estimated net realizable
value and do not result in the recording of gross profit upon the recognition
of related revenues. A large portion of recorded revenues in the second
quarter of fiscal 1996 and 1995 relate to this product. In addition, the prior
year's second quarter was adversely affected by $2,600,000 of writedowns to net
realizable value, based upon preliminary results, of the two films that were
released in September 1994. In addition, as is done every quarter, the Company
performed a review of its inventory of film product and, where appropriate,
adjusted values of films in release to reflect current estimates of net
realizable value. Such writedowns aggregated approximately $4,000,000 and
$5,300,000 in the second quarter of fiscal 1996 and 1995, respectively.
As previously disclosed, the Company has released only 16 theatrical films that
were substantially financed by the Company in the domestic theatrical
marketplace since the beginning of fiscal 1992 compared to an annual average of
14 releases in each of the previous three years. This reduced release schedule
has had an adverse effect on amounts and comparisons of revenues and,
consequently, gross profit and is expected to continue to have an adverse
effect on comparisons with earlier periods in the future.
INTEREST EXPENSE
Interest expense for the three months ended August 31, 1995 decreased $522,000
(7%) from the previous year's quarter from $7,266,000 to $6,744,000. This
decrease, which primarily reflects reduced interest charges on lower
outstanding debt balances as principal payments continue to reduce the
Company's debt, was partially offset by increased interest rates.
PROVISION FOR INCOME TAXES
The provision for income taxes on operations in the second 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 August 31, 1995 and 1994 are
attributable to foreign remittance taxes.
<PAGE>
Page 22
SIX MONTHS ENDED AUGUST 31 (1995 VS. 1994)
REVENUES
The following table sets forth the sources of the Company's revenues from
operations by market during the first six months of fiscal 1996 and 1995 (in
thousands):
Six Months Ended
August 31,
--------------------
1995 1994
---------- ---------
Theatrical distribution $ 2,074 $ 6,317
Television and video distribution:
Home video direct distribution 21,783 22,740
Home video subdistribution 2,516 4,401
Pay television 14,869 46,345
Free television and other 32,177 33,441
-------- --------
Total television and video distribution 71,345 106,927
-------- --------
$ 73,419 $113,244
======== ========
THEATRICAL REVENUES
Approximately 61% of the Company's theatrical revenues during the first two
quarters of fiscal 1995 were derived from the distribution of three theatrical
films in the domestic theatrical market place. During the current six-month
period, the Company released three titles in the domestic theatrical market
place that were acquired using non-recourse financing under the restrictions of
the Plan. None of these films contributed significant revenues during the
current six-month period and accordingly theatrical revenues decreased 67% to
$2,074,000 for the six months ended August 31, 1995 as compared to $6,317,000
for the six months ended August 31, 1994.
Pursuant to the terms of the Plan and the related Plan documents, the Company's
ability to produce or acquire additional product for distribution is limited.
Accordingly, revenues from theatrical distribution after the third quarter of
fiscal 1995 depend entirely on the Company's ability to produce or acquire
additional product.
HOME VIDEO REVENUES
The distribution of "BLUE SKY" in the domestic home video rental market
accounted for approximately 34% of the Company's home video direct distribution
revenues during the current six-month period. The distribution of "ROBOCOP 3"
and " CAR 54, WHERE ARE YOU?" in the domestic home video rental market and of
"DANCES WITH WOLVES" in the domestic home video "sell-thru" market through OHV
accounted for approximately 54% of the Company's home video direct distribution
revenues during the six months ended August 31, 1994. No picture generated
significant home video subdistribution revenues during the first two quarters
of fiscal 1996 or 1995. Furthermore, the Company's reduced theatrical release
schedule beginning in fiscal 1992, and the limitations of the Plan and the
related Plan documents with regard to the ability of the Company to invest in
the production of new theatrical product, are likely to have an adverse effect
on quarterly revenue in this market for the foreseeable future.
The Company's home video subdistribution revenue is primarily generated in the
foreign market place. Beginning in fiscal 1992, the Company's foreign home
video releases began to be distributed under the subdistribution agreement with
Sony described in the Company's 1995 Form 10-K. Under the terms of such
agreement, which was entered into in February 1990, and amended and restated as
of October 20, 1992, the Company received a substantial advance against the
performance of the 23 pictures (amended from 50 pictures) covered by the
agreement. Revenues recorded to date and to be recorded
<PAGE>
Page 23
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.
PAY TELEVISION REVENUES
During the first six months of fiscal 1996, three titles became available for
exclusive exhibition in the pay cable market pursuant to the Showtime
Settlement reached with Showtime, compared to nine titles which became
available in the first six months of fiscal 1995. Pay television revenues for
the current six-month period included approximately $8,700,000 from the
recognition of license fees on these titles, compared to approximately
$40,000,000 in the prior year's six-month period ended August 31, 1994.
The majority of the remainder of the Company's revenue in this market for the
first six months of each fiscal year was recorded upon the availability of
various titles under certain foreign pay television agreements.
Furthermore, as described above, the prior year's six-month period included a
one time recognition of significant domestic pay revenues due to the Showtime
Settlement. The reduced license fees under the Showtime Settlement, the
Company's reduced theatrical release schedule beginning in fiscal 1992, and the
limitations of the Plan with regard to the investment in the production of new
theatrical product, are likely to have an adverse effect on quarterly revenues
in this market for the foreseeable future.
FREE TELEVISION REVENUES
The Company's free television revenues in each of the fiscal 1996 and 1995 six-
month periods included approximately $12,000,000 and $16,700,000, respectively,
of license fees recorded upon the availability in a number of foreign
territories of certain of the Company's theatrical titles. Free television
revenues in the fiscal 1996 six-month period also includes approximately
$12,400,000 of license fees from the availability to Lifetime of 11 pictures
under the Company's two major agreements with that basic cable network, which
compares to 12 titles and approximately $9,300,000 of license fees in the
previous six-month period.
GROSS PROFIT (LOSS)
The Company's gross profit from operations for the six months ended August 31,
1995 increased $8,578,000 from the previous year's six-month period from
($1,691,000) to $6,887,000.
No title contributed significantly to gross profit in the first six months of
fiscal 1996. In the first six months of fiscal 1995 gross profit was favorably
affected by the recognition of approximately $40,000,000 of domestic pay
television license fees on nine titles pursuant to the Showtime Settlement as
described above and in Note 4. These nine titles accounted for approximately
$6,600,000 in gross profit during the period. However, this contribution to
gross profit was adversely affected by the recording of writedowns to the
estimated net realizable value of the carrying amounts of the three domestic
theatrical releases in that six-month period. These writedowns aggregated
approximately $6,500,000. In addition, a writedown to estimated net realizable
value of approximately $2,600,000 was recorded due to the preliminary results
of the two previously unreleased titles that were released in September 1994.
As is done every quarter, the Company performed a review of its inventory of
film product and, where appropriate, adjusted values of films in release to
reflect current estimates of net realizable value.
As stated in previous publicly-filed reports, the Company has released only 16
theatrical films that were substantially financed by the company in the
domestic theatrical marketplace since the beginning of fiscal 1992, compared to
an annual average of 14 releases in each of the previous three years. This
reduced release schedule has had an adverse effect on amounts and comparisons
of revenues and, consequently, gross profit and is expected to continue to have
an adverse effect on such comparisons in future periods. Furthermore, as
previously disclosed, approximately two-thirds of the Company's film
<PAGE>
Page 24
inventories are stated at estimated net realizable value and do not result in
the recording of gross profit upon the recognition of related revenues.
INTEREST EXPENSE
Interest expense for the six months ended August 31, 1995 decreased $750,000
(5%) from the prior year's six-month period from $14,421,000 to $13,671,000.
This decrease which primarily reflects reduced interest charges on lower
outstanding debt balances as principal payments continue to reduce the
Company's debt was partially offset by increased interest rates.
PROVISION FOR INCOME TAXES
The provision for income taxes for the first six months of both fiscal 1996 and
1995 are partially based upon an estimate of the effective rate for the entire
year. Only a portion of the provisions are offset by losses from operations
because of certain foreign and state taxes which cannot be mitigated by such
losses. In addition, foreign taxes are provided for certain transactions in
the period in which they occur.
The provision for income taxes for the six months ended August 31, 1995 and
1994 are attributable to foreign remittance taxes and minimum state taxes.
LIQUIDITY AND CAPITAL RESOURCES
On the Filing Date, as described above, the Company and certain of its
subsidiaries filed petitions for relief under the Bankruptcy Code in the Court.
Under the Plan, the Company will continue to concentrate its efforts on the
licensing and distribution of its library. Currently, the principal sources of
the funds required for the Company's motion picture distribution activities are
proceeds from the licensing of exhibition and ancillary rights to the Company's
library. In accordance with the terms of the Plan, the Company will be
permitted to invest in the production of new theatrical product, only if, among
other things, financing for such product can be obtained, which is secured only
by the film being produced or acquired and is thus nonrecourse to the other
assets of the Company.
Before the filing of the Company's petitions under chapter 11, the Company had
as an operating plan to release each year approximately 12 to 15 theatrical
motion pictures which the Company fully or substantially financed. Prior to
the filing, all new production was halted leaving the Company with only 12
largely completed but unreleased motion pictures at the Filing Date. In
addition, under the Plan, the Company's ability to produce or invest in new
theatrical product is severely limited as described above. Accordingly the
Company released only five, four, and three of such 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 3, approximately two-thirds of the Company's film inventories at August
31, 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.
The Company filed a proposed plan of reorganization and the related disclosure
statement as described above. The Court approved the Disclosure Statement on
September 8, 1992 and confirmed the Plan on October 20, 1992. On November 5,
1992, the Effective Date, the Company emerged from the chapter 11 proceedings.
<PAGE>
Page 25
The Plan is extremely complex and the summary presented below contains only a
brief synopsis of the compromises and benefits granted pursuant to the Plan and
is qualified in its entirety by reference to the Plan. The reader should refer
to the Plan to obtain a more thorough understanding of the provisions of the
Plan and for precise definitions of capitalized terms in the summary presented
below. The Plan represents a compromise and settlement reached among the
Company's principal creditor constituencies, most of which relinquished, upon
confirmation of the Plan, potential legal and equitable arguments in exchange
for the treatment and certainty provided by the Plan.
Under the Plan, the Company's senior secured creditors (the Banks and Sony) are
sharing 85% of the reorganized Company's Net Cash Flow. The Plan permits
certain unsecured creditors (including holders of certain 10% Subordinated
Debentures that were issued pursuant to the Plan as described below) to
receive, on a PARI PASSU basis with the senior secured creditors, the remaining
15% of Net Cash Flow. After payment in full of the Allowed Claims of the Banks
(and Metromedia and its affiliate, if they shall become subrogees under the
Bank Guarantee) and Sony, 100% of Net Cash Flow will be paid to the holders of
such unsecured Allowed Claims. After payment of the Talent Notes, holders of
the Creditor Notes and the 10% Subordinated Debentures issued pursuant to the
Plan, as described below, will share 100% of Net Cash Flow.
Under the Plan, the holders of Guild Claims and Participation Claims reduced by
17% their Allowed Prepetition Residual Claims and Allowed Preconfirmation
Participation Claims, respectively, in exchange for Talent Notes, which are
payable currently out of a portion of Net Cash Flow not required to be paid to
the Banks and Sony; holders of Allowed Postpetition Residual Claims will be or
have been paid in full with respect to such Claims. The holders of most of the
other Unsecured Claims, have or will receive Creditor Notes, which are also
payable currently out of a portion of Net Cash Flow not required to be paid to
the Banks and Sony. Additional Creditor Notes will be issued in accordance
with the Plan as and when Disputed Unsecured Claims become allowed.
Under the Plan, the holders of the Company's subordinated notes and debentures
outstanding at the Filing Date received an aggregate of $50,000,000 initial
principal amount of 10% Subordinated Debentures due October 31, 2001 of the
reorganized Company, payable out of the portion of Net Cash Flow not otherwise
payable to the Banks and Sony as described above, as well as 49% of the equity
of the reorganized Company. The holders of the Company's previously
outstanding Series B Preferred Stock and common stock received, in the
aggregate, 0.1% and 0.8%, respectively, of the common stock of the reorganized
Company. Metromedia and its affiliate have received an aggregate of 50.1% of
the common stock of the reorganized Company in exchange for $15,000,000, a
guarantee of the bank borrowings of the reorganized Company and a contribution
of all rights in respect of a letter agreement dated November 28, 1990 between
the Company and an affiliate of Metromedia (the "MetMermaids Rights").
For a period of five years from the Effective Date, the Company's By-laws
provide that the Company must cause certain Directors not affiliated with
Metromedia to be included in the Company's slate of directors nominated for
election by the Company's shareholders. One of such nominees is to be a member
of the Executive Committee of the Board of Directors of the reorganized
Company.
Pursuant to the terms of the Plan, the Company is licensing and distributing
its library. Expenditures for selling, general and administrative costs are
substantially less than the levels of such expenditures that were incurred
prior to the Filing Date. Further, the Plan limits the Company's ability to
produce or acquire new motion pictures or other product. Such product may be
produced or acquired only if, among other things, any financing of such
purchase or acquisition is secured, if necessary, only by the assets being
produced or acquired. With respect to acquired assets only, the Company is
nevertheless allowed, without any restriction, to pay related debt service out
of operating cash flow. While the Company has been able to acquire certain
distribution rights to certain new product with nonrecourse financing, no
assurance can be given that the Company will be successful in obtaining
additional nonrecourse debt financing or acquiring additional substantial
entertainment assets. Furthermore, to date, such arrangements have not
contributed substantially to the Company's results of operations.
To the extent that the Company generates Net Cash Flow, the Company is required
to make principal payments with respect to the Banks and Sony and to its
holders of its 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
<PAGE>
Page 26
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 fiscal 1995 and 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, was obligated to make certain principal payments to Sony
pursuant to the Sony obligation in September 1995, and is obligated to make the
final principal payments to its Bank lenders under the terms of the Third
Restated Credit Agreement on October 20, 1995. 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 to Sony in September 1995, 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 payment
to the Banks, on October 20, 1995. The payments made by the Guarantors in
October and November 1994, and in September 1995 and any such additional
payments made by the Guarantors under the Bank Guarantee on behalf of the
Company to the Bank 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 provide that an Event of
Default will occur under such Indentures if the aggregate amount of Net Cash
Flow paid by the Company to the holders of the Plan Debt does not exceed 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
<PAGE>
Page 27
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, 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 did not generate sufficient Net
Cash Flow to satisfy such reformed quarterly Mandatory Minimums at the quarter
ended August 31, 1995. Because the Company did not satisfy the Mandatory
Minimum thresholds at the quarter ended August 31, 1995, an Event of Default
occurred under the Indentures on such date. As a result the Trustee or Holders
of such Notes could cause an acceleration of such Notes as described above. No
notification has been received by the Company. 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 obligations to the Banks and the Guarantors, so as
to ease the cash flow burden on MIG of the mergers and avoid an acceleration of
the Notes pursuant to the Indentures. The Company will use the proceeds of the
Term Loan, cash provided by Actava, and its own cash on hand to repay all its
senior obligations to the Banks or the Guarantors and redeem all of Plan Debt.
The Talent Notes and Creditor Notes would be redeemed at 100% of their
principal amount and the 10% Subordinated Debentures at 95% of their principal
amount (plus accrued interest, if any) at the effective time of the mergers.
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 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 acceleration of the Talent Notes and
Creditor Notes in fiscal 1996.
<PAGE>
Page 28
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
1. THE CHAPTER 11 CASES
The Company may continue to be a party to numerous contested matters and
adversary proceedings pending against it in the Court seeking a variety of
forms of relief, including, without limitation, motions (a) to approve
settlements and compromises, and (b) to allow or disallow claims. Other
matters and claims may be referenced in the Disclosure Statement filed by
Debtors with the Court on July 24, 1992, as amended, and approved by such Court
by order dated September 8, 1992. The Company also has the right to file such
motions or actions as may be necessary to implement and enforce the terms of
the Plan.
Pursuant to section 362 of the Bankruptcy Code an automatic stay went
into effect when the Debtors commenced their chapter 11 cases. The automatic
stay halted, among other things, all pending litigation and prevented the
commencement of all judicial, administrative or other proceedings against the
Debtors that were or could have been commenced before the commencement of the
bankruptcy case. Pursuant to paragraph 35 of the Confirmation Order, any
action which had been stayed by operation of section 362(a) of the Bankruptcy
Code continues to be stayed pursuant to sections 1141(d) and 105(2) of the
Bankruptcy Code, absent special relief which the Court could grant.
2. THE LITIGATION-BASED CLAIMS
HEMDALE FILM CORPORATION V. ORION PICTURES CORPORATION, (Los Angeles
County Superior Court, Case No. RCO12594). On or about September 13, 1995 the
Court issued an order approving a settlement of the subject claims. The
settlement approved by the Court involves, INTER ALIA, an exchange of releases,
dismissal of pending litigation claims and the allowance of a claim within
Class 6 of the Plan. On or about September 15, 1995, the United States
Bankruptcy Court for the Central District of California which is administering
the bankruptcy case involving NSB Film Corporation, formerly known as Hemdale,
also issued an order approving the settlement of the subject claims. No appeal
was taken from either of the orders of the two bankruptcy courts approving the
settlement.
PACIFIC WESTERN PRODUCTIONS, INC., ET AL. V. HEMDALE FILM CORPORATION AND
ORION PICTURES CORPORATION, ET AL., (Los Angeles County Superior Court, Case
No. RCO12873). On or about September 26, 1995, the Court entered an order
granting a motion made by the Company and expunging all claims filed by or on
behalf of the Pacific Western Productions claimants on the ground INTER ALIA,
that the Pacific Western Productions claimants had failed to establish that
they were intended third-party beneficiaries of the various distribution
agreements between, INTER ALIA, the Company and NSB Film Corporation, formerly
known as Hemdale Film Corporation. The Company's motion was unopposed and no
appeal of the expungement order was taken.
SHARON BADAL V. ORION PICTURES CORPORATION, (United States District
Court, Southern District of New York, Case No. 91 Civ. 4288). The Court has
entered an order approving a settlement of all claims filed by or on behalf of
Sharon Badal. The settlement involves, INTER ALIA, a covenant not to sue the
Company, dismissal of pending litigation claims and the allowance of a general
unsecured claim. No appeal of the settlement approval order was taken.
Antitrust and Similar Proceedings - JOSEPH SOFFER D/B/A CINE 1-2-3-4 V.
ORION PICTURES DISTRIBUTION CORPORATION, ET AL., (United States District Court
for the District of Connecticut). The hearing on objections to the claim has
been adjourned to October 18, 1995. Settlement negotiations are ongoing. THE
MOVIE V. ORION PICTURES DISTRIBUTION CORPORATION, ORION CLASSICS, ET AL.
(United States District Court for the Northern District of California, Case No.
C86-203-90RPA). The Court has
<PAGE>
Page 29
entered an order approving settlement of all claims filed by or on behalf of
The Movie. The settlement involves, INTER ALIA, an exchange of releases,
dismissal of pending litigation claims and the allowance of a general unsecured
claim within Class 7 of the Plan. No appeal of the settlement approval order
was taken.
3. OTHER CLAIMS ISSUES
The Company filed numerous claims objections with the Bankruptcy Court,
both prior to and after the Effective Date of the Plan. Most of these
objections have been granted by the Bankruptcy Court or consensually resolved,
but certain disputes remain outstanding and ultimately will be disposed of
through negotiations or contested hearings before the Bankruptcy Court
4. SHAREHOLDER ACTION ARISING OUT OF PROPOSED TRANSACTION
JERRY KRIM V. JOHN W. KLUGE, SILVIA KESSEL, JOEL R. PACKER, MICHAEL I.
SOVERN, RAYMOND L. STEEL, STUART SUBOTNICK, ARNOLD C. WADLER, STEPHEN
WERTHEIMER, LEONARD WHITE AND ORION PICTURES CORPORATION, (Delaware Chancery
Court, C.A. No.13721). The Company and each of its directors has been named as
a defendant in a purported class action lawsuit which alleges that the mergers
with Actava, MITI and Sterling are adverse to the Company's shareholders. The
Company's directors have been sued for alleged violations of their fiduciary
duties to the Company and its shareholders and seeks to enjoin the mergers
contemplated by the Merger Agreement. The lawsuit further alleges that as a
result of the actions of the Company's directors, the Company's shareholders
will not receive the fair value of the Company's assets and business in
exchange for their Orion stock, in the mergers contemplated by the Merger
Agreement. The Company and its directors have obtained an extension of time to
answer the complaint.
HARRY LEWIS V. JOHN W. KLUGE, LEONARD WHITE, STUART SUBOTNICK, SILVIA
KESSEL, JOEL PACKER, MICHAEL I. SOVERN, RAYMOND L. STEEL, ARNOLD L. WALKER,
STEPHEN WERTHEIMER, ACTAVA GROUP, INC. AND ORION PICTURES CORP. (Delaware
Chancery Court, C.A. No. 14234); complaint filed April 17, 1995. The Company,
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. The Company and its directors have obtained an extension
of time to answer to complaint.
JAMES F. SWEENEY, TRUSTEE OF FRANK SWEENEY DEFINED BENEFIT PLAN TRUST V.
JOHN D. PHILLIPS, FREDERICK B. BREILSTEIN, 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). The Company is a defendant in this class
action lawsuit which was filed by shareholders of Actava against Actava and its
directors as well as the Company. The complaint alleges that the terms of the
merger of the Company, Actava, MITI and Sterling constitutes an overpayment by
Actava for the assets of the Company and it seeks to enjoin the mergers
contemplated by the Merger Agreement. The complaint further alleges that the
Company knowingly aided, abetted and materially assisted Actava's directors in
breach of their fiduciary duties to Actava's shareholders. The Company has
obtained an indefinite extension 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.
<PAGE>
Page 30
5. OTHER LITIGATIONS
CINEFIN CORPORATION V. ORION PICTURES CORPORATION ET AL. (Los Angeles
County Superior Court; Case No. BC135254) On September 13, 1995, plaintiff
CineFin Corporation ("CineFin") filed an action against the Company, asserting
causes of action for breach of contract. The Complaint alleges that the
Company wrongfully terminated and otherwise breached certain written agreements
with CineFin, specifically, the Multiple Picture Submission/Distribution
Agreement and the Sales Representative Agreement, which respectively provided,
INTER ALIA, that the Company would distribute, in various domestic markets,
certain motion pictures financed and produced by CineFin, and that CineFin
would act as a sales representative for the Company's product in certain
international markets (the "CineFin Territory"). Plaintiff seeks unspecified
compensatory damages, alleged to exceed $100 million with respect to the Sales
Representative Agreement, plus attorneys fees and costs. Plaintiff also seeks
provisional and permanent injunctive relief restraining the Company from
soliciting sales of the Company's product in the CineFin Territory. The
Company's Answer is due on October 16, 1995. The Company believes that it has
meritorious defenses to the claims made against it in this action, and believes
it has meritorious claims, which it indends to pursue, against Cinefin.
<PAGE>
Page 31
ITEM 4. EXHIBITS AND REPORTS ON FORM 8-K
(A) EXHIBITS
11. - Statement Re: computation of per-share earnings
(B) REPORTS ON FORM 8-K
The Registrant filed a Current Report on Form 8-K on September 7, 1995,
The Registrant filed a Current Report on Form 8-K on September 14, 1995,
The Registrant filed a Current Report on Form 8-K on September 28, 1995.
<PAGE>
Page 32
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
ORION PICTURES CORPORATION
(Registrant)
Dated: October 16, 1995 \S\ CYNTHIA A. FRIEDMAN
---------------------------
Cynthia A. Friedman
Senior Vice President and
Chief Financial Officer
EXHIBIT 11
ORION PICTURES CORPORATION
STATEMENT RE COMPUTATION OF PER SHARE EARNINGS
(in thousands, except per-share amounts)
Three Months Ended August 31 Six months Ended August 31,
1995 1994 1995 1994
Net loss $ (9,110) $ (16,280) $ (18,871) $ (28,384)
========== ========== ========== ==========
Weighted average
number of shares
outstanding 20,000 20,000 20,000 20,000
========== ========== ========== ==========
Loss per common
share $ (0.46) $ (0.81) $ (0.94) $ (1.42)
========== ========== ========== ==========
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> FEB-29-1996
<PERIOD-END> AUG-31-1995
<CASH> 18504
<SECURITIES> 0
<RECEIVABLES> 67139
<ALLOWANCES> 11600
<INVENTORY> 207191
<CURRENT-ASSETS> 0
<PP&E> 2314
<DEPRECIATION> 177
<TOTAL-ASSETS> 307105
<CURRENT-LIABILITIES> 0
<BONDS> 197536
<COMMON> 5000
0
0
<OTHER-SE> (32338)
<TOTAL-LIABILITY-AND-EQUITY> 307105
<SALES> 31187
<TOTAL-REVENUES> 31187
<CGS> 27631
<TOTAL-COSTS> 33453
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 6744
<INCOME-PRETAX> (9010)
<INCOME-TAX> 100
<INCOME-CONTINUING> (9110)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (9110)
<EPS-PRIMARY> (0.46)
<EPS-DILUTED> (0.46)
</TABLE>
