- --------------------------------------------------------------------------------
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
----------
FORM 10-K
(Mark One)
|X| ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 (FEE REQUIRED)
For the fiscal year ended December 31, 1996
OR
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 (NO FEE REQUIRED)
For the transition period from _____________ to _____________
Commission File Number 1-5706
----------
METROMEDIA INTERNATIONAL GROUP, INC.
(Exact name of registrant, as specified in its charter)
DELAWARE 58-0971455
(State or other jurisdiction (I.R.S. Employer
of incorporation or Identification No.)
organization)
One Meadowlands Plaza, East Rutherford, New Jersey 07073-2137
(Address and zip code of principal executive offices)
(201) 531-8000
(Registrant's telephone number, including area code)
----------
Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange
on which registered
Common Stock, $1.00 par value American Stock Exchange
Pacific Stock Exchange
9 1/2% Subordinated Debentures, due August 1, 1998 New York Stock Exchange
10% Subordinated Debentures, due October 1, 1999 New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act:
None
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes |X| No |_|
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K.
The aggregate market value of voting stock of the registrant held by
nonaffiliates of the registrant at February 28, 1997 computed by reference to
the last reported sale price of the Common Stock on the composite tape on such
date was $507,383,400.
The number of shares of Common Stock outstanding as of February 28, 1997
was 66,157,971.
Documents Incorporated by Reference
Portions of the Definitive Proxy Statement to be used in connection with
the Registrant's 1997 Annual Meeting of Stockholders are incorporated by
reference into Part III of this Annual Report on Form 10-K.
- --------------------------------------------------------------------------------
<PAGE>
PART I
Item 1. Business
Metromedia International Group, Inc.
Metromedia International Group, Inc. ("MMG" or "the Company") is a global
communications, entertainment and media company engaged in two strategic
businesses: (i) the development and operation of communications businesses,
including wireless cable television, AM/FM radio, paging, cellular
telecommunications, international toll calling and trunked mobile radio, in
Eastern Europe, the republics of the former Soviet Union, the People's Republic
of China (the "PRC") and other selected emerging markets, through its
Communications Group ( the "Communications Group") and (ii) the production and
worldwide distribution in all media of motion pictures, television programming
and other filmed entertainment and the exploitation of its library of over 2,200
feature film and television titles, through its Entertainment Group (the
"Entertainment Group"). Each of these businesses currently operates on a stand
alone basis, pursuing distinct business plans designed to capitalize on the
growth opportunities within their individual industries. As these industries
continue to converge worldwide, the Company expects to be able to capitalize on
synergies resulting from its position as a diversified company with significant
operations in communications, entertainment and media services.
During 1996, the Company experienced significant development in both its
Communications and Entertainment Groups. For example, aggregate subscribers of
the Communications Group's joint ventures various services at the end of the
1996 fiscal year was approximately 120,596, representing a growth of
approximately 130% over the 1995 year end total of approximately 52,360
subscribers. The Communications Group's financial results for December 31
include the Group's joint ventures for the 12 months ending September 30th. In
addition, during 1996, the Entertainment Group increased its feature film
production, acquisition and distribution as it released 13 feature films and
announced plans to release approximately 17 feature films in 1997.
In addition to its Communications and Entertainment Groups, the Company also
owns two nonstrategic businesses: Snapper, Inc. ("Snapper"), a wholly-owned
subsidiary of the Company, and its investment in RDM Sports Group, Inc.
(formerly known as Roadmaster Industries, Inc.) ("RDM"), each of which the
Company owned prior to the November 1, 1995 Merger (as defined below) and the
subsequent shift in its business focus to a global communications, entertainment
and media company. Snapper manufactures Snapper(R) brand premium-priced power
lawnmowers, lawn tractors, garden tillers, snowthrowers and related parts and
accessories. RDM, which is listed on the New York Stock Exchange, is a leading
sporting goods manufacturer of which the Company owns approximately 19.2 million
shares, approximately 39%, of the outstanding shares.
Following the consummation of the November 1 Merger (as defined below), the
Company publicly announced that it was actively exploring a sale of both Snapper
and its investment in RDM, and as a result, for accounting purposes, both assets
were classified as assets held for sale and the results of operations for both
assets were not consolidated with the Company's consolidated results of
operations for the period from November 1, 1995 through October 31, 1996. The
Company has decided not to continue to pursue its previously adopted plan to
dispose of Snapper and to actively manage Snapper to maximize its long-term
value. As of November 1, 1996, the Company has included Snapper's operating
results in the consolidated results of operations of the Company for the
two-month period ended December 31, 1996. (see "Business-Snapper"). The Company
continues to pursue opportunities for a sale of its investment in RDM. In
addition, the Company, consistent with its fiduciary duty to stockholders,
evaluates opportunities as they arise to maximize stockholder value by disposing
of other assets.
1
<PAGE>
The Company was organized in 1929 under Pennsylvania law and reincorporated in
1968 under Delaware law. On November 1, 1995, as a result of the mergers of
Orion Pictures Corporation ("Orion") and Metromedia International
Telecommunications, Inc. ("MITI") with and into wholly-owned subsidiaries of the
Company and the merger of MCEG Sterling Incorporated ("Sterling") with and into
the Company (collectively, the "November 1 Merger"), the Company changed its
name from "The Actava Group Inc." to "Metromedia International Group, Inc." The
Company's principal executive offices are located at One Meadowlands Plaza, East
Rutherford, New Jersey 07073-2137, telephone: (201) 531-8000.
Description of Business Groups
In addition to the other information contained in this Form 10-K, the following
factors should be considered carefully in evaluating the Company and its
business. Certain statements set forth below under this caption constitute
"Forward-Looking Statements" within the meaning of the Private Securities
Litigation Reform Act of 1995. See "Special Note Regarding Forward-Looking
Statements" on page 55 for relating to such statements.
For a complete description of the consolidated financial statements of the
Company, see Part IV.
The Communications Group
The Communications Group was founded in 1990 to take advantage of the growing
demand for modern communications services in Eastern Europe and the republics of
the former Soviet Union and in other selected emerging markets and launched its
first operating system in 1992. The Communications Group's markets generally
have large populations, with high density and strong economic potential, but
lack reliable and efficient communications services. At December 31, 1996, the
Communications Group owned interests in and participated with partners in the
management of joint ventures that had 29 operational systems, consisting of 9
wireless cable television systems, 6 AM/FM radio stations, 9 paging systems, 1
international toll calling service and 4 trunked mobile radio systems. In
addition, the Communications Group has interests in and participates with
partners in the management of joint ventures (the "Joint Ventures") that, as of
December 31, 1996, had 6 pre-operational systems consisting of 1 wireless cable
television system, 1 paging system, 2 cellular telecommunication systems, 1
trunked mobile radio system and 1 company providing sales, financing and service
for wireless local loop equipment, each of which the Company believes will be
operational during 1997. The Communications Group generally owns approximately
50% of the Joint Ventures in which it invests. The Company's objective is to
establish the Communications Group as a major multiple-market provider of modern
communications services in Eastern Europe, the republics of the former Soviet
Union, the PRC and other selected emerging markets.
The Company's Communications Group's Joint Ventures experienced significant
growth in 1996. Total subscribers for the Communications Group's Joint Ventures
at the end of the 1996 fiscal year was 120,596 compared with 52,360 at year end
1995, which represents an increase of approximately 130%. The Communications
Group's financial results for December 31 include the Group's Joint Ventures for
the 12 months ending September 30th.
2
<PAGE>
The following chart summarizes operating statistics by service type of both the
licensed but pre-operational and operational systems constructed by the
Communications Group's Joint Ventures:
<TABLE>
<CAPTION>
Target
Population/
Pre-Operational Markets Households (MM) Aggregate
Communications Markets at Operational at at Subscribers at
Service December 31, December 31, December 31,(1) December 31,
1996 1996 1995 1996 1995 1996 1995
<S> <C> <C> <C> <C> <C> <C> <C>
Wireless Cable Television(2) 1 9 7 9.5 7.2 69,118 37,900
AM/FM Radio - 6 5 23.8 22.2 n/a n/a
Paging(3) 1(4) 9 6 89.5 73.3 44,836 14,460
Cellular Telecommunications 2(5) - - 8.2 - n/a n/a
International Toll Calling(6) - 1 1 5.5 5.5 n/a n/a
Trunked Mobile Radio(7) 1(8) 4(8) - 36.2 - 6,642 -
Wireless Local Loop(9) 1 - - 72.6(10) - n/a n/a
</TABLE>
(1) Target population is provided for paging, telephony and trunked mobile
radio systems and target households is provided for wireless cable
television systems and radio stations.
(2) After December 31, 1996, one of the Communications Group's Joint Ventures
acquired a wired network adding approximately 37,000 subscribers.
(3) Target population for the Communications Group's paging joint ventures
included the total population in the jurisdictions where such joint
ventures are licensed to provide services. In many markets, however, the
Communications Group's paging system currently only covers the capital
city and is expanding into additional cities.
(4) Since December 31, 1996, the Communications Group has commenced a paging
operation in Vienna, Austria, which was licensed to provide paging
services nationwide.
(5) The Communications Group owns 23.6% of Baltcom GSM which subsequent to
December 31, 1996 completed construction and launched commercial service
of a national cellular telecommunications system in Latvia. The
Communications Group also owns 34.3% of a joint venture that holds a
license and has recently begun construction of a nationwide cellular
telecommunications system in Georgia.
(6) Provides international toll calling services between Georgia and the rest
of the world and is the only Intelstat-designated representative in
Georgia to provide such services.
(7) Target population for the Communications Group's trunked mobile radio
systems includes total population in the jurisdictions where such joint
ventures are licensed to provide services. In many markets, the
Communications Group's systems are only operational in major cities.
(8) Since December 31, 1996, the Communications Group has commenced trunked
mobile radio services in Almaty and Atyrau, Kazakstan.
(9) The Communications Group owns a 60% interest in a pre-operational joint
venture in China that provides telecommunications equipment, financing,
network planning, installation and maintenance services.
(10) Indicates population of the Hebei and Tianjin provinces in China in which
the Communications Group's joint venture has tested it equipment.
Licenses
The Communications Group's operations are subject to governmental regulation in
its markets and its operations require certain governmental approvals. There can
be no assurance that the Communications Group will obtain necessary approvals to
operate additional wireless cable television, wireless telephony or paging
systems or radio broadcast stations in any of the markets in which it is seeking
to establish its businesses.
3
<PAGE>
The licenses pursuant to which the Communications Group's businesses operate are
issued for limited periods, including certain licenses which are renewable
annually. Certain of these licenses expire over the next several years. Two of
the licenses held by the Communications Group have recently expired, although
the Communications Group has been permitted to continue operations while the
reissuance is pending. The Communications Group has applied for renewals and
expects new licenses to be issued. Five other licenses held or used by the
Communications Group will expire during 1997. While there can be no assurance on
this matter, based on past experience, the Communications Group expects that all
of these licenses will be renewed. For most of the licenses held or used by the
Communications Group, no statutory or regulatory presumption exists for renewal
by the current license holder, and there can be no assurance that such licenses
will be renewed upon the expiration of their current terms. The Communications
Group's partners in these ventures have not advised the Communications Group of
any reason such licenses would not be renewed. The failure of such licenses to
be renewed may have a material adverse effect on the Communications Group.
Additionally, certain of the licenses pursuant to which the Communications
Group's businesses operate contain network build-out milestone clauses. The
failure to satisfy such milestones could result in the loss of such licenses
which may have a material adverse effect on the Communications Group.
In addition to its existing projects and licenses, the Communications Group
continues to explore a number of investment opportunities in wireless telephony
systems in certain markets in Eastern Europe, including Romania, the republics
of the former Soviet Union, including Kazakstan, the PRC and other selected
emerging markets, and has installed test systems in certain of these selected
markets. The Communications Group acquired or obtained access to the right to
offer its services under a total of 16 new licenses to provide its various
services in 1996 in both new and existing markets.
In February 1997, the Communications Group, through Metromedia Asia Corporation
("MAC"), acquired Asian America Telecommunications Corporation ("AAT"), a
company which owns interests in and participates in the management of two
separate joint ventures in the PRC, and which has entered into agreements with
China United Telecommunications Corporation ("China Unicom") to (i) construct
and develop a local telephone network for up to 1,000,000 lines in the Sichuan
province in which the Communications Group will utilize fixed wireless local
loop technology and (ii) construct and develop a wireless GSM system for up to
50,000 subscribers in the City of Ningbo. As a result of the consummation of the
acquisition of AAT, the Communications Group owns 57% of MAC.
Strategies
The Communications Group intends to expand its subscriber and customer bases, as
well as its revenues and cash flows, by (i) completing the build-out of existing
license areas; (ii) utilizing low cost wireless technology; (iii) growing the
subscriber base in existing license areas; (iv) pursuing additional licenses in
existing markets; and (v) obtaining new licenses.
The use of wireless technologies has allowed and will continue to allow the
Communications Group to build-out its existing and future license areas more
rapidly and at a lower cost than the construction of comparable wired networks.
Many of the cities where the Communications Group has wireless licenses
significantly limit wireline construction above and/or underground.
4
<PAGE>
Since its formation in 1990, the Communications Group has been investing in
joint ventures to obtain communications licenses in emerging markets. Since the
consummation of the Company's offering of 18.4 million shares of common stock in
July 1996, the Company has accelerated the construction and marketing of its
communications systems. In 1996, the Company expanded the build-out of its
paging operations in Uzbekistan by adding several cities as part of its
long-term plan to provide nationwide paging service.
The Communications Group believes it will continue to add subscribers by (i)
targeting each demographic group in its markets with customized communications
services; (ii) cross-marketing and bundling communications services to existing
customers; (iii) providing technologically-advanced services and a high level of
services to its customers; (iv) providing new and targeted programming on its
radio stations to increase its advertising revenue and (v) opportunistically
acquiring additional existing systems in its service areas and in other
strategic areas to increase its subscriber base.
The Communications Group is pursuing opportunities to provide additional
communications services in regions in which it currently operates. Recently, for
example, the Communications Group launched commercial service of GSM
telecommunications in Latvia where it already provides wireless cable
television, paging and radio broadcasting services. This strategy enables the
Communications Group to leverage its existing infrastructure and to capitalize
on marketing opportunities by bundling its services. The Communications Group
believes that it has several competitive advantages that will enable it to
obtain licenses in these markets, including: (i) established relationships with
local strategic partners and local governments; (ii) a proven track record of
handling and operating systems and (iii) a fundamental understanding of the
regions' political, economic and cultural issues.
The Communications Group is actively pursuing investments in joint ventures to
obtain new licenses for wireless communications services in markets in which it
presently does not have any licenses. The Communications Group is targeting
emerging markets with strong economic potential, but which lack adequate
communications services. In evaluating whether to enter a new market, the
Communications Group assesses, among other factors, (i) the potential demand for
the Communications Group's services and the availability of competitive
services; (ii) the strength of local partners; and (iii) the political, social
and economic environment. The Communications Group has identified several
attractive opportunities in Eastern Europe and the Pacific Rim. Recently, for
example, the Communications Group began to provide paging services in Austria,
radio broadcasting in Prague, Czech Republic. In February 1997, the
Communications Group, through MAC acquired AAT, which owns interests in and
participates in the management of joint ventures which have agreements to
provide wireless telephone equipment and services in certain provinces of the
PRC. The Communications Group owns 57% of MAC.
The Communications Group has experienced significant growth since its inception
and continues to pursue additional investments in a variety of Communications
Businesses in both existing and additional markets. The Group's growth strategy
requires the Company to expend significant capital to enable the Communications
Group to continue to develop its existing operations and to invest in additional
ventures. There can be no assurance that the Company will have the funds
necessary to support the current needs of the Communications Group's current
investments or any of the Communications Group's additional opportunities or
that the Communications Group will be able to obtain financing from third
parties. If such financing is unavailable, the Group may not be able to further
develop existing ventures and the number of additional ventures in which it
invests may be significantly curtailed. See Item 7 Management's Discussion and
Analysis of Financial Condition and Results of Operations, Liquidity and Capital
Resources.
5
<PAGE>
Wireless Cable Television
General. The Communications Group commenced offering wireless cable television
services in 1992 with the launch by two of its Joint Ventures of Kosmos TV in
Moscow, Russia ("Kosmos") and Baltcom TV in Riga, Latvia ("Baltcom"). The
Communications Group currently has interests in joint ventures which offer
wireless cable television services in 10 markets in Eastern Europe and the
republics of the former Soviet Union with approximately 69,118 subscribers at
December 31, 1996, an increase of approximately 82% from December 31, 1995. In
addition, the Communications Group has an interest in a joint venture which is
licensed to provide wireless cable television service and is building a system
in St. Petersburg, Russia and in January 1997, one of the Communications Group's
joint ventures acquired an existing wired network system in Romania, adding a
total of approximately 37,000 connected subscribers. The Communications Group
believes that there is a growing demand for multi-channel television services in
each of the markets where its Joint Ventures are operating, which is driven by
several factors including: (i) the lack of quality television and alternative
entertainment options in these markets; (ii) the growing demand for Western-type
entertainment programming; and (iii) the increase in disposable income in these
markets which is raising the demand for entertainment services.
Technology
Each of the Communications Group's wireless television joint ventures utilizes
microwave multipoint distribution system ("MMDS") technology. The Communications
Group believes that MMDS is the most attractive technology to utilize for
multi-channel television services in these markets because (i) the initial
construction costs of an MMDS system generally are lower than wireline cable or
direct-to-home ("DTH") satellite transmission; (ii) the time required to
construct a wireless cable network is significantly less than the time required
to build a standard wireline cable television network covering a comparably
sized service area; (iii) the obstacles to obtaining the required permits and
rights-of-way to construct wired networks in the Communications Group's markets
are substantial; (iv) the high communications tower typically utilized by the
MMDS network combined with the high density of multi-family dwelling units in
these markets gives the MMDS networks very high line of sight ("LOS")
penetration; and (v) the wide bandwidth of the spectrum typically licensed by
each of the Communications Group's Joint Ventures gives each system the ability
to broadcast a wide variety of attractive international and localized
programming.
In each system operated by the Communications Group's Joint Ventures, encrypted
multichannel signals are broadcast in all directions from a transmission tower
which, in the case of such joint ventures systems, is typically the highest
structure in the city and, as a result, has very high LOS penetration.
Specialized compact receiving antenna systems, installed by the Communications
Group on building rooftops as part of the system, receive the multiple channel
signals transmitted by the transmission tower antennae and convert and route the
signals to a set-top converter and a television receiver via a coaxial cabling
system within the building. In each city where the Communications Group provides
or expects to provide service, a substantial percentage of the population lives
in large, multi-dwelling apartment buildings. This infrastructure significantly
reduces installation costs and eases penetration of wireless cable television
services into a city, because a single MMDS receiving location can bring service
to numerous apartment buildings housing a large number of people. In order to
take advantage of such benefits, in many areas the Communications Group is
internally wiring buildings so that it can serve all of the apartment dwellers
in such buildings through one microwave receiving location. The set-top
converter descrambles the signal and is also used as a channel selector to
augment televisions having a limited number of channels. The Communications
Group generally utilizes the same equipment across its wireless cable television
systems which enables it to realize purchasing efficiencies in the build-out of
its networks.
6
<PAGE>
In two cities in which the Communications Group's Joint Ventures operate
wireless cable television systems, Bucharest, Romania and Chisinau, Moldova,
where local cable television companies have been able to construct large wired
networks, its Joint Ventures have also purchased wired networks and are in the
process of integrating the wired operations with their wireless systems. The
Communications Group believes that in these markets, the integration of these
wired networks into its Communications Group's wireless operations will enable
the Communications Group to build its subscriber base while delivering high
quality, premium services to existing subscribers.
Programming. The Communications Group believes that programming is a critical
component in building successful wireless cable television systems. The
Communications Group currently offers a wide variety of programming including
English, French, German and Russian programming, some of which is dubbed or
subtitled into the local language. In order to maximize penetration and revenues
per subscriber, the cable television joint ventures generally offer multiple
tiers of service including, at a minimum, a "lifeline" service, a "basic"
service and a "premium" service. Generally, the lifeline service provides
programming of local off-air channels and an additional two to four channels
with a varied mixture of European or American sports, music, international news
and general entertainment. The basic and premium services generally include the
channels which make up the lifeline service, as well as an additional number of
satellite channels and a movie channel that offers recent and classic movies.
In most of its markets, the Communications Group offers subscribers different
tiers of programming , with a variety of channels. The content of each
programming tier varies from market to market, but generally include channels
such as MTV, Eurosport, NBC Super Channel, Bloomberg TV, Cartoon Network/TNT,
BBC World, CNN, SKY News/Discovery Channel and the Adult Channel. Each tier also
offers localized programming.
In one of its markets, the Communications Group offers "pay-per-view" movies and
plans to add similar services to its program lineups in certain of its other
markets. The subscriber pays for "pay-per-view" services in advance, and the
intelligent decoders that the Communications Group uses automatically deduct the
purchase of a particular service from the amount paid in advance. In addition,
one of the Communications Group's Joint Ventures has created a movie channel,
"TV21", consisting of U.S. and European films dubbed into Russian language and
distributes this channel (dubbed in different languages) to most of the
Communications Group's other wireless cable television ventures. Centralized
dubbing and distribution of this movie channel has enabled the Communications
Group to avoid the cost of separately providing a similar movie channel in its
other markets.
The Communications Group has been able to capitalize on synergies with the
Entertainment Group by establishing the Metromedia Entertainment Network ("MEN")
programming package which it licenses to cable television companies in Romania.
MEN contains a number of subtitled channels with the main attraction being the
"Orion Film Channel," a channel containing movies primarily distributed by the
Entertainment Group. The Communications Group is currently exploring the
roll-out of MEN in certain other markets.
7
<PAGE>
Marketing. While each wireless cable television joint venture initially targets
its wireless cable television services toward foreign national households,
embassies, foreign commercial establishments and international and local hotels,
each system offers multiple tiers, at least one of which is targeted toward, and
within the economic reach of, a substantial and growing number of the local
population in each market. The Communications Group offers several tiers of
programming in each market and strives to price the lowest tier at a level that
is affordable to a large percentage of the population and that generally
compares in price, to alternative entertainment products. The Communications
Group believes that a growing number of subscribers to local broadcast services
will demand the superior quality programming and increased viewing choices
offered by its MMDS service. Upon launching a particular service, the
Communications Group uses a combination of event sponsorships, billboard, radio
and broadcast television advertisements to increase awareness in the marketplace
about its services.
Competition. Each of the Communications Group's wireless cable television
systems competes with off-the-air broadcast television stations. In addition, in
many markets there are several existing wireline cable television providers
which are generally small, undercapitalized local companies that are providing
limited programming to subscribers in limited service areas. In many of its
wireless cable television markets, it competes with providers of DTH programming
services, which offer subscribers programming directly from satellite
transponders. The Communications Group believes that it has significant
competitive advantages over DTH providers via lower cost and the ability to
offer localized programming.
AM/FM Radio
General. The Communications Group entered the radio broadcasting business in
Eastern Europe through the acquisition of Radio Juventus in Hungary in 1994. It
operates radio stations in Eastern Europe and the republics of the former Soviet
Union and owns and operates, through joint ventures, stations in six markets.
The Communications Group's radio broadcasting operations generally seek to
acquire underdeveloped "stick" properties (i.e., stations with insignificant
ratings and little or no positive cash flow) at attractive valuations. The
Communications Group then installs experienced radio management to improve
performance through increased marketing and focused programming. Management
utilizes its programming expertise to specifically tailor the programming of
each station utilizing sophisticated research techniques to identify
opportunities within each market and programs its stations to provide complete
coverage of a demographic or format type. This strategy allows each station to
deliver highly effective access to a target demographic and capture a higher
percentage of the radio advertising audience share.
Programming. Programming in each of the Communications Group's AM and FM markets
is designed to appeal to the particular interests of a specific demographic
group in such markets. The Communications Group's radio programming formats
generally consist of popular music from the United States, Western Europe, and
the local region. News is delivered by local announcers in the language
appropriate to the region, and announcements and commercials are locally
produced. By developing a strong listener base comprised of a specific
demographic group in each of its markets, the Communications Group believes it
will be able to attract advertisers seeking to reach these listeners. The
Communications Group believes that the technical programming and marketing
expertise that it provides to its Joint Ventures enhances the performance of the
Joint Ventures' radio stations.
8
<PAGE>
Marketing. Radio station programming is generally targeted toward
25-to-55-year-old consumers, who are believed by management of the
Communications Group to be the most affluent in the Group's radio markets. Each
station's format is intended to appeal to the particular listening interests of
this consumer group in its market. This is intended to enable the commercial
sales departments of each Joint Venture to present to advertisers the most
desirable market for their products and services, thereby heightening the value
of the station's commercial advertising time. Advertising on these stations is
sold to local, national and international advertisers.
Competition. In each of the Communications Group's existing markets, there are
either a number of stations in operation already or plans for competitive
stations to be in service shortly. As additional stations are constructed and
commence operations, the Communications Group expects to face significantly
increased competition for listeners and advertising revenues from parties with
programming, engineering and marketing expertise comparable to the
Communications Group. Other media businesses, including broadcast television,
cable television, newspapers, magazines and billboard advertising also compete
with the Communications Group's radio stations for advertising revenues.
Paging
General. The Communications Group commenced offering radio paging services in
1994 with the launch of paging networks serving the countries of Romania and
Estonia. Paging systems are useful in these markets as a means for one-way
business/personal communications without the need for a recipient to access a
telephone network, which in many of these markets is often overloaded or
unavailable. At December 31, 1996, the Communications Group's paging joint
ventures were licensed to offer paging services in markets containing
approximately 89.5 million persons. The Communications Group's Joint Ventures
generally provide service in the capital or major cities in these countries and
are currently expanding the services of such operations to cover additional
areas. At December 31, 1996, the Communications Group's Joint Ventures paging
service operations had an aggregate of approximately 44,836 subscribers, from
approximately 14,460 subscribers at December 31, 1995, an increase of
approximately 210%.
The Communications Group offers several types of paging services. Substantially
all of the Group's subscribers choose alphanumeric pagers, which emit a variety
of tones and display as many as 63 characters. Subscribers may also purchase
additional services, such as paging priority, group calls and other options. The
Group provides a choice of pagers, which are typically purchased by the
subscriber or leased for a small monthly fee. The Communications Group also
provides 24-hour operator service with operators who are capable of taking and
sending messages in several languages.
Technology
Paging is a one-way wireless messaging technology which uses an assigned
frequency and a specific pager identifier to contact a paging customer within a
geographic service area. Each customer who subscribes to a paging service is
assigned a specific pager number. Transmitters broadcast the appropriate signal
or message to the subscriber's pager, which has been preset to monitor a
designated radio frequency. Each pager has a unique number identifier, or "cap
code," which allows it to pick up only those messages sent to that pager. The
pager signals the subscriber through an audible beeping signal or an inaudible
vibration and displays the message on the subscriber's pager. Depending on the
market, the joint ventures offer alphanumeric pagers which have Latin and/or
Cyrillic (Slavic language) character display.
The effective signal coverage area of a paging transmitter typically encompasses
a radius of between 15 and 20 miles from each transmitter site. Obstructions,
whether natural, such as mountains, or man-made, such as large buildings, can
interfere with the signal. Multiple transmitters are often used to cover large
geographic areas, metropolitan areas containing tall buildings or areas with
mountainous terrain.
9
<PAGE>
Each of the Communications Group's paging joint ventures use either terrestrial
radio frequency ("RF") control links that originate from one broadcast
transmitter which is controlled by a local paging terminal and broadcast to each
of the transmitters or to a satellite uplink controlled by the paging terminal,
which transmits to a satellite and downlinks to a receiving dish adjacent to
each of the transmitters. Once a message is received by each transmitter in a
simulcast market, they in turn broadcast the paging information using the paging
broadcast frequency. The RF control link frequency is different from the paging
broadcast frequency. For non-contiguous regional coverage, either telephone
lines or microwave communication links are also used in lieu of an RF control
link or satellite link.
Marketing. Paging services are targeted toward people who spend a significant
amount of time outside of their offices, have a need for mobility or are
business people without ready access to telephones. The Communications Group
targets its paging services primarily to local businesses, the local police, the
military, and expatriates. Paging provides an affordable way for local
businesses to communicate with employees in the field. Subscribers are charged a
monthly fee which entitles the subscriber to receive an unlimited number of
pages per month.
Competition. In some of the Communications Group's paging markets, the
Communications Group has experienced and expects to continue to experience
competition from existing small, local, paging operators who have limited areas
of coverage, and, in a few cases, from paging operators established by Western
European and United States investors with substantial experience in paging. The
Communications Group believes it competes effectively against these companies
with its high quality, reliable, 24-hour service. The Communications Group does
not have or expect to have exclusive franchises with respect to its paging
operations and may therefore face more significant competition in its markets in
the future from highly capitalized entities seeking to provide similar services.
Cellular Telecommunications
Overview. The Communications Group owns a 23.6% interest in Baltcom GSM, which
has recently completed construction and launched commercial service of a
national cellular telephone system in Latvia. The Communications Group also owns
a 34.3% interest in Magticom, a joint venture that holds a license for and has
recently begun construction on a national cellular telephone system in the
country of Georgia. The Communications Group is partnered in these ventures with
Western Wireless, a leading U.S. cellular provider. The Communications Group
believes that there is a large demand for cellular telephone service in each of
Latvia and Georgia due to the limited supply and poor quality of wireline
telephone service in these markets, as well as the rapidly growing demand for
the mobility offered by cellular telephone service. Landline telephone
penetration is approximately 25% in Latvia and 9% in Georgia. The demand for
reliable and mobile telephone service is increasing rapidly and the pace is
expected to continue as commerce in these regions continues to experience rapid
growth.
In addition, through AAT, the Communications Group has entered into a joint
venture agreement with Ningbo United Telecommunications Investment Co., Ltd. to
(i) finance and assist China Unicom, in the construction of an advanced GSM
cellular telephone network; and (ii) provide consulting and management support
services to China Unicom in its operation of such network within the City of
Ningbo, PRC. This project will have a capacity of up to 50,000 subscribers.
Construction of the project has recently been completed and the joint venture
has begun to market the network to subscribers. This Communications Group's
joint venture is entitled to 73% of the distributed cash flow, as defined in the
joint venture agreement, from the network for a 15-year period.
10
<PAGE>
Technology. The Communications Group's cellular telephone network in Latvia has
been constructed and the telephone network in Georgia is being constructed using
GSM technology. GSM is the standard for cellular service throughout Western
Europe, which will allow the Communications Group's customers to "roam"
throughout the region. GSM's mobility is a significant competitive advantage
compared to competing Advanced Mobile Phone System ("AMPS") services which
cannot offer roaming service in most neighboring countries in Europe or Nordic
Mobile Telephone ("NMT") services which are based on what the Communications
Group believes is an older and less reliable technology.
Marketing. The Communications Group targets its cellular telephony services
toward individuals, corporations and other organizations with a need for
mobility, ready access to a high quality voice transmission service and the
ability to conduct business outside of the workplace or home. The Communications
Group sells cellular phones at a small mark-up to cost. This pass-through
strategy encourages quick market penetration and early acceptance of cellular
telephony as a desirable alternative to fixed land-based telephony systems. The
Communications Group intends to market its cellular telephony service to
customers of its existing wireless cable television and paging services in both
Latvia and Georgia. The Group believes that this database of names will be
useful in marketing its cellular telephony services, as these are customers who
already have exhibited an interest in modern communications services. In
addition, these joint ventures intended to market these services by providing a
comprehensive set of packages with different service features which permit the
subscriber to choose the package that most closely fits his or her needs.
Competition. Baltcom GSM's primary competitor in Latvia is Latvia Mobile Telecom
("LMT"), which is partly owned by a state-owned enterprise. LMT commenced
service in 1995 and currently has approximately 20,000 subscribers. LMT operates
a second system using the older, less efficient NMT technology that the
Communications Group believes will pose less of a competitive threat than LMT's
GSM system. The Communications Group believes that its primary competitors in
Georgia will be Geocell, a Georgian-Turkish joint venture that recently launched
commercial service using a GSM system, as well as an existing smaller provider
of cellular telephony service which uses the AMPs technology in its network.
The Communications Group also faces competition from the primary provider of
telephony services in each of its markets, which are the national PTTs. However,
given the low telephone penetration rates in these markets and the
underdeveloped landline telephone system infrastructure, the Communications
Group believes that cellular telephony provides an attractive alternative to
customers who need fast, reliable and quality telephone service.
International Toll Calling
General. The Communications Group owns approximately 30% of Telecom Georgia.
Telecom Georgia handles all international calls inbound to and outbound from the
Republic of Georgia to the rest of the world. Telecom Georgia has made
interconnect arrangements with several international long distance carriers such
as Sprint and Telespazio of Italy. For every international call made to the
Republic of Georgia, a payment will be due to Telecom Georgia by the
interconnect carrier and for every call made from the Republic of Georgia to
another country, Telecom Georgia will bill its subscribers and pay a destination
fee to the interconnect carrier.
Since Telecom Georgia commenced operations, long distance traffic in and out of
Georgia has increased dramatically as Telecom Georgia has expanded the number of
available international telephone lines. Incoming call traffic increased from
approximately 200,000 minutes per month in 1993 to the current rate of 1,000,000
minutes per month, and outgoing call traffic increased from approximately
100,000 minutes per month in 1993 to the current rate of 230,000 minutes.
Telecom Georgia has instituted several marketing programs in order to maintain
this growth.
Competition. The Communications Group does not currently face any competition
in the international long distance business in Georgia as Telcom Georgia is the
only entity licensed to handle all international call traffic in and out of
Georgia.
11
<PAGE>
Trunked Mobile Radio
General. The Communications Group currently owns interests in joint ventures
which operate 4 trunked mobile radio services in Europe and certain republics of
the former Soviet Union. The Group's joint ventures serviced an aggregate of
approximately 6,642 subscribers at December 31, 1996. In March 1997, the
Communications Group launched trunked mobile radio services in Kazakstan.
Trunked mobile radio systems provide mobile voice communications among members
of user groups and interconnection to the public switched telephone network and
are commonly used by construction teams, security services, taxi companies,
service organizations and other groups with a need for significant internal
communications. Trunked mobile radio allows such users to communicate with
members of a closed user group without incurring the expense or delay of the
public switched telephone network, and also provides the ability to provide
dispatch services (i.e. one sender communicating to a large number of users on
the same network). In many cases, the Communications Group's trunked mobile
radio systems are also connected to the public switched telephone network, thus
providing some or all of the users the flexibility of communicating outside the
closed user group. In many niche markets, trunked mobile radio has significant
advantages over cellular telephony or the public switch telephone network.
Competition. The Communications Group faces competition from other trunked
mobile radio service providers and from private networks in all of the markets
in which it operates. Trunked mobile radio also faces competition from cellular
providers, especially for users who need access to the public switched telephone
network for most of their needs, pagers for users who need only one-way
communication and private branch exchanges (PBXs), where users do not need
mobile communications.
Development Opportunities
Wireless Telephony. The Communications Group is currently exploring a number of
investment opportunities in wireless local loop telephony systems in certain
countries in Eastern Europe, the republics of the former Soviet Union, the PRC
and other selected emerging markets, and has installed test systems in certain
of these markets. The Communications Group believes that the wireless local loop
telephony it is using is a time and cost effective means of improving the
communications infrastructure in such markets. The current telephone systems in
these markets are antiquated and overloaded, and consumers in these markets
typically must wait several years to obtain telephone service.
The fixed wireless local loop telephony the Communications Group is using offers
the current telephone service provider a rapid and cost effective method to
expand its service base. The wireless local loop telephony system it is using
can provide telephone access to a large number of apartment dwellers through a
single microwave transceiver installed on their building. This microwave
transceiver sends signals to and from a receiver located adjacent to a central
office of the public switched telephone network where the signal is routed from
or into such network. This system eliminates the need to build fixed wireline
infrastructure between the central office and the subscriber's building, thus
reducing the time and expense involved in expanding telephone service to
customers.
12
<PAGE>
The Communications Group through AAT, has entered into a joint venture agreement
with China Huaneng Technology Development Corporation, to (i) assist China
Unicom in the development and construction of advanced telecommunications
systems in Sichuan Province, PRC; (ii) provide financing to China Unicom in
Sichuan Provice and (iii) provide telephone consulting services to China Unicom
within Sichuan Province. With a population of over 100 million and a telephone
density rate estimated at less than 2% the Sichuan Province project provides a
large potential market for AAT's products and services. The project involves a
20-year period of cooperation between the Communications Group's Joint Venture
and China Unicom for the development of a local telephone network in Sichuan
Province with an initial capacity of 50,000 lines, and a projected growth of up
to 1,000,000 lines within the next five years. The Communications Group expects
that the fixed wireless local loop technology it is using will be used in the
project. For its services, the Communications Group's Joint Venture is entitled
to 78% of the distributable cash flow from the network for a 20-year period for
each phase of the network developed.
While the existing wireline telephone systems in Eastern Europe and the former
Soviet Republics are often antiquated, the fact that these systems are already
well-established and operated by governmental authorities means that they are a
source of competition for the Communications Group's proposed wireless telephony
operations. In addition, one-way paging service may be a competitive alternative
which is adequate for those who do not need a two-way service, or it may be a
service that reduces wireless telephony usage among wireless telephony
subscribers. The Communications Group does not have or expect to have exclusive
franchises with respect to its wireless telephony operations and may therefore
face more significant competition in the future from highly capitalized entities
seeking to provide services similar to or competitive with those of the
Communications Group in its markets.
In certain markets, cellular telephone operators exist and represent a
competitive alternative to the Communications Group's proposed wireless local
loop telephony systems. A cellular telephone can be operated in the same manner
as a wireless loop telephone in that either type of service can simulate the
conventional telephone service by providing local and international calling from
a fixed position in its service area. However, while cellular telephony enables
a subscriber to move from one place in a city to another while using the
service, wireless local loop telephony is intended to provide fixed telephone
services which can be deployed as rapidly as cellular telephony but at a lower
cost. This lower cost makes wireless local loop telephony a more attractive
telephony alternative to a large portion of the populations in the
Communications Group's markets that do not require mobile communications. In
addition, because the wireless local loop technology the Communications Group is
using operates at 64 kilobits per second, it can be used for high speed
facsimile and data transmission in the same manner as a wired telephone system.
13
<PAGE>
The following table summarizes the Communications Group's Joint Ventures at
December 31, 1996, as well as the amounts contributed, amounts loaned and total
amounts invested in such joint ventures at December 31, 1996.
COMMUNICATIONS GROUP JOINT VENTURES OWNERSHIP AT DECEMBER 31, 1996
<TABLE>
<CAPTION>
VENTURE(1) MITI AMOUNT AMOUNT TOTAL
OWNERSHIP CONTRIBUTED LOANED INVESTMENT
AMOUNT (12)
<S> <C> <C> <C> <C>
Cable
Kosmos TV (Moscow, Russia) 50% $1,092,896 $8,958,521 $10,051,417
Baltcom TV (Riga, Latvia) 50% 819,000 11,201,353 12,020,353
Ayety TV (Tbilisi, Georgia) 49% 779,000 6,115,658 6,894,658
Romsat Cable TV (Bucharest, Romania) 99% 681,930 1,680,263 2,362,193
Sun TV (Chisinau, Moldova) 50% 400,000 3,581,459 3,981,459
Alma TV (Almaty, Kazakstan) 50% 222,000 3,146,766 3,368,766
Cosmos TV (Minsk, Belarus) 50% 400,000 1,580,504 1,980,504
Viginta (Vilnius, Lithuania) 55% 433,781 1,029,316 1,463,097
Kamalak TV (Tashkent, Uzbekistan) 50% 754,156 5,489,224 6,243,380
Paging
Baltcom Estonia (Estonia) 39% 396,150 3,895,192 4,291,342
CNM (Romania) 54% 490,000 3,709,443 4,199,443
Kamalak Paging (Tashkent, Samarkand, Bukhara 50%
and Andijan, Uzbekistan)(2)
Paging One (Tbilisi, Georgia) 45% 250,000 801,000 1,051,000
Paging Ajara (Ajara, Georgia) 35% 43,200 212,339 255,539
Raduga Poisk (Nizhni Novgorod, Russia) 45% 330,000 77,534 407,534
Alma Page (Almaty and Ust-Kamenogorsk, 50%
Kazakstan)(3)
Baltcom Plus (Latvia) 50% 250,000 2,576,988 2,826,988
Pt-Page (St. Petersburg, Russia) 40% 1,057,762 0 1,057,762
Radio
Radio Juventus (Budapest, Siofok and Khebegy, 100% 8,106,890 274,147 8,381,037
Hungary)
SAC (Moscow, Russia) 83% 630,593 2,892,258 3,522,851
Radio Katusha (St. Petersburg, Russia) 50% 132,528 768,663 901,191
Radio Nika (Socci, Russia) 51% 223,497 119,867 343,364
Radio Skonto (Riga, Latvia) 55% 302,369 227,358 529,727
Radio One (Prague, Czech Republic) 80% 283,293 0 283,293
International Toll Calling
Telecom Georgia (Georgia) 30% 2,553,600 0 2,553,600
Trunk Mobile Radio (4)
Belgium Trunking (Brussels and Flanders, 24%
Belgium)
Radiomovel Telecomunicacoes (Portugal) 14%
Teletrunk Spain (Madrid, Valencia, Aragon and 6-16%(5)
Catalonia, Spain)
National Business Communications (Bucharest, 58% 30,097 215,000 245,097
Cluj, Brasov, Constanta and Timisoira, Romania)(6)
Pre-Operational
Teleplus (St. Petersburg, Russia)(Cable)(7) 45% 553,705 0 553,705
Paging One Services (Austria)(Paging)(8) 100% 1,007,434 1,048,004 2,055,438
Spectrum (Kazakstan)(Trunk Mobile)(9) 31% 36,050 0 36,050
Baltcom GSM (Latvia)(Cellular)(10) 24% 7,883,112 0 7,883,112
Magticom (Georgia)(Cellular)(11) 34% 2,450,000 0 2,450,000
Metromedia-Jinfeng (Wireless Local Loop)(13) 60% 3,018,762 0 3,018,762
</TABLE>
(1) The parenthetical notes the area of operations for the operational joint
ventures and the area for which the joint venture is licensed for the
pre-operational joint ventures.
(2) The Communications Group's cable and paging services in Uzbekistan are
provided by the same company, Kamalak TV. All amounts contributed and
loaned to Kamalak TV are listed under that joint venture's entry for
cable.
(3) The Company's cable and paging services in Kazakstan are provided by or
through the same company, Alma TV. All amounts contributed and loaned to
Alma TV are listed under that joint venture's entry for cable.
(4) Most of the Company's ownership of the trunk mobile radio ventures is
through Protocall Ventures, Ltd., a United Kingdom company in which the
Communications Group has 56% ownership. The Communications Group's
interest in Protocall Ventures, Ltd. was purchased for $2,500,000. As of
12/31/96, the Communications Group had provided Protocall Ventures, Ltd.
$2,384,742 in credit to fund its operations. This chart does not
separately list amounts contributed or loaned to the trunked mobile radio
joint ventures by Protocall Ventures, Ltd.
(5) The Communications Group's trunk mobile radio operations in Spain are
provided through 4 joint ventures of Protocall Ventures, Ltd. The
Company's ownership of these joint ventures ranges from 6-16%.
(6) Amounts contributed and loaned are amounts contributed and loaned to
National Business Communications directly by the Communications Group.
(7) Teleplus was created in November 1996.
(8) Paging One Services launched commercial paging service in Vienna, Austria
in February 1997.
(9) Spectrum launched commercial trunk mobile radio service in Almaty and
Atyrau, Kazakstan in March 1997.
(10) Baltcom GSM launched commercial GSM cellular service in Latvia in March
1997.
(11) The Communications Group's interest in Magticom was registered in October
1996.
(12) The total investment does not include any incurred losses.
(13) Metromedia-Jinfeng is a pre-operational joint venture that plans to
provide telecommunications equipment, financing, network planning,
installation and maintenance services to telecommunications operations in
China.
14
<PAGE>
After deciding to obtain an interest in a particular communications business,
the Communications Group generally enters into discussions with the appropriate
ministry of communications or local parties which have interests in
communications properties in a particular market. If the negotiations are
successful, a joint venture agreement is entered into and is registered, and the
right to use frequency licenses is contributed to the joint venture by the
Communications Group's local partner or is allocated by the appropriate
governmental authority to the joint venture. In some cases, the Communications
Group owns or acquires interests in entities (including competitors) that are
already licensed and are providing service.
Generally, the Communications Group owns approximately 50% of the equity in a
joint venture with the balance of such equity being owned by a local entity,
many times a government-owned enterprise. Each joint venture's day-to-day
activities are managed by a local management team selected by its board of
directors or its shareholders. The operating objectives, business plans, and
capital expenditures of a joint venture are approved by the joint venture's
board of directors, or in certain cases, by its shareholders. In most cases, an
equal number of directors or managers of the joint venture are selected by the
Communications Group and its local partner. In other cases, a differing number
of directors or managers of the joint venture may be selected by the
Communications Group on the basis of the percentage ownership interest of the
Communications Group in the joint venture.
In many cases, the credit agreement pursuant to which the Communications Group
loans funds to a joint venture provides the Communications Group with the right
to appoint the general manager of the joint venture and to approve unilaterally
the annual business plan of the joint venture. These rights continue so long as
amounts are outstanding under the credit agreement. In other cases, such rights
may also exist by reason of the Communications Group's percentage ownership
interest in the joint venture or under the terms of the joint venture's
governing instruments.
The Communications Group's joint ventures are limited liability entities which
are permitted to enter into contracts, acquire property and assume and undertake
obligations in their own names. Because the joint ventures are limited liability
companies, their equity holders have limited liability to the extent of their
investment. Under the joint venture agreements, each of the Communications Group
and the local joint venture partner is obligated to make initial capital
contributions to the joint venture. In general, a local joint venture partner
does not have the resources to make cash contributions to the joint venture. In
such cases, the Communications Group has established or plans to establish an
agreement with the joint venture whereby, in addition to cash contributions by
the Communications Group, each of the Communications Group and the local partner
makes in-kind contributions (usually communications equipment in the case of the
Communications Group and frequencies, space on transmitting towers and office
space in the case of the local partner), and the joint venture signs a credit
agreement with the Communications Group pursuant to which the Communications
Group loans the venture certain funds. Prior to repayment of such funds, the
joint ventures are significantly limited or prohibited from distributing profits
to their shareholders. Typically, such credit agreements provide for interest
payments to the Company at rates ranging generally from prime to prime plus 6%
and for payments of interest and principal from 90% of the joint ventures
available cash flow. As of December 31, 1996, the Communications Group had
obligations to fund (i) an additional $5.5 million to the equity of its joint
ventures (or to complete the payment of shares purchased by the Communications
Group) and (ii) up to an additional $18.9 million to fund the various credit
lines the Communications Group has extended to its Joint Ventures. The
Communications Group's funding commitments under such credit lines are
contingent upon its approval of the joint ventures' business plans. To the
extent that the Communications Group does not approve a joint venture's business
plan, the Communications Group is not required to provide funds to such joint
venture under the credit line. The distributions (including profits) from the
joint venture to the Communications Group and the local partner are made on a
pro rata basis in accordance with their respective ownership interests.
15
<PAGE>
In addition to loaning funds to the Joint Ventures, the Communications Group
provides certain services to many of the Joint Ventures, for which it charges
the joint ventures a management fee. The Communications Group often does not
require start-up joint ventures to reimburse it for certain services that it
provides such as engineering advice, assistance in locating programming, and
assistance in ordering equipment. As each joint venture grows, the
Communications Group institutes various payment mechanisms to have each joint
venture reimburse it for such services when they are provided. The failure of
the Communications Group to obtain reimbursement of such services will not have
a material impact on its results of operations.
Under existing legislation in certain of the Communications Group's markets,
distributions from a joint venture to its partners are subject to taxation. The
laws in the Communications Group's markets vary widely with respect to the tax
treatment of distributions to joint venture partners and such laws have also
recently been revised significantly in many of the Communications Group's
markets. There can be no assurance that such laws will not continue to undergo
major changes in the future which may have a significant negative impact on the
Communications Group and its operations.
The Entertainment Group
Overview
The Company's Entertainment Group is one of the largest independent producers
and distributors of motion picture and television product in the United States
and one of the few entertainment companies, other than the major motion picture
studios and their affiliates, that is capable of distributing entertainment
product in all media worldwide. The Company also holds a valuable library of
over 2,200 feature film and television titles, including Academy Award(R)
winning films such as Dances with Wolves and Silence of the Lambs, action films
such as the three-film RoboCop series and classic motion pictures such as
Wuthering Heights, The Pride of the Yankees, Guys and Dolls and The Best Years
of Our Lives. This library provides the Company with a stable stream of revenues
and cash flow to support, in part, its various production operations and other
activities. The Entertainment Group is a well-established, full-service
distributor of motion picture and television product with access to all
significant domestic and international markets. The Entertainment Group
distributes feature films produced or acquired by it to domestic theatres and
distributes motion pictures and television entertainment product in the domestic
home video and television markets through its in-house distribution divisions
and subsidiaries. Internationally, the Entertainment Group primarily distributes
its feature films and other product through a combination of output deals and
other distribution deals with third party licensees and subdistributors.
Through its Orion, Orion Classics and Goldwyn labels, the Entertainment Group
produces and acquires a full range of commercial films with well-defined target
audiences with the Entertainment Group's portion of the production cost
generally ranging from $5.0 million to $10.0 million per picture. The
Entertainment Group's management has significant experience in the production of
motion picture and television entertainment of this type and was responsible for
producing the box office successes Beverly Hills Ninja, Dumb and Dumber and the
Academy Award(R) winning The Madness of King George. The Entertainment Group
released theatrically 13 feature films in the year ended December 31, 1996 and
it expects to release theatrically approximately 17 feature films during the
year ended December 31, 1997, including the Academy Award(R) nominated best
foreign language feature film Prisoner of the Mountains, which was released in
January 1997. The Entertainment Group also owns the Landmark Theatre
Corporation, which management believes is the leading specialty theater group in
the United States, consisting of 50 motion picture theaters with a total of 138
screens at December 31, 1996.
16
<PAGE>
Production and Acquisition of Feature Films
The Entertainment Group focuses on producing or acquiring commercial and
specialized films with well-defined target audiences and marketing campaigns, at
costs lower than those for feature films at the major motion picture studios.
The Entertainment Group believes it will successfully control costs and increase
returns by carefully selecting projects that: (i) are based on exploitable
concepts, such as action-adventure and specialized motion pictures; (ii) are
aimed at and cost-effectively marketed to specific niche audiences; (iii) employ
affordable, well-recognized or emerging talent; and (iv) fit within
pre-established cost/performance criteria. The Entertainment Group also
currently plans to avoid peak seasonal release periods such as early summer,
Christmas and other holidays, when competition for screens is most intense and
marketing costs are highest. This strategy is based on management's success with
producing such films as Beverly Hills Ninja and the Entertainment Group's 1996
release Big Night as well as its feature films, Much Ado About Nothing, The
Madness of King George and Eat Drink Man Woman.
The Entertainment Group intends to produce or acquire and release an average of
approximately 10-15 theatrical features per year, in which the Company's portion
of the production cost will generally range from $5.0 million to $10.0 million.
The Company also expects to spend on average, between $3.5 million and $10.0
million on print and advertising costs for feature films it produces or
acquires. The Company's acquisition program contemplates output arrangements
with producers and the acquisition of existing catalogs, as well as film-by-film
acquisitions. In addition, in order to expand its production capabilities and
minimize its exposure to the performance of any particular film, the Company
intends to finance a significant portion of each film's budget by "pre-selling"
or pre-licensing foreign distribution rights. Furthermore, certain of the
Company's executives will, on behalf of the Company, enter into
"producer-for-hire" agreements with other studios for which the Company and such
executives will receive a fee. See "--United States Motion Picture Industry
Overview--Motion Picture Production and Financing" and "--Motion Picture
Distribution" below. The Entertainment Group believes that its ability to
successfully produce or acquire and distribute a significant number of feature
films each year will enhance the marketability of its existing library as it
markets these films with films already in the library.
17
<PAGE>
Distribution and Release of Feature Films and Other Product
Theatrical. The Entertainment Group's existing distribution system enables it to
release the feature films it produces or acquires in all media in all
significant domestic and international marketplaces, through its in-house
domestic theatrical, television and home video distribution divisions and its
international distribution division. The Entertainment Group believes that its
full-service distribution system is a significant asset which gives it an
advantage over other independent film companies which must generally rely upon
one of the major motion picture studios to release their product theatrically
and in other outlets such as home video. In addition, this distribution system
allows the Entertainment Group to acquire, at low and sometimes no cost,
entertainment product produced by third parties who generally bear most or all
of the financial risk of producing the feature film, but who lack the
distribution system to release the product in some or all of the domestic media.
In addition, in certain of these "rent-a-system" arrangements, the third party
producer will also advance the print and advertising costs for each such film,
thereby further limiting the Entertainment Group's financial exposure in a film.
For example, during 1996, the Entertainment Group theatrically released a number
of films produced by Live Entertainment for which it was paid a percentage
distribution fee, including two feature films, The Arrival and The Substitute,
both of which grossed in excess of $10.0 million in the U.S. theatrical market.
Live Entertainment bore all of the production and distribution costs of such
films. Although there can be no assurance that the Entertainment Group will be
successful in attracting these types of transactions on these terms, it plans to
continue to enter into similar "rent a system" transactions in the future. In
addition, the Entertainment Group intends to continue to co-produce (with
limited financial exposure to the Entertainment Group) larger budget movies with
major studios. For example, in 1996, Goldwyn produced, in conjunction with Walt
Disney Pictures, The Preacher's Wife, starring Denzel Washington and Whitney
Houston and directed by Penny Marshall which was released in December 1996, and
had a gross profit participation in the film. Also in 1996, Goldwyn announced an
agreement with New Line Cinema for the production of a remake of the Secret Life
of Walter Mitty.
The Entertainment Group films are released under the Orion, Orion Classics
and Goldwyn labels. Orion markets primarily mainstream commercial films,
Goldwyn produces and acquires specialized and "arthouse" motion pictures with
crossover potential and Orion Classics focuses on specialized and "arthouse"
pictures. During 1996, the Entertainment Group released 13 pictures including, I
Shot Andy Warhol, Big Night, Angels & Insects, The Substitute and The Arrival.
During 1997, the Entertainment Group plans to release approximately 17 pictures
in the U.S. theatrical market. Its widest releases in 1997 are expected to be
Eight Heads in a Duffle Bag, a comedy starring Joe Pesci, which will be
distributed to between 1,500 and 1,800 screens nationwide and Gang Related, a
police action thriller starring Jim Belushi, Dennis Quaid, and the late Tupac
Shakur in his last screen performance.
The following is a list of the Entertainment Group's scheduled 1997 releases:
<TABLE>
<CAPTION>
Expected Title Cast Description Release
Release Date Label
<S> <C> <C> <C> <C>
January 31 Prisoner of the Mountains(1) Oleg Menshikov An Academy Award(R)nominee and Orion Classics
Sergei Bodrov, Jr. Golden Globe nominee for Best
Foreign Language Film, this
adaptation of a Tolstoy
novella follows the
experiences of two Russian
soldiers who are captured and
held hostage in a Chechen
mountain community.
February 28 Hard Eight(2) Gwyneth Paltrow A taut noir story of a seasoned Goldwyn
Samuel L. Jackson gambler whose friendship with a
John C. Reilly young man is threatened by a dark
Phillip Baker Hall secret from his past.
</TABLE>
18
<PAGE>
<TABLE>
<CAPTION>
Expected Title Cast Description Release
Release Date Label
<S> <C> <C> <C> <C>
March 7 City of Industry(1) Harvey Keitel A hard-edged film-noir thriller Orion
Stephen Dorff concerning two brothers, small
Timothy Hutton time L.A. criminals, whose
Famke Janssen plans for a final jewelry
heist go awry when an
unpredictable partner is
brought into the deal.
April 11 Kissed(1) Molly Parker A story of a striking young Goldwyn
Peter Outerbridge woman who has a particular
fascination with life and
death. A romance with an
obsessive medical student
threatens to expose her secret
passion and redefine the
bounds of love.
April 18 Eight Heads in a Joe Pesci A raucous comedy about a mob Orion
Duffle Bag(3) David Spade bag man whose luggage
Kristy Swanson containing eight human heads,
George Hamilton crucial proof of a recent hit,
Dyan Cannon gets switched at the airport
Andy Comeau and goes south of the border
with a family vacationing in
Mexico.
May Rough Magic(2) Bridget Fonda A romantic adventure involving Goldwyn
Russell Crowe magic, mysticism and Mexico.
Jim Broadbent
D.W. Moffet
Paul Rodriguez
August Paperback Romance(1) Anthony LaPaglia A story of star-crossed lovers Goldwyn
Gia Carides who find themselves thrown
together in a madcap adventure
reminiscent of the classic
`30's romantic comedies.
Summer Ulee's Gold(4) Peter Fonda A Jonathan Demme (Academy Orion
Patricia Richardson Award(R) winning director of
Orion's Silence of the Lambs)
presentation, the poignant
story of a stubborn, solitary
beekeeper in the tupelo
marshes of the Florida
panhandle who must abandon his
isolating routine in order to
save his family and
ultimately, himself.
Summer Napoleon(4) Voices of A live-action adventure story Goldwyn
Bronson Pinchot of an adorable puppy who gets
David Odgen Stiers lost in the wild Australian
Blythe Danner outback. Befriended by exotic
Joan Rivers animals, Napoleon overcomes
his fears and discovers the
magic of nature.
September 7 Gang Related(4) Jim Belushi An exciting, thought-provoking Orion
Tupac Shakur thriller about two detectives
Lela Rochan in a metropolitan police
Dennis Quaid department who get in over
James Earl Jones their heads when their
money-on-the-side scheme
involving murder and stolen
police evidence horribly
backfires with the unintended
death of an undercover DEA
agent. This film is Tupac
Shakur's final film role.
Fall The Locusts(3) Vince Vaughn A dark tale of romance and Orion
Ashley Judd mystery set in 1960 rural
Paul Rudd Kansas. When a drifter with a
Jeremy Davies mysterious past comes to the
Kate Capshaw feedlot of a sultry, black
widow figure with a strangely
withdrawn son, family secrets
and painful truths are
revealed as a trio of damaged
souls search for love and
respect, desperately trying to
connect.
</TABLE>
19
<PAGE>
<TABLE>
<CAPTION>
Expected Title Cast Description Release
Release Date Label
<S> <C> <C> <C> <C>
Fall The Big Red(5) Johnathon Schaech A twisted road comedy by the Goldwyn
director of Adventures of
Priscilla, Queen of the
Desert, a con-artist escapes a
deal gone wrong in New York
and winds up in the Australian
outback in a strange town,
whose inhabitants are an
oddball collection of misfits.
Fall Best Men(3) Drew Barrymore A film about five lifelong freiends Orion
Dean Cain in a nowhere town headed for their
Luke Wilson buddies' wedding whose lives take a
Sean Patrick Flanery major detour as they find themselves
Andy Dick holding up a bank in a rebellious
Mitchell Whitfield search for independence.
Fred Ward
TBA Storefront Hitchcock(4) Robyn Hitchcock A concert/performance film Orion Classics
showcasing the singular
personal style of British
singer/songwriter Robyn
Hitchcock, directed by Jonathan
Demme, who directed Orion's
Academy Award(R) winning film
Silence of the Lambs as well as
David Byrne in Stop Making
Sense, one of the all-time
favorite concert/performance
films ever made.
TBA This world, then the Billy Zane A film-noir potboiler, set in Orion Classics
fireworks(1) Gina Gershon the 1950's, based on one of
Sheryl Lee master crime writer Jim
Rue McClanahan Thompson's most riveting
stories, involving sexual
perversity, dysfunctional
family ties, greed and lust.
TBA I Love You...Don't(1) Julie Davis A bold and sexy romantic comedy Goldwyn
Touch Me about a young woman's attempt to
reconcile her need for love and
desire for sex. Critically
acclaimed directorial debut of
Julie Davis.
TBA Music From Another Room(3) Brenda Blethyn A comedy which follows a man's Orion
Jude Law search for his one true love,
Jennifer Tilly whose birth he assisted in as
Martha Plimpton a 5 year old.
Jon Tenney
Jeremy Piven
</TABLE>
- -----------
(1) All domestic media, limited term
(2) Domestic theatrical only
(3) All domestic media, in perpetuity
(4) All media worldwide, in perpetuity
(5) All media worldwide, except Australia, in perpetuity
Home Video. The Entertainment Group distributes its own product and product
produced by third parties in the United States and Canada through its in-home
video division. In addition to releasing its new product to which it owns home
video rights, the Entertainment Group will continue to exploit titles from its
existing library, including previously released rental titles, re-issued titles
and initially released titles, in the expanding sell-through and premium market
sectors and through arrangements with mail-order and other selected licensees.
In addition to distribution in the traditional videocassette sector, the
Entertainment Group also intends to pursue opportunities to distribute its
library in video discs (see "--United States Motion Picture Industry Overview"
and "--Emerging Technologies" below) emerging multimedia formats. The
Entertainment Group provides exclusive distribution services for Major League
Baseball Properties home video product and the Fox-Lorber catalog of foreign
language and specialty films both of which the Entertainment Group believes it
was able to attract because of its existing home video distribution system.
20
<PAGE>
Pay-Per-View, Pay Television, Broadcast and Basic Cable Television and other
Ancillary Markets. The Entertainment Group currently licenses its new product
and product from its film and television library to both domestic and foreign
pay-per-view, pay television, broadcast and basic cable television and other
ancillary markets worldwide. The Entertainment Group has historically been
successful in selling its library titles to the free and pay television and home
video markets worldwide. The Entertainment Group believes that pay and free
television markets are expected to continue to experience significant growth,
primarily as a result of technological advances and the expansion of the
multi-channel television industry worldwide, permitting it to market its titles
in new geographic markets. With an extensive library which contains a variety of
film and television titles, the Entertainment Group believes it is
well-positioned to benefit from this anticipated increase in demand for
programming. In addition, the Entertainment Group believes that its increased
production and acquisition of feature films will enable it to better exploit its
extensive library in these markets as it is able to license such new product
together with existing titles from its film and television library. To date, the
Entertainment Group has licensed its product with domestic pay television
programmers both through output deals with pay cable providers such as Showtime
and HBO and through distribution deals with a variety of television services.
The emergence of digital compression, video-on-demand, DTH and other new
technologies is expected to increase the worldwide demand for entertainment
programming largely by increasing existing transmission capabilities and by
increasing the percentage of the population which can access multi-channel
television systems.
Foreign Markets. The Entertainment Group distributes its new product in which it
retains rights and its existing library in traditional media and established
markets outside of the United States and Canada to the extent of its rights,
while actively pursuing new areas of exploitation. The Entertainment Group
intends to market its library in (i) new international markets in which the
multi-channel television industry has recently emerged or is in the early stages
of development, and (ii) territories which have not been reached by privatized
free television, cable television, home video and other traditional media, but
where the industry is expected to develop in the future. The Entertainment Group
will also explore opportunities to acquire and distribute new product in
overseas markets, adding value to the library. Other strategies include the
acquisition of foreign language programming for foreign distribution in
combination with the English language library product.
Landmark Theatre Group
The Entertainment Group believes that its Landmark Theatre Group with, at
December 31, 1996, 138 screens in 50 theaters, is the largest exhibitor of
specialized motion picture and art films in the United States. The operation of
these theaters provides the Entertainment Group with relatively stable cash
flows and allows the Entertainment Group to participate in revenues from the
exhibition of its films as well as films produced and distributed by others. The
Entertainment Group 's strategy is to (i) expand in existing and new major
markets through internal growth and acquisitions; (ii) upgrade and multiplex
existing locations where there is demand for additional screens; and (iii)
maximize revenue and cash flow from its existing theaters by capitalizing on the
large demand for art and specialty films in the U.S. by continuing to reduce
operating and overhead costs as a percentage of revenue.
21
<PAGE>
The Entertainment Group currently operates theaters in 18 cities in California,
Colorado, Louisiana, Massachusetts, Minnesota, Ohio, Texas, Washington and
Wisconsin. The Entertainment Group emphasizes the exhibition of specialized
motion pictures and art films and commercial films with literary and artistic
components which appeal to the specialized film audience. The seating capacity
for all theaters operated by the Entertainment Group is approximately 39,000,
of which 56% is in theatres located in California. The following table
summarizes the location and number of theaters and screens operated by the
Entertainment Group:
Location Theaters Screens
Belmont, California 1 3
Berkeley, California 6 19
Los Angeles, California 3 7
Corona Del Mar, California 1 1
Palo Alto, California 4 6
Pasadena, California 1 1
Sacramento, California 2 6
San Diego, California 5 9
San Francisco, California 5 14
Denver, Colorado 3 8
New Orleans, Louisiana 1 4
Cambridge, Massachusetts 1 9
Minneapolis, Minnesota 2 6
Cleveland, Ohio 1 3
Dallas, Texas 1 3
Houston, Texas 2 6
Seattle, Washington 9 28
Milwaukee, Wisconsin 2 5
-- ---
50 138
The exhibition of first-run specialized motion pictures and art films is a niche
in the film exhibition business that is distinct from the exhibition of higher
budget, wide-release films. For the most part, specialized motion pictures and
art films are marketed by different distributors and exhibited in different
theatres than commercial films produced by the major studios. Exhibitors of
wide-release films typically must commit a substantial percentage of its screens
to a small number of films. The Entertainment Group typically show approximately
30 to 40 different films on its screens at any given time. In the normal course
of its business, the Entertainment Group actively pursues opportunities to
acquire or construct new theatres in promising locations and closes theaters
that are not performing well or for which it may not be feasible to renew the
lease.
22
<PAGE>
Competition and Seasonality
All aspects of the Entertainment Group's operations are conducted in a highly
competitive environment. To the extent that the Entertainment Group seeks to
distribute the films contained in its library or acquire or produce product, the
Entertainment Group will need to compete with many other motion picture
distributors, including the "majors," (including producers owned or affiliated
with the majors) most of which are larger and have substantially greater
resources and film libraries, as well as production capabilities and
significantly broader access to production, distribution and exhibition
opportunities. Many of the Entertainment Group's competitors have substantially
greater assets and resources. By reason of their resources, these competitors
may have access to programming that would not generally be available to the
Entertainment Group and may also have the ability to market programming more
extensively than the Entertainment Group.
Distributors of theatrical motion pictures compete with one another for access
to desirable motion picture screens, especially during the summer, holiday and
other peak movie-going seasons, and several of the Entertainment Group's
competitors in the theatrical motion picture distribution business have become
affiliated with owners of chains of motion picture theatres. In addition,
program suppliers of home video product compete for the open to buy dollars of
video specialty stores and mass merchant retailers. A larger portion of these
dollars are designated for "megahit" theatrically based sell-thru titles, video
games and other entertainment media. The success of all the Entertainment
Group's product is heavily dependent upon public taste, which is both
unpredictable and susceptible to change.
Although there are no other nationwide exhibitors of specialty motion pictures,
the Entertainment Group faces direct competition in each market from local or
regional exhibitors of specialized motion pictures and art films. To a lesser
degree, the Entertainment Group also competes with other types of motion picture
exhibitors. Other organizations, including the national and regional circuits,
major studios, production companies, television networks and cable companies are
or may become involved in the exhibition of films comparable to the type of
films exhibited by the Entertainment Group. Many of these companies have greater
financial and other resources than the Entertainment Group. As a result of new
theater development and conversion of single-screen theaters to multiplexes,
there is an increasing number of motion picture screens in the geographic areas
in which the Entertainment Group operates. At the same time, many motion picture
exhibitors have been merging or consolidating their operations, resulting in
fewer competitors with an increased number of motion picture screens competing
for the available pictures. This combination of factors may tend to increase
competition for films that are popular with the general public. The
Entertainment Group also competes with national and regional circuits and
independent exhibitors with respect to attracting patrons and acquiring new
theaters.
United States Motion Picture Industry Overview
The United States motion picture industry encompasses the production and
theatrical exhibition of feature-length motion pictures and the subsequent
distribution of such pictures in home video, television and other ancillary
markets. The industry is dominated by the major studios, including Universal
Pictures, Warner Bros. (including New Line Cinema), Twentieth Century Fox, Sony
Pictures Entertainment (including Columbia Pictures, Tri-Star Pictures and Sony
Classics), Paramount Pictures and The Walt Disney Company (including Buena
Vista, Touchstone Pictures, Hollywood Pictures and Miramax), and MGM (including
United Artists) which historically have produced and distributed the majority of
theatrical motion pictures released annually in the United States. The major
studios generally own their production studios and have national or worldwide
distribution organizations. Major studios typically release films with
production costs ranging from $20 million to $50 million or more and provide a
continual source of motion pictures to the nation's theatre exhibitors.
23
<PAGE>
In recent years, "independent" motion picture production companies played an
important role in the production of motion pictures for the worldwide feature
film market. The independents do not own production studios and have more
limited distribution capabilities than the major studios, often distributing
their product through "majors." Independents typically produce fewer motion
pictures at substantially lower average production costs than major studios.
Several of the more prominent independents, including Miramax and New Line, were
acquired by large entertainment companies, giving them access to greater
financial resources.
Motion Picture Production and Financing. The production of a motion picture
begins with the screenplay adaptation of a popular novel or other literary work
acquired by the producer or the development of an original screenplay having its
genesis in a story line or scenario conceived of or acquired by the producer. In
the development phase, the producer typically seeks production financing and
tentative commitments from a director, the principal cast members and other
creative personnel. A proposed production schedule and budget also are prepared
during this phase.
Upon completing the screenplay and arranging financial commitments,
pre-production of the motion picture begins. In this phase, the producer (i)
engages creative personnel to the extent not previously committed; (ii)
finalizes the filming schedule and production budget; (iii) obtains insurance
and secures completion guarantees; (iv) if necessary, establishes filming
locations and secures any necessary studio facilities and stages; and (v)
prepares for the start of actual filming. Principal photography, the actual
filming of the screenplay, may extend from six to twelve weeks or more,
depending upon such factors as budget, location, weather and complications
inherent in the screenplay.
Following completion of principal photography, the motion picture is edited,
optical, dialogue, music and any special effects are added, and voice, effects
and music sound tracks and picture are synchronized during post-production. This
results in the production of the negative from which the release prints of the
motion picture are made.
The cost of a theatrical motion picture produced by an independent production
company for limited distribution ranges from approximately $4 million to $10
million as compared with an average of approximately $30 million for commercial
films produced by major studios for wide release. Production costs consist of
acquiring or developing the screenplay, film studio rental, cinematography,
post-production costs and the compensation of creative and other production
personnel. Distribution expenses, which consist primarily of the costs of
advertising and release prints, are not included in direct production costs and
vary widely depending on the extent of the release and nature of the promotional
activities.
Independent and smaller production companies generally avoid incurring
substantial overhead costs by hiring creative and other production personnel and
retaining the other elements required for pre-production, principal photography
and post-production activities on a project-by-project basis. Unlike the major
studios, the independents and smaller production companies also typically
finance their production activities from discrete sources. Such sources include
bank loans, pre-sales, co-productions, equity offerings and joint ventures.
Independents generally attempt to complete their financing of a motion picture
production prior to commencement of principal photography, at which point
substantial production costs begin to be incurred and must be paid.
Pre-sales are used by independent film companies and smaller production
companies to finance all or a portion of the direct production costs of a motion
picture, thereby limiting such companies' financial exposure to the project.
Pre-sales consist of fees paid to the producer by third parties in return for
the right to exhibit the motion picture when completed in theaters or to
distribute it in home video, television, foreign or other ancillary markets.
Producers with distribution capabilities may retain the right to distribute the
completed motion picture either domestically or in one or more foreign markets.
Other producers may separately license theatrical, home video, television,
foreign and all other distribution rights among several licensees.
24
<PAGE>
Both major studios and independent film companies often acquire motion pictures
for distribution through a customary industry arrangement known as a negative
pickup, under which the studio or independent film company agrees to acquire
from an independent production company all rights to a film upon completion of
production. The independent production company normally finances production of
the motion picture pursuant to financing arrangements with banks or other
lenders in which the lender is granted a security interest in the film and the
independent production company's rights under its arrangement with the studio or
independent. When the studio or independent picks up the completed motion
picture, it assumes the production financing indebtedness incurred by the
production company in connection with the film. In addition, the independent
production company is paid a production fee and generally is granted a
participation in the net profits from distribution of the motion pictures.
Motion Picture Distribution. Motion picture distribution encompasses the
distribution of motion pictures in theaters and in ancillary markets such as
home video, pay-per-view, pay television, broadcast television, foreign and
other markets. The distributor typically acquires rights from the producer to
distribute a motion picture in one or more markets. For its distribution rights,
the distributor typically agrees to advance the producer a certain minimum
royalty or guarantee, which is to be recouped by the distributor out of revenues
generated from the distribution of the motion picture and is generally
nonrefundable. The producer also is entitled to receive a royalty equal to an
agreed-upon percentage of all revenues received from distribution of the motion
picture in excess of revenues covered by the royalty advance.
Theatrical Distribution. The theatrical distribution of a motion picture
involves the manufacture of release prints, the promotion of the picture through
advertising and publicity campaigns and the licensing of the motion picture to
theatrical exhibitors. The size and success of the promotional advertising
campaign can materially affect the revenues realized from the theatrical release
of a motion picture. The costs incurred in connection with the distribution of a
motion picture can vary significantly, depending on the number of screens on
which the motion picture is to be exhibited and the ability to exhibit motion
pictures during peak exhibition seasons. Competition among distributors for
theaters during such peak seasons is great. Similarly, the ability to exhibit
motion pictures in the most popular theaters in each area can affect theatrical
revenues.
The distributor and theatrical exhibitor generally enter into a license
agreement providing for the exhibitor's payment to the distributor of a
percentage of the box office receipts for the exhibition period, in some cases
after deduction of the theater's overhead, or a flat negotiated weekly amount.
The distributor's percentage of box office receipts generally ranges from an
effective rate of 35% to over 50%, depending upon the success of the motion
picture at the box office and other factors. Distributors carefully monitor the
theatres which have licensed the picture to ensure that the exhibitor promptly
pays all amounts due the distributor. Substantial delays in collections are not
unusual.
Motion pictures may continue to play in theaters for up to six months following
their initial release. Concurrently with their release in the United States,
motion pictures generally are released in Canada and may also be released in one
or more other foreign markets. Typically, the motion picture then becomes
available for distribution in other markets as follows:
Months After Approximate
Initial Release Release Period
Domestic home video 4-6 months --
Domestic pay-per-view 6-9 months 3 months
Domestic pay television 10-18 months 12-21 months
Domestic network or basic cable 30-36 months 18-36 months
Domestic syndication 30-36 months 3-15 years
Foreign home video 6-12 months --
Foreign television 18-24 months 3-12 years
25
<PAGE>
Home Video. Home video distribution consists of the promotion and sale of
videocassettes and videodiscs to local, regional and national video retailers
which rent or sell such products to consumers primarily for home viewing.
Pay-Per-View. Pay-per-view television allows cable television subscribers to
purchase individual programs, including recently released motion pictures and
live sporting, music or other events, on a "per use" basis. The subscriber fees
are typically divided among the program distributor, the pay-per-view operator
and the cable system operator.
Foreign Markets. In addition to their domestic distribution activities, some
motion picture distributors generate revenues from distribution of motion
pictures in foreign theaters, home video, television and other foreign markets.
There has been a dramatic increase in recent years in the worldwide demand for
filmed entertainment. This growth is largely due to the privatization of
television stations, introduction of direct broadcast satellite services, growth
of home video and increased cable penetration. In many foreign markets, a film
company may also enter into a pre-sale distribution arrangement whereby a third
party distributor in a foreign territory pays an advance to the film company
equal to a specified percentage of a film's budget. The third party distributor
is responsible for all marketing and distribution costs in such territory,
recoups its advance, costs, a fee and a portion of the film receipts and pays an
overage to the film company. Under this type of arrangement, the third party
distributor is responsible for any shortfalls in recoupment. In these
arrangements, the third party distributor receives most distribution rights to
films in their territory for a period of years. Some arrangements contain
carve-outs of television rights which the film company then sells directly to
television programmers (sometimes in a separate similar arrangement). These
arrangements provide film companies with upside potential through participations
in overages. In an alternative arrangement in other foreign markets, a third
party distributor will fund all marketing and distribution expenses up front,
but the film company is responsible for reimbursing such expenditures if they
are not recouped by the third party distributor through film receipts. The third
party distributor sells the film to theatrical exhibitors, video stores and
sometimes television programming outlets in the territory. The distributor
receives a small fee on the film's gross receipts, recoups its marketing and
distribution expenses and remits the balance of the receipts to the film
company.
Pay Television. Pay television allows cable television subscribers to view HBO,
Cinemax, Showtime, The Movie Channel, Encore and other pay television network
programming offered by cable system operators for a monthly subscription fee.
The pay television networks acquire a substantial portion of their programming
from motion picture distributors.
Broadcast and Basic Cable Television. Broadcast television allows viewers to
receive, without charge, programming broadcast over the air by affiliates of the
major networks (ABC, CBS, NBC and Fox), independent television stations and
cable and satellite networks and stations. In certain areas, viewers may receive
the same programming via cable transmission for which subscribers pay a basic
cable television fee. Broadcasters or cable systems operators pay fees to
distributors for the right to air programming a specified number of times.
Other Markets. Revenues also may be derived from the distribution of motion
pictures to airlines, schools, libraries, hospitals and the military, licensing
of rights to perform musical works and sound recordings embodied in a motion
picture, and rights to manufacture and distribute games, dolls, clothing and
similar commercial articles derived from characters or other elements of a
motion picture.
26
<PAGE>
Emerging Technologies
Video-On-Demand. Perhaps the most important advance in the last five years has
been the development of the video-on-demand technology through the creation of
digital video compression. Digital compression involves the conversion of the
analog television signal into digital form and the compression of more than one
video signal into one standard channel for delivery to customers. Compression
technology will be applied not only to cable but to satellite and over-the-air
broadcast transmission systems. This offers the opportunity to dramatically
expand the capacity of current transmission systems which is expected to create
demand for the Company's product.
DVD. Another new technology that has emerged is digital variable disc or "DVD."
DVD is an MPEG-encoded, multi-layered, high density compact disc. Similar in
size to an audio compact disc ("CD"), DVDs can hold up to four two-hour movies
but take up less space than a videotape and do not degrade over time. Just as
CDs have replaced records as the dominant medium for prerecorded music, DVD is
expected to become a widely-accepted format for home video programming. The
Company believes that it will experience additional demand for its library
product, particularly sell-through product, as DVD equipment becomes more
prevalent.
DTH. Direct to Home. Recently, a number of international, well-capitalized
companies have launched DTH systems in the United States (such as Direct TV,
USSB, ASkyB) and in other major markets, including Japan (such as Direct TV,
Perfect TV, and JSKYB). Each of these systems will require programming for their
multi-channel systems, thereby creating additional demand for the Entertainment
Group's library.
Snapper
Snapper manufactures Snapper(R) brand power lawn and garden equipment for sale
to both residential and commercial customers. The residential equipment includes
self-propelled and push-type walk behind lawnmowers, rear engine riding
lawnmowers, garden tractors, zero turn radius lawn equipment, garden tillers,
snow throwers, and related parts and accessories. The commercial mowing
equipment and mid-mount commercial equipment includes commercial quality
self-propelled walk-behind lawnmowers, and wide area and front-mount zero turn
radius lawn equipment.
Snapper products are premium-priced, generally selling at retail from $300 to
$8,500, and are currently sold through three types of distribution networks.
Snapper sells and supports directly a 4,000 dealer network for the distribution
of its products. Snapper also has a two-step distribution process whereby it
sells to eight distributors that in turn service approximately 2,000 dealers
throughout the United States. The third type of distribution done by Snapper is
to the Home Depot retail chain. A limited selection of residential walk-behind
lawnmowers and rear engine riding lawnmowers are sold at approximately 300 Home
Depot locations.
A large percentage of the residential sales of lawn and garden equipment are
made during a seventeen-week period from early spring to mid-summer. Although
some sales are made to the dealers and distributors prior to this selling
season, the largest volume of sales to the ultimate consumer are made during
this time. The main sales revenues during the late fall and winter periods are
related to snowthrower shipments. Snapper has an agreement with a financial
institution which makes floor plan-financing for Snapper products available to
dealers. This agreement provides financing for dealer inventories and
accelerates cash flow to Snapper. Under the terms of this agreement, a default
in payment by one of the dealers on the program is non-recourse to Snapper. If
there is a default by a dealer and the equipment is retained in the dealer
inventory, Snapper is obligated to repurchase any such new and unused equipment.
Snapper also makes available through General Electric Credit Corporation a
retail customer revolving credit plan. This credit plan allows consumers to pay
for Snapper products. Consumers also receive Snapper credit cards which can be
used to purchase additional Snapper products.
27
<PAGE>
Snapper manufactures its products in McDonough, Georgia at facilities totaling
approximately 1,000,000 square feet. Excluding engines and tires, Snapper
manufactures a substantial portion of the component parts for its products.
Most of the parts and material for Snapper's products are commercially
available from a number of sources.
During the three years ended December 31, 1996, Snapper has spent an average of
$3.0 million per year for research and development. Although it holds several
design and mechanical patents, Snapper is not dependent upon such patents, nor
does it believe that patents play an important role in its business. Snapper
does believe, however, that the registered trademark Snapper(R) is an important
asset in its business. Snapper walk-behind mowers are subject to Consumer
Product Safety Commission safety standards and are designed and manufactured in
accordance therewith.
The lawn and garden industry is highly competitive with the competition being
based on price, image, quality, and service. Although no one company dominates
the market, the Company believes that Snapper is a significant manufacturer of
lawn and garden products. Approximately 50 companies manufacture products that
compete with Snapper's. Snapper's principal brand name competitors in the sale
of lawn and garden equipment include The Toro Company, Lawn-Boy (a product of
The Toro Company), Sears, Roebuck and Co., Deere and Company, Ariens Company,
Honda Corporation, Murray Ohio Manufacturing, American Yard Products, Inc., MTD
Products, Inc. and Simplicity Manufacturing, Inc.
Investment in RDM Sports Group, Inc. ("RDM")
In December 1994, the Company acquired 19,169,000 shares of RDM common stock, or
approximately 39% of the outstanding RDM common stock, in exchange for all of
the issued and outstanding capital stock of four of its wholly-owned
subsidiaries (the "Exchange Transaction"). RDM, through its operating
subsidiaries, is a leading manufacturer of fitness equipment and toy products in
the United States. RDM's common stock is listed on the New York Stock Exchange.
As of December 31, 1996, the closing price per share of RDM common stock was $1
1/4 and the quoted market value of the Company's investment in Roadmaster was
approximately $24.0 million. As disclosed in Amendment No. 1 to its Schedule 13D
relating to RDM, filed with the SEC on March 1, 1996, MMG intends to dispose of
its investment in RDM.
In connection with the Exchange Transaction, the Company, RDM and certain
officers of RDM entered into a Shareholders Agreement pursuant to which, among
other things, the Company obtained the right to designate four individuals to
serve on RDM's nine-member Board of Directors, subject to certain reductions.
In addition, the Shareholders Agreement generally grants RDM a right of first
refusal with respect to any proposed sale by the Company of any shares of RDM
common stock received by the Company in the Exchange Transaction for as long as
the MMG Designated Directors have been nominated and elected to the Board of
Directors of RDM. Such right of first refusal will not, however, apply to any
proposed sale, transfer or assignment of such shares to any persons who would,
after consummation of such transaction, own less than 10% of the outstanding
shares of RDM common stock or to any sale of such shares pursuant to a
registration statement filed under the Securities Act, provided the Company has
used its reasonable best efforts not to make any sale pursuant to such
registration statement to any single purchaser or "Acquiring Person" who would
own 10% or more of the outstanding shares of RDM common stock after the
consummation of such transaction. "Acquiring Person" generally is defined in the
Shareholders Agreement to mean any person or group which together with all
affiliates is the beneficial owner of 5% or more of the outstanding shares of
RDM common stock.
28
<PAGE>
Also in connection with the Exchange Transaction, the Company and RDM entered
into a Registration Rights Agreement (the "Registration Rights Agreement") under
which RDM agreed to register such shares ("Registrable Stock") at the request of
the Company or its affiliates or any transferee who acquires at least 1,000,000
shares of the RDM common stock issued to the Company in the Exchange
Transaction. Under the Registration Rights Agreement, registration may be
required at any time during a ten-year period beginning as of the closing date
of the Exchange Transaction (the "Registration Period") by the holders of at
least 50% of the Registrable Stock if a "long-form" registration statement
(i.e., a registration statement on Form S-1, S-2 or other similar form) is
requested or by the holders of Registrable Stock with a value of at least
$500,000 if a "short-form "registration statement (i.e., a registration
statement on Form S-3 or other similar form) is requested. RDM is required to
pay all expenses incurred (other than the expenses of counsel, if any, for the
holders of Registrable Stock, the expenses of underwriter's counsel, and
underwriting fees) for any two registrations requested by the holders of
Registrable Stock during the Registration Period. RDM will become obligated to
pay the expenses of up to two additional registrations if RDM is not eligible to
use a short-form registration statement to register the Registrable Stock at any
time during the Registration Period. All other registrations will be at the
expense of the holders of the Registrable Stock. RDM will have the right at
least once during each twelve-month period to defer the filing of a demand
registration statement for a period of up to 90 days after request for
registration by the holders of the requisite number of shares of Registrable
Stock. The Company has requested that RDM register its shares of RDM common
stock pursuant to the terms of the Registration Rights Agreement.
Environmental Protection
Snapper's manufacturing plant is subject to federal, state and local
environmental laws and regulations. Compliance with such laws and regulations
has not, and is not expected to, materially affect Snapper's competitive
position. Snapper's capital expenditures for environmental control facilities,
its incremental operating costs in connection therewith and Snapper's
environmental compliance costs were not material in 1996 and are not expected to
be material in future years.
The Company has agreed to indemnify a former subsidiary of the Company for
certain obligations, liabilities and costs incurred by the subsidiary arising
out of environmental conditions existing on or prior to the date on which the
subsidiary was sold by the Company in 1987. Since that time, the Company has
been involved in various environmental matters involving property owned and
operated by the subsidiary, including clean-up efforts at landfill sites and the
remediation of groundwater contamination. The costs incurred by the Company with
respect to these matters have not been material during any year through and
including the fiscal year ended December 31, 1996. As of December 31, 1996, the
Company had a remaining reserve of approximately $1.3 million to cover its
obligations to its former subsidiary. During 1995, the Company was notified by
certain potentially responsible parties at a superfund site in Michigan that the
former subsidiary may also be a potentially responsible party at the superfund
site. The former subsidiary's liability, if any, has not been determined but the
Company believes that such liability will not be material.
29
<PAGE>
The Company, through a wholly-owned subsidiary, owns approximately 17 acres of
real property located in Opelika, Alabama (the "Opelika Property"). The Opelika
Property was formerly owned by Diversified Products Corporation, a former
subsidiary of the Company ("DP"), and was transferred to a wholly-owned
subsidiary of the Company in connection with the Exchange Transaction. DP
previously used the Opelika Property as a storage area for stockpiling cement,
sand, and mill scale materials needed for or resulting from the manufacture of
exercise weights. In June 1994, DP discontinued the manufacture of exercise
weights and no longer needed to use the Opelika Property as a storage area. In
connection with the Exchange Transaction, RDM and the Company agreed that
the Company, through a wholly-owned subsidiary, would acquire the Opelika
Property, together with any related permits, licenses, and other authorizations
under federal, state and local laws governing pollution or protection of the
environment. In connection with the closing of the Exchange Transaction, the
Company and RDM entered into an Environmental Indemnity Agreement (the
"Indemnity Agreement") under which the Company agreed to indemnify RDM for costs
and liabilities resulting from the presence on or migration of regulated
materials from the Opelika Property. The Company's obligations under the
Indemnity Agreement with respect to the Opelika Property are not limited. The
Indemnity Agreement does not cover environmental liabilities relating to any
property now or previously owned by DP except for the Opelika Property.
On January 22, 1996, the Alabama Department of Environmental Management ("ADEM")
wrote a letter to the Company stating that the Opelika Property contains an
"unauthorized dump" in violation of Alabama environmental regulations. The
letter from ADEM requires the Company to present for ADEM's approval a written
environmental remediation plan for the Opelika Property. The Company has
retained an environmental consulting firm to develop an environmental
remediation plan for the Opelika Property. In 1997, the Company received the
consulting firm's report. The Company has conducted a grading and capping in
accordance with plan and has reported to ADEM that the work was completed and
the Company will undertake to monitor the Property on a quarterly basis. Since
quarterly testing will be conducted the Company believes that the reserves of
approximately $1.8 million will be adequate to cover any further cost of
remediation if required.
Employees
As of March 7, 1997, the Company had approximately 2,600 regular employees.
Approximately 1,000 of the employees are part-time employees in the
Entertainment Group's theatre business. In addition, approximately 850 employees
were represented by unions under collective bargaining agreements. In general,
the Company believes that its employee relations are good.
Certain of the Entertainment Group's subsidiaries are signatories to various
agreements with unions that operate in the entertainment industry. In addition,
a substantial number of the artists and talent and crafts people involved in the
motion picture and television industry are represented by trade unions with
industry-wide collective bargaining agreements.
Segment and Geographic Data
Business segment data and information regarding the Company's foreign revenues
by geographic area are included in notes 8 and 13 of the "notes to consolidated
financial statements" included in Item 8 hereof.
30
<PAGE>
Item 2. Properties
The following table contains a list of the Company's principal properties.
Number
------
Description Owned Leased Location
- ----------- ----- ------ --------
The Entertainment Group:
Office space - 4 Los Angeles, California
Sales office - 1 New York, New York
The Communications Group:
Office space - 1 Stamford, Connecticut
Office space - 1 Moscow, Russia
Office space - 1 Vienna, Austria
Office space - 1 Hong Kong
Office space - 1 New York, New York
General Corporate:
Office space - 1 East Rutherford, New Jersey
Snapper:
Manufacturing plant 1 - McDonough, Georgia
Distribution facility - 1 McDonough, Georgia
Distribution facility - 1 Dallas, Texas
Distribution facility - 1 Greenville, Ohio
Three of Orion's offices will be combined into one facility during 1997. Of
Landmark's 50 theaters, four and one-half are owned and the remainder are
located in leased or subleased premises. Landmark owns the Seven Gables Theatre,
the Crest Theatre, the Guild Theatres and a one-half interest in the Harvard
Exit Theatre, all in Seattle, Washington, and it owns the Sacramento Inn Theater
in Sacramento, California. The leased and subleased theaters have remaining
terms ranging from two months to 30 years or more and, in some cases, renewal
options for additional periods of from five to 20 years. The renewal options
generally provide for increased rent. Rent is sometimes calculated as a
percentage of sales or profits, subject to an annual minimum. Assuming the
exercise of all the options, ten leases will expire between January 1, 1997 and
December 31, 1998 and the balance thereafter.
The Company's management believes that the facilities listed above are generally
adequate and satisfactory for their present usage and are generally well
utilized.
31
<PAGE>
Item 3. Legal Proceedings
Fuqua Industries, Inc. Shareholder Litigation
Between February 25, 1991 and March 4, 1991, three lawsuits were filed against
the Company (formerly named Fuqua Industries, Inc.) in the Delaware Chancery
Court. On May 1, 1991, these three lawsuits were consolidated by the Delaware
Chancery Court in re Fuqua Industries, Inc. Shareholders Litigation, Civil
Action No. 11974. The named defendants are certain current and former members of
the Company's Board of Directors and certain former members of the Board of
Directors of Intermark, Inc. ("Intermark"). Intermark is a predecessor to Triton
Group Ltd., which at one time owned approximately 25% of the outstanding shares
of the Company's Common Stock. The Company was named as a nominal defendant in
this lawsuit. The action was brought derivatively in the right of and on behalf
of the Company and purportedly was filed as a class action lawsuit on behalf of
all holders of the Company's Common Stock other than the defendants. The
complaint alleges, among other things, a long-standing pattern and practice by
the defendants of misusing and abusing their power as directors and insiders of
the Company by manipulating the affairs of the Company to the detriment of the
Company's past and present stockholders. The complaint seeks (i) monetary
damages from the director defendants, including a joint and several judgment for
$15.7 million for alleged improper profits obtained by Mr. J.B. Fuqua in
connection with the sale of his shares in the Company to Intermark; (ii)
injunctive relief against the Company, Intermark and its former directors,
including a prohibition against approving or entering into any business
combination with Intermark without specified approval; and (iii) costs of suit
and attorneys' fees. On December 28, 1995, the plaintiffs filed a consolidated
second amended derivative and class action complaint, purporting to assert
additional facts in support of their claim regarding an alleged plan, but
deleting their prior request for injunctive relief. On January 31, 1996, all
defendants moved to dismiss the second amended complaint and filed a brief in
support of that motion. A hearing regarding the motion to dismiss was held on
November 6, 1996; the decision relating to the motion is pending.
Michael Shores v. Samuel Goldwyn Company
On May 20, 1996 a purported class action lawsuit against Goldwyn and its
directors was filed in the Superior Court of the State of California for the
County of Los Angeles in Michael Shores v. Samuel Goldwyn Company. et al., case
no. BC 150360. In the complaint, plaintiff alleged that Goldwyn's Board of
Directors breached its fiduciary duties to the stockholders of Goldwyn by
agreeing to sell Goldwyn to the Company at a premium, yet providing Mr. Samuel
Goldwyn, Jr., the Samuel Goldwyn Family Trust and Mr. Meyer Gottlieb with
additional consideration, and sought to enjoin consummation of the Goldwyn
Merger. The Company believes that the suit is without merit and intends to
vigorously defend such action.
Indemnification Agreements
In accordance with Section 145 of the General Corporation Law of the State of
Delaware, pursuant to the Company's Restated Certificate of Incorporation, the
Company has agreed to indemnify its officers and directors against, among other
things, any and all judgments, fines, penalties, amounts paid in settlements and
expenses paid or incurred by virtue of the fact that such officer or director
was acting in such capacity to the extent not prohibited by law.
Litigation Relating to the November 1 Merger
Three stockholder suits relating to the November 1 Merger were filed in the
Delaware Chancery Court prior to the consummation of such mergers. Set forth
below is a brief description of the status of such litigations.
32
<PAGE>
Jerry Krim v. John W. Kluge, Silvia Kessel, Joel R. Packer, Michael I. Sovern,
Raymond L. Steele, Stuart Subotnick, Arnold L. Wadler, Stephen Wertheimer,
Leonard White and Orion Pictures Corporation (Delaware Chancery Court, C.A. No.
13721); complaint filed September 2, 1994. Orion and each of its directors were
named as defendants in this purported class action lawsuit, which alleged that
Orion's Board of Directors failed to use the required care and diligence in
considering the November 1 Merger and sought to enjoin the consummation of such
merger. The lawsuit further alleged that as a result of the actions of Orion's
directors, Orion's stockholders would not receive the fair value of Orion's
assets and business in exchange for their Orion Common Stock in the November 1
Merger.
Harry Lewis v. John W. Kluge, Leonard White, Stuart Subotnick, Silvia Kessel,
Joel R. Packer, Michael I. Sovern, Raymond L. Steele, Arnold L. Wadler, Stephen
Wertheimer, The Actava Group, Inc. and Orion Pictures Corp. (Delaware Chancery
Court, C.A. No. 14234); complaint filed April 17, 1995. Orion, each of its
directors and Actava were named in this purported class action lawsuit which was
filed after the execution of the initial merger agreement relating to the
November 1 Merger. The complaint contained similar allegations and sought
similar relief to the Krim case described above.
On January 22, 1996, the parties to these two lawsuits executed a Memorandum of
Understanding embodying a tentative settlement agreement. In the tentative
settlement agreement, the plaintiffs accept the September 27, 1995 amended and
restated merger agreement relating to the November 1 Merger as full settlement
of all claims that were asserted or could have been asserted in such
litigations. Counsel for the plaintiffs concluded confirmatory discovery during
1996 and entered into a stipulated and agreement of complaints settlement and
released dated January 24, 1997. On January 31, 1997, the court ordered a
settlement hearing regarding the settlement to be held on April 23, 1997 to
determine the fairness, reasonableness and adequacy of the settlement, whether
the action should be class action and whether the court should approve the
settlement. On March 11, 1997, the Company mailed to the members of the class a
notice of pending class action along with the proposed settlement to afford
class members the ability to opt out of the class.
James F. Sweeney, Trustee of Frank Sweeney Defined Benefit Plan Trust v. John D.
Phillips, Frederick B. Beilstein, III, John E. Aderhold, Michael B. Cahr, J.M.
Darden, III, John P. Imlay, Jr., Clark A. Johnson, Anthony F. Kopp, Richard
Nevins, Carl E. Sanders, Orion Picture Corporation, International Telcell, Inc.,
Metromedia International, Inc. and MCEG Sterling Inc. (Delaware Chancery Court,
C.A. No. 13765); complaint filed September 23, 1994. This class action lawsuit
was filed by stockholders of the Company (then known as The Actava Group, Inc.)
against the Company and its directors, and against each of Orion, MITI and
Sterling, the other parties to the November 1 Merger. The complaint alleges
that the terms of the November 1 Merger constitute an overpayment by the
Company for the assets of Orion and, accordingly, would result in a waste of the
Company's assets. The complaint further alleges that Orion, MITI and Sterling
each knowingly aided, abetted and materially assisted the Company's directors in
breach of their fiduciary duties to the Company's stockholders. On November 23,
1994, the Company and its directors filed a motion to dismiss the complaint. The
plaintiff never responded to the motion to dismiss. On February 22, 1996,
however, the plaintiff filed a status report with the Court of Chancery in
Delaware indicating that the case is moot but that the plaintiff intends to
pursue an application for fees and expenses. The parties entered into a
settlement, which was approved by the court concerning the application for fees,
which was filed in April 1996. In October, 1996 the Company notified the
provisional class of the settlement and provided such persons the opportunity to
object to the dismissal of the case or the settlement concerning the fees.
Item 4. Submission of Matters to a Vote of Security Holders
No matters were submitted to a vote of the Company's stockholders, through the
solicitation of proxies or otherwise, during the fourth quarter of the year
ended December 31, 1996.
33
<PAGE>
Executive Officers of the Company
Each of the executive officers of the Company have served in their respective
capacities since the consummation of the November 1 Merger. Each executive
officer shall, except as otherwise provided in the Company's By-Laws, hold
office until his or her successor shall have been chosen and qualify.
<TABLE>
<CAPTION>
Position
Name Age Office Held Since
- ---- --- ------ ----------
<S> <C> <C> <C>
John W. Kluge 82 Chairman November 1995
Stuart Subotnick 55 Vice Chairman, President and Chief November 1995 (Vice Chairman)
Executive Officer December 1996 (President and
Chief Executive
Officer)
Silvia Kessel 46 Executive Vice President, Chief November 1995
Financial Officer and Treasurer
Arnold L. Wadler 53 Executive Vice President, General November 1995
Counsel and Secretary
Robert A. Maresca 62 Senior Vice President (Chief November 1995
Accounting Officer)
</TABLE>
Mr. Kluge has served as Chairman of the Board of Directors of the Company since
November 1, 1995 and as Chairman of the Board of Orion since 1992. In addition,
Mr. Kluge has served as Chairman and President of Metromedia Company
("Metromedia") and its predecessor-in-interest, Metromedia, Inc. for over five
years. Mr. Kluge is also a director of The Bear Stearns Companies, Inc.,
Occidental Petroleum Corporation and Conair Corporation. Mr. Kluge is Chairman
of the Company's Executive Committee.
Mr. Subotnick has served as Vice Chairman of the Board of Directors of the
Company since the November 1, 1995 and President and Chief Executive Officer
since December 4, 1996 and as Vice Chairman of the Board of Orion since November
1992. In addition, Mr. Subotnick has served as Executive Vice President of
Metromedia and its predecessor-in-interest, Metromedia, Inc., for over five
years. Mr. Subotnick is also a director of Carnival Cruise Lines, Inc. and RDM
Sports Group, Inc. Mr. Subotnick is Chairman of the Audit Committee and a member
of the Executive and Nominating Committees of the Company.
Ms. Kessel has served as Executive Vice President, Chief Financial Officer and
Treasurer since August 29, 1996 and as Senior Vice President, Chief Financial
Officer and Treasurer of MMG since November 1, 1995 and as Executive Vice
President of Orion since January 1993, Senior Vice President of Metromedia since
1994 and President of Kluge & Company since January 1994. Prior to that time,
Ms. Kessel served as Senior Vice President of Orion from June 1991 to November
1992 and Managing Director of Kluge & Company (and its predecessor) from April
1990 to January 1994. Ms. Kessel is also a director of RDM Sports Group, Inc.
Ms. Kessel is a member of the Nominating Committee of the Company.
Mr. Wadler has served as Executive Vice President, General Counsel and Secretary
since August 29, 1996 and Senior Vice President, General Counsel and Secretary
since November 1, 1995, as a Director of Orion since 1991 and as Senior Vice
President, Secretary and General Counsel of Metromedia and its
predecessor-in-interest, Metromedia, Inc., for over five years. Mr. Wadler is
Chairman of the Nominating Committee of the Company.
Mr. Maresca has served as a Senior Vice President and Chief Accounting Officer
of the Company since November 1, 1995. Mr. Maresca has served as a Senior Vice
President-Finance of Metromedia and its predecessor-in-interest, Metromedia,
Inc. for over five years.
34
<PAGE>
PART II
Item 5. Market for Registrant's Common Stock and Related Stockholder Matters.
Since November 2, 1995, the Common Stock has been listed and traded on the
American Stock Exchange and the Pacific Stock Exchange (the "AMEX" and "PSE",
respectively) under the symbol "MMG" and "MIG", respectively. Prior to November
2, 1995, the Common Stock was listed and traded on both the New York Stock
Exchange (the "NYSE") and the PSE under the symbol "ACT." The following table
sets forth the quarterly high and low closing sales prices per share for the
Company's Common Stock according to the NYSE Composite Tape for the period from
January 1, 1995 through November 1, 1995 and the quarterly high and low closing
sales prices per share of the Company's Common Stock as reported by the AMEX
from November 2, 1995 through the present.
Market Price of Common Stock
Quarters Ended 1996 1995
- -------------- ---- ----
High Low High Low
----- --- ---- ---
March 31..................... $ 14 1/4 $11 1/2 $ 11 $ 8 3/4
June 30...................... 16 5/8 12 1/4 13 3/8 8 5/8
September 30................. 12 1/2 9 1/2 19 1/8 13 1/4
December 31.................. 12 1/8 8 7/8 18 7/8 13 3/4
Holders of Common Stock are entitled to such dividends as may be declared by the
Board of Directors and paid out of funds legally available for the payment of
dividends. The Company has not paid a dividend to its stockholders since the
dividend declared in the fourth quarter of 1993, and has no plans to pay cash
dividends on the Common Stock in the foreseeable future. The Company intends to
retain earnings to finance the development and expansion of its businesses. The
decision of the Board of Directors as to whether or not to pay cash dividends in
the future will depend upon a number of factors, including the Company's future
earnings, capital requirements, financial condition, and the existence or
absence of any contractual limitations on the payment of dividends. The
Company's ability to pay dividends is limited because the Company operates as a
holding company, conducting its operations solely through its subsidiaries.
Certain of the Company's subsidiaries' existing credit arrangements contain, and
it is expected that their future arrangements will similarly contain,
substantial restrictions on dividend payments to the Company by such
subsidiaries. See Item 7 -- "Management's Discussion and Analysis of Financial
Condition and Results of Operations."
As of March 24, 1997, there were approximately 7,790 record holders of Common
Stock. The last reported sales price for the Common Stock on such date was $
9 7/16 per share as reported by the American Stock Exchange.
35
<PAGE>
Item 6. Selected Financial Data
SELECTED FINANCIAL DATA
(in thousands, except per share data)
<TABLE>
<CAPTION>
====================================================================================================================
Years Ended
December 31 Years Ended February 28
---------------------- ----------------------------------
1996 1995(1) 1995 1994 1993
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA
Revenues $ 201,755 $ 138,970 $ 194,789 $ 175,713 $ 222,318
Equity in losses of Joint Ventures (11,079) (7,981) (2,257) (777) --
Loss from continuing operations before discontinued
operations and extraordinary item (94,433) (87,024) (69,411) (132,530) (72,973)
Loss from discontinued operations (16,305) (293,570) -- -- --
Loss before extraordinary item (110,738) (380,594) (69,411) (132,530) (72,973)
Net income (loss) (115,243) (412,976) (69,411) (132,530) 250,240
Loss from continuing operations before discontinued
operations and extraordinary item per common share (1.74) (3.54) (3.43) (7.71) (19.75)
Loss before extraordinary item per
common share (2.04) (15.51) (3.43) (7.71) (19.75)
Net income (loss) per common share (2.12) (16.83) (3.43) (7.71) 67.74
Weighted average common shares entering into
computation of per-share amounts 54,293 24,541 20,246 17,188 3,694
Dividends per common share -- -- -- -- --
BALANCE SHEET DATA
(at end of period)
Total assets 944,740 599,638 391,870 520,651 704,356
Notes and subordinated debt 459,059 304,643 237,027 284,500 325,158
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) The consolidated financial statements for the twelve months ended
December 31, 1995 include two months for Orion (January and February
1995) that were included in the February 28, 1995 consolidated financial
statements. The revenues and net loss for the two month duplicate period
are $22.5 million and $11.4 million, respectively.
36
<PAGE>
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
The following discussion should be read in conjunction with the Company's
consolidated financial statements and related notes thereto and the "Business"
section included as Item 1 herein.
General
On November 1, 1995 (the "Merger Date"), Orion, MITI, the Company and MCEG
Sterling Incorporated ("Sterling") consummated the November 1 Merger. In
connection with the November 1 Merger, the Company changed its name from "The
Actava Group Inc." ("Actava") to "Metromedia International Group, Inc." ("MMG").
For accounting purposes only, Orion and MITI have been deemed to be the joint
acquirers of Actava and Sterling. The acquisition of Actava and Sterling has
been accounted for as a reverse acquisition. As a result of the reverse
acquisition, the historical financial statements of the Company for periods
prior to the November 1 Merger are the combined financial statements of Orion
and MITI, rather than Actava's.
The operations of Actava and Sterling have been included in the accompanying
consolidated financial statements from November 1, 1995, the date of
acquisition. During 1995, the Company adopted a formal plan to dispose of
Snapper, Inc. ("Snapper"), a wholly-owned subsidiary of the Company, and as a
result, Snapper was classified as an asset held for sale and the results of its
operations were not included in the consolidated results of operations of the
Company from November 1, 1995 to October 31, 1996. Subsequently, the Company
announced its intention not to continue to pursue its previously adopted plan to
dispose of Snapper and to actively manage Snapper to maximize its long term
value to the Company. The operations of Snapper are included in the accompanying
consolidated financial statements as of November 1, 1996. In addition, at
November 1, 1995 the Company's investment in RDM Sports Group, Inc. (formerly
Roadmaster Industries, Inc., "RDM") was deemed to be a non-strategic asset and
is included in the accompanying consolidated financial statements as a
discontinued operation and an asset held for sale. The Company intends to
dispose of its RDM stock during 1997.
The business activities of the Company consist of three business segments: (i)
the development and operation of communications businesses, which include
wireless cable television, paging services, radio broadcasting, and various
types of telephony services, (ii) the production and distribution in all media
of motion pictures, television programming and other filmed entertainment
product and the exploitation of its library of over 2,200 feature film and
television titles and (iii) the manufacture of lawn and garden products through
Snapper.
Communications Group
The Company, through the Communications Group, is the owner of various interests
in Joint Ventures that are currently in operation or planning to commence
operations in certain republics of the former Soviet Union and in Eastern
European and other emerging markets.
The Joint Ventures currently offer wireless cable television, radio paging
systems, radio broadcasting, and various types of telephony services including
trunked mobile radio, international toll calling and wireless telephony
services. Joint ventures are principally entered into with governmental agencies
or ministries under the existing laws of the respective countries.
37
<PAGE>
The consolidated financial statements include the accounts and results of
operations of the Communications Group, its majority owned and controlled Joint
Ventures, CNM Paging, Radio Juventas, Radio Skonto, Romsat, SAC/Radio 7, Vilnius
Cable and Protocall Ventures Ltd., and its subsidiaries. The following table
lists the Communications Group's majority owned and controlled Joint Ventures at
September 30, 1996:
<TABLE>
<CAPTION>
Population/HH
Covered (MM)
Joint Venture Business Market 1996(1)
- ------------- -------- ------ ----
<S> <C> <C> <C>
CNM Paging Paging Bucharest, Romania 23.0
Radio Juventus Radio Budapest, Hungary 3.5
Radio Skonto Radio Riga, Latvia 0.9
SAC/Radio 7 Radio Moscow, Russia 12.0
Romsat Cable TV Bucharest, Romania 0.9
Vilnius Cable Cable TV Vilnius, Lithuania 2.0
Protocall Ventures Trunked Mobile Radio Belgium, Portugal, Romania,
Spain 33.7
</TABLE>
(1) Information for Romsat and Vilnius Cable are households covered. All other
information is for population covered.
Investments in other companies and joint ventures which are not majority owned,
or in which the Communications Group does not control, but exercises significant
influence, have been accounted for using the equity method. Investments of the
Communications Group or its consolidated subsidiaries over which significant
influence is not exercised are carried under the cost method. See note 8 to the
consolidated financial statements, "Investments in and Advances to Joint
Ventures", for these Joint Ventures and their summary financial information.
Entertainment Group
The Entertainment Group consists of Orion and, as of July 2, 1996, Goldwyn and
MPCA and their respective subsidiaries. Until November 1, 1995, Orion operated
under certain agreements entered into in connection with the terms of its
Modified Third Amended Joint Consolidated Plan of Reorganization (the "Plan"),
which severely limited the Entertainment Group's ability to finance and produce
additional feature films. Therefore, the Entertainment Group's primary activity
prior to the November 1 Merger was the ongoing distribution of its library of
theatrical motion pictures and television programming. The Entertainment Group
believes the lack of a continuing flow of newly produced theatrical product
while operating under the Plan adversely affected its results of operations. As
a result of the removal of the restrictions on the Entertainment Group to
finance, produce, and acquire entertainment products in connection with the
November 1 Merger, the Entertainment Group has begun to produce, acquire, and
release new theatrical product. In addition, the Entertainment Group operates a
movie theater circuit.
Theatrical motion pictures are produced initially for exhibition in theaters in
the United States and Canada. Foreign theatrical exhibition generally begins
within the first year after initial release. Home video distribution in all
territories usually begins six to twelve months after theatrical release in that
territory, with pay television exploitation beginning generally six months after
initial home video release. Exhibition of the Company's product on network and
on other free television outlets begins generally three to five years from the
initial theatrical release date in each territory.
38
<PAGE>
Snapper
Snapper manufacturers Snapper(R) brand premium-priced power lawnmowers, lawn
tractors, garden tillers, snowthrowers and related parts and accessories. The
lawnmowers include rear engine riding mowers, front engine riding mowers or lawn
tractors, and self-propelled and push-type walk-behind mowers. Snapper also
manufactures a line of commercial lawn and turf equipment under the Snapper
brand. Snapper provides lawn and garden products through distribution channels
to domestic and foreign retail markets.
The following table sets forth the operating results and financial condition of
the Company's entertainment, communications and lawn and garden products
segments.
METROMEDIA INTERNATIONAL GROUP
Segment Information
Management's Discussion and Analysis Table
(in thousands)
<TABLE>
<CAPTION>
Calendar Year Calendar Year Fiscal Year
1996 1995 1995
--------- --------- ---------
<S> <C> <C> <C>
Entertainment Group:
Net revenues $ 165,164 $ 133,812 $ 191,244
Cost of sales and rentals and operating expenses (139,307) (132,951) (187,477)
Selling, general and administrative (24,709) (24,049) (22,888)
Depreciation and amortization (5,555) (694) (767)
--------- --------- ---------
Loss from operations (4,407) (23,882) (19,888)
--------- --------- ---------
Communications Group:
Net revenues 14,047 5,158 3,545
Cost of sales and rentals and operating expenses (1,558) -- --
Selling, general and administrative (37,463) (26,803) (19,067)
Depreciation and amortization (6,403) (2,101) (1,149)
--------- --------- ---------
Loss from operations (31,377) (23,746) (16,671)
--------- --------- ---------
Snapper:
Net Revenues 22,544 -- --
Cost of sales and rental and operating expenses (20,699) -- --
Selling, general and administrative (9,954) -- --
Depreciation and amortization (1,256) -- --
--------- --------- ---------
Loss from operations (9,365) -- --
--------- --------- ---------
Corporate Headquarters and Eliminations:
Net revenues -- -- --
Cost of sales and rental and operating expenses -- -- --
Selling, general and administrative (9,355) (1,109) --
Depreciation and amortization (18) -- --
--------- --------- ---------
Loss from operations (9,373) (1,109) --
--------- --------- ---------
Consolidated- Continuing Operations:
Net revenues 201,755 138,970 194,789
Cost of sales and rentals and operating expenses (161,564) (132,951) (187,477)
Selling, general and administrative (81,481) (51,961) (41,955)
Depreciation and amortization (13,232) (2,795) (1,916)
--------- --------- ---------
Loss from operations (54,522) (48,737) (36,559)
--------- --------- ---------
Interest expense (36,256) (33,114) (32,389)
Interest income 8,838 3,575 3,094
Provision for income taxes (1,414) (767) (1,300)
Equity in losses of Joint Ventures (11,079) (7,981) (2,257)
Discontinued operations (16,305) (293,570) --
Extraordinary item (4,505) (32,382) --
--------- --------- ---------
Net loss $(115,243) $(412,976) $ (69,411)
========= ========= =========
</TABLE>
39
<PAGE>
MMG Consolidated - Results of Operations
Year ended December 31, 1996 Compared to Year Ended December 31, 1995.
During the year ended December 31, 1996 ("calendar 1996"), the Company reported
a loss from continuing operations of $94.4 million, a loss from discontinued
operations of $16.3 million and a loss on extinguishment of debt of $4.5
million, resulting in a net loss of $115.2 million. This compares to a loss from
continuing operations of $87.0 million, a loss from discontinued operations of
$293.6 million and a loss on extinguishment of debt of $32.4 million, resulting
in a net loss of $413.0 million for the year ended December 31, 1995 ("calendar
1995"). The loss from continuing operations increased by $7.4 million as a
result of increases in the operating losses at the Communications Group,
corporate overhead and the consolidation of Snapper losses as of November 1,
1996, which were partially offset by a decrease in the operating losses at the
Entertainment Group.
The calendar 1996 loss from discontinued operations and extraordinary item is
attributable to the writedown of the investment in RDM to its net realizable
value and the loss associated with the refinancing of the Orion debt facility as
part of the Goldwyn and MPCA acquisition, respectively.
The calendar 1995 loss from discontinued operations represents the writedown of
the portion of the purchase price of the Company allocated to Snapper on
November 1, 1995 to its net realizable value.
The extraordinary loss relating to the early extinguishment of debt in calendar
1995 was a result of the repayment and termination of the Plan debt, which was
refinanced with funds provided under the Old Orion Credit Facility (see note 9)
and a non-interest bearing promissory note from the Company, and to the
charge-off of the unamortized discount associated with such obligations.
Interest expense increased $3.1 million for calendar 1996. The increase in
interest expense was primarily due to the interest on the debt at corporate
headquarters for twelve months in calendar 1996 as compared to two months in
calendar 1995. This increase was partially offset by the reduction in interest
expense for the Communications Group since the funding of their operations is
from MMG and for the Entertainment Group due principally to lower interest rates
on their outstanding debt balance for each respective period. The average
interest rates on average debt outstanding of $363.3 million and $254.8 million
in calendar 1996 and calendar 1995, were 10.0% and 11.4%, respectively.
Interest income increased $5.3 million principally as a result of funds invested
at corporate headquarters and increased interest resulting from increased
borrowings under the Communications Group's credit facilities with its Joint
Ventures for their operating and investing cash requirements.
Year Ended December 31, 1995 Compared to Year Ended February 28, 1995
During calendar 1995, the Company reported a loss from continuing operations of
$87.0 million, a loss from discontinued operations of $293.6 million and a loss
on extinguishment of debt of $32.4 million, resulting in a net loss of $413.0
million. This compares to a net loss of $69.4 million for the year ended
February 28, 1995 ("fiscal 1995"), all of which came from continuing operations.
The loss from continuing operations increased by $17.6 million from calendar
1995 as compared to fiscal 1995, primarily as a result of an increase in the
Communications Group's operating loss in calendar 1995.
The effect of the acquisitions of Actava and Sterling on calendar 1995 results
of operations was to increase revenues by $198,000, to increase selling, general
and administrative expenses by $1.6 million, and to increase interest expense by
$2.2 million.
40
<PAGE>
The calendar 1995 loss from discontinued operations represents the writedown of
the portion of the purchase price of the Company allocated to Snapper in the
November 1 Merger to its net realizable value.
The extraordinary loss relating to the early extinguishment of debt in calendar
1995 was a result of the repayment and termination of the Plan debt, which was
refinanced with funds provided under the Old Orion Credit Facility (see note 9)
and a noninterest bearing promissory note from MMG, and to the charge-off of the
unamortized discount associated with such obligations.
Interest expense increased by $700,000 to $33.1 million in calendar 1995 due to
increased borrowings by the Communications Group to finance operations and
investment activities of its Joint Ventures and two months of interest on the
debt at corporate headquarters as part of the November 1 Merger, partially
offset by lower debt levels at the Entertainment Group. The average interest on
average debt outstanding of $254.8 million and $245.2 million in calendar 1995
and fiscal 1995, were 11.4% and 10.9% respectively.
Interest income increased $500,000 to $3.6 million in calendar 1995 due
principally to interest charged by the Communications Group to the Joint
Ventures for credit facilities.
Entertainment Group - Results of Operations
Year Ended December 31, 1996 Compared to Year Ended December 31,1995.
Revenues
Total revenues for calendar year 1996 were $165.2 million, an increase of $31.4
million or 23% from calendar year 1995.
Revenues increased during calendar 1996, reflecting the additional revenues
associated with the acquisitions of Goldwyn and MPCA ("Acquired Businesses"),
including revenues from the theatrical exhibition business. This increase was
partially offset by the decrease in revenues in home video and pay television,
which resulted from the Entertainment Group's reduced theatrical release
schedule. Although the Entertainment Group released 13 pictures theatrically
during calendar 1996, several of these titles had limited releases and/or were
acquired solely for domestic theatrical distribution and consequently will
generate little or no ancillary revenues. The Entertainment Group anticipates
that its reduced theatrical release schedule during the last few years, as well
as the acquisition of limited distribution rights for certain current titles,
will continue to have an adverse effect on its ancillary revenues.
Theatrical revenues for calendar 1996 were $20.3 million, an increase of $15.6
million or 332% from the previous year. Such increase was due to the theatrical
release of 13 pictures during calendar 1996 compared to three theatrical
releases in calendar 1995.
Domestic home video revenues for calendar 1996 were $30.9 million, a decrease of
$9.1 million or 23% from the previous year. The decrease in domestic home video
revenue is due primarily to a reduction in rental units sold for calendar 1996
video releases as compared to calendar 1995 video releases.
Home video subdistribution revenues for calendar 1996 were $8.3 million, an
increase of $4.4 million or 113% from calendar 1995. These revenues are
generated primarily in the foreign marketplace through a subdistribution
arrangement with Sony Pictures Entertainment, Inc. ("Sony"). The increase for
calendar 1996 was due primarily to the release of the remaining titles under
this agreement in certain major territories. All 23 pictures covered by this
agreement have been released theatrically.
41
<PAGE>
Pay television revenues were $20.5 million in calendar 1996, a decrease of $11.1
million or 35% from the previous year. The decrease in pay television revenues
is due to the lack of available titles in calendar 1996 in the primary pay cable
window compared to six available titles during calendar 1995. The Entertainment
Group's reduced theatrical release schedule in calendar 1996 as well as limited
ancillary rights to certain theatrical releases in calendar 1996 will continue
to have an adverse effect on future pay television revenues.
Free television revenues for calendar 1996 were $55.5 million, an increase of
$1.9 million or 4% from the previous year. In both the domestic and
international marketplaces, Orion derives significant revenue from the licensing
of free television rights. Major international contracts in calendar 1996 that
contributed to revenues include agreements with British Sky Broadcasting, LTD
for rights in the U.K., Mitsubishi Corporation for rights in Japan and Principal
Network for rights in Italy. In calendar 1995, the most significant agreements
were TV de Catalunya for rights in Spain, RTL Plus for rights in Germany and
Principal Network for rights in Italy. The Entertainment Group's reduced
theatrical release schedule while operating under the Plan has had and will
continue to have an adverse effect on free television revenues.
Film exhibition revenues for calendar 1996 were $29.6 million. As the
acquisition of this business occurred on July 2, 1996, only six months of
operations has been included in the calendar 1996 statement of operations.
Selling, General and Administrative Expenses
Selling, general and administrative expenses were $24.7 million in calendar
1996, an increase of $700,000 from the previous year. The increase is attributed
to the inclusion of the Acquired Businesses' selling, general and administrative
expenses for the six months ended December 31, 1996 offset almost entirely by
nonrecurring costs associated with the Plan in calendar 1995, by reductions in
insurance costs and by reductions in outside computer consulting costs.
Depreciation and Amortization Expense
Depreciation and amortization charges were $5.6 million in calendar 1996, an
increase of $4.9 million from the previous year. The increase is attributed to
the inclusion of the depreciation of the theatre group property and equipment as
well as the amortization of the goodwill associated with the Acquired
Businesses.
Operating Loss
Operating loss decreased $19.5 million in calendar 1996 to $4.4 million from an
operating loss of $23.9 million in calendar 1995. Two main factors contributed
to the decreased operating loss in calendar 1996. First, calendar 1995 results
were adversely affected by approximately $15.7 million of writedowns to
estimated net realizable value of the carrying amounts on certain film product.
No such writedowns occurred in calendar 1996. Secondly, the theatre group
acquired on July 2, 1996 contributed positively to calendar 1996 operating
results.
The Entertainment Group is likely to generate operating losses until profitable
new product is produced and released, as approximately one-half of its film
inventories are stated at estimated net realizable value and do not generate
gross profit upon recognition of revenues.
Year Ended December 31, 1995 Compared to Year Ended February 28, 1995
Revenues
Total revenues for calendar 1995 were $133.8 million a decrease of $57.4 million
or 30% from fiscal 1995.
42
<PAGE>
Theatrical revenues for calendar 1995 were $4.7 million, a decrease of $4.3
million or 48% from the previous year. While operating under the Plan, the
Entertainment Group's ability to produce or acquire additional theatrical
product was limited. This lack of product has negatively impacted theatrical
revenues and will continue to do so until Orion produces or acquires significant
new product for theatrical distribution.
Domestic home video revenues for calendar 1995 were $40.0 million, a decrease of
$11.9 million or 23% from the previous year. The decrease in domestic home video
revenue was due primarily to the Entertainment Group's reduced theatrical
release schedule in calendar 1995. The Entertainment Group had available only
one of its theatrical releases for sale to the domestic home video rental market
in calendar 1995 compared to six such titles in fiscal 1995. The Entertainment
Group's reduced theatrical release schedule in both calendar 1995 and fiscal
1995 has had and will continue to have an adverse effect on home video annual
revenues until new product is available for distribution.
Home video subdistribution revenues for calendar 1995 were $3.9 million, a
decrease of $2.8 million or 42% from fiscal 1995. These revenues are primarily
generated in the foreign marketplace through a subdistribution agreement with
Sony. All 23 pictures covered by this agreement have been released theatrically.
The Entertainment Group's reduced theatrical release schedule in calendar 1995
and fiscal 1995 has negatively impacted home video subdistribution revenues and
will continue to do so in the future until the Entertainment Group produces or
acquires significant new product for theatrical distribution.
Pay television revenues were $31.6 million in calendar 1995, a decrease of $29.3
million or 48% from the previous year. The decrease in pay television revenues
was due to the availability of six titles during calendar 1995 in the pay cable
market compared to eleven titles during fiscal 1995. The Entertainment Group's
reduced theatrical release schedule in calendar 1995 and fiscal 1995 will
continue to have an adverse effect on future pay television revenues.
Free television revenues for calendar 1995 were $53.6 million a decrease of $9.1
million or 15% from the previous year. In both the domestic and international
marketplaces, the Entertainment Group derives significant revenue from the
licensing of free television rights. Major international contracts in calendar
1995 that contributed to revenues were with TV de Catalunya for rights in Spain,
RTL Plus for rights in Germany and Principal Network for rights in Italy. In
fiscal 1995, the most significant licensees were TV de Catalunya, Principal
Network and Mitsubishi for rights in Japan. The Entertainment Group's reduced
theatrical release schedule while operating under the Plan has had and will
continue to have an adverse effect on free television revenues.
Selling, General and Administrative Expenses
Selling, general and administrative expenses increased $1.1 million to $24.0
million during calendar 1995 from $22.9 million during fiscal 1995.
Depreciation and Amortization Expense
Depreciation and amortization charges for calendar 1995 were $694,000 compared
to $767,000 for fiscal 1995.
43
<PAGE>
Operating Loss
Operating loss increased $4.0 million in calendar 1995 to $23.9 million from an
operating loss of $19.9 million in fiscal 1995. The most significant
contributions to the Entertainment Group's fiscal 1995 operating results, which
was absent in calendar 1995, came from the recognition of significant domestic
pay television license fees pursuant to a settlement of certain litigation with
the Entertainment Group's pay television licensee, Showtime Networks, Inc. (the
"Showtime Settlement"). The calendar 1995 and fiscal 1995 results were adversely
affected by writedowns to estimated net realizable value of the carrying amounts
on certain film product totaling approximately $15.7 million for calendar 1995
compared to writedowns for fiscal 1995 totaling approximately $17.1 million. In
addition, approximately two-thirds of the Entertainment Group's film inventories
were stated at estimated realizable value and did not generate gross profit upon
recognition of revenues.
The Communications Group - Results of Operations
Year Ended December 31, 1996 Compared to Year Ended December 31, 1995.
Revenues
Revenues increased to $14.0 million for calendar 1996 from $5.2 million for
calendar 1995. Revenues of unconsolidated Joint Ventures for calendar 1996 and
1995 appear in note 8 to the consolidated financial statements. The growth in
revenue of the consolidated Joint Ventures has resulted primarily from an
increase in radio operations in Hungary, paging service operations in Romania
and an increase in management and licensing fees. Revenue from radio operations
increased to $9.4 million for calendar 1996 from $3.9 million for calendar 1995.
Radio paging services generated revenues of $2.9 million for calendar 1996 as
compared to $700,000 for calendar 1995. Management fees and licensing fees
increased to $1.8 million for calendar 1996 from $600,000 for calendar 1995. In
1995, the Company changed its policy of consolidating these operations by
recording the related accounts and results of operations based on a three month
lag. As a result, the calendar 1995 consolidated statement of operations
reflects nine months of these operations as compared to twelve months for
calendar 1996. Had the Company applied this method from October 1, 1994 the net
effect on the results of operations would not have been material.
Selling, General and Administrative Expenses
Selling, general and administrative expenses increased by $10.7 million or 40%
for calendar 1996 as compared to calendar 1995. The increase relates principally
to the hiring of additional staff and additional expenses associated with the
increase in the number of Joint Ventures and the need for the Communications
Group to support and assist the operations of the Joint Ventures, as well as
additional staffing at the radio stations and radio paging operations.
Depreciation and Amortization Expense
Depreciation and amortization expense increased to $6.4 million for calendar
1996. The increase is attributed principally to the amortization of goodwill in
connection with the November 1 Merger.
Equity in Losses of Joint Ventures
The Communications Group accounts for the majority of its Joint Ventures under
the equity method of accounting since it generally does not exercise control of
these ventures. Under the equity method of accounting, the Communications Group
reflects the cost of its investments, adjusted for its share of the income or
losses of the Joint Ventures, on its balance sheet and reflects generally only
its proportionate share of income or losses of the Joint Ventures in its
statement of operations.
44
<PAGE>
The Communications Group recognized equity in losses of its Joint Ventures of
approximately $11.1 million for calendar 1996 as compared to $8.0 million for
calendar 1995.
The losses recorded for calendar 1996 and calendar 1995 represent the
Communications Group's equity in the losses of the Joint Ventures for the twelve
months ended September 30, 1996 and 1995, respectively. Equity in the losses of
the Joint Ventures by the Communications Group are generally reflected according
to the level of ownership of the Joint Venture by the Communications Group until
such Joint Venture's contributed capital has been fully depleted. Subsequently,
the Communications Group recognizes the full amount of losses generated by the
Joint Venture since the Communications Group is generally the sole funding
source of the Joint Ventures.
The increase in losses of the Joint Ventures of $3.1 million from calendar 1995
to calendar 1996 is partially attributable to the acquisition during 1996 of
Protocall Ventures, Ltd., which included five new trunked mobile radio ventures
and increased the loss by $600,000. Further, a loss of $500,000 was incurred in
connection with the expansion of radio operations. The Communications Group's
paging ventures in Estonia and Riga, and cable venture in Tblisi were
responsible for $600,000, $900,000 and $1.0 million, respectively of the
increased loss. These losses were attributable to increased costs associated
with promotional discount campaigns at the paging ventures, which resulted
ultimately in increased subscribers, and a writedown of older receivable
balances at the cable venture. Losses were offset by an increase in equity in
income of $1.2 million realized at the Communications Group's telephony venture
in Tblisi.
Revenues generated by unconsolidated Joint Ventures were $43.8 million for
calendar 1996 as compared to $19.3 million for calendar 1995.
Subscriber Growth
Many of the Joint Ventures are in early stages of development and consequently
ordinarily generate operating losses in the first years of operation. The
Company believes that subscriber growth is an appropriate indicator to evaluate
the progress of the subscriber based businesses. The following table presents
the aggregate telephony, paging and cable TV Joint Ventures subscriber growth:
Wireless
Cable TV Paging Telephony
-------- ------ ---------
December 31, 1995 37,900 14,460 --
March 31, 1996 44,632 20,683 --
June 30, 1996 53,706 29,107 --
September 30, 1996 62,568 37,636 6,104
December 31, 1996 69,118 44,836 6,642
Foreign Currency
The Communications Group's strategy is to minimize its foreign currency exposure
risk. To the extent possible, in countries that have experienced high rates of
inflation, the Communications Group bills and collects all revenues in United
States ("US") dollars or an equivalent local currency amount adjusted on a
monthly basis for exchange rate fluctuations. The Communications Group's Joint
Ventures are generally permitted to maintain US dollar accounts to service their
US dollar denominated credit lines, thereby reducing foreign currency risk. As
the Communications Group and its Joint Ventures expand their operations and
become more dependent on local currency based transactions, the Communications
Group expects that its foreign currency exposure will increase. The
Communications Group does not hedge against foreign exchange rate risks at the
current time and therefore could be subject in the future to any declines in
exchange rates between the time a Joint Venture receives its funds in local
currencies and the time it distributes such funds in US dollars to the Company.
45
<PAGE>
Year Ended December 31, 1995 Compared to Year Ended December 31, 1994.
Revenues
Revenues increased to $5.2 million in calendar 1995 from $3.5 million in the
year ended December 31, 1994 ("calendar 1994"). This growth in revenue from
calendar 1994 to calendar 1995 resulted primarily from an increase in radio
operations in Hungary and paging service operations in Romania. However, in
calendar 1995 the Company changed its policy of consolidating these operations
by recording the related accounts and results of operations based on a three
month lag. As a result, the December 31, 1995 consolidated balance sheet
includes the accounts for these operations at September 30, 1995 as compared to
the December 31, 1994 balances included in 1994, and the calendar 1995 statement
of operations reflects nine months of these operations as compared to twelve
months for calendar 1994. Had the Company applied this method from October 1,
1994, revenues would have increased over the revenues reported but the net
effect on the results of operations would not have been material.
Selling, General and Administrative Expenses
Selling, general and administrative expenses increased by $7.7 million or 41% in
calendar 1995 as compared to calendar 1994. The increases relate principally to
the hiring of additional staff and additional expenses associated with the
increase in the number of Joint Ventures and the need for the Communications
Group to support and assist the operations of the Joint Ventures. During
calendar 1995, the Communications Group completed the staffing of its Vienna
office and opened an office in Hong Kong.
Depreciation and Amortization Expense
Depreciation and amortization expense increased to $2.1 million for calendar
1995 from $1.1 million for calendar 1994.
Equity in Losses of Joint Ventures
The Communications Group recognized equity in losses of its Joint Ventures
of approximately $8.0 million in calendar 1995 as compared to $2.3 million in
calendar 1994. The increase in losses of the Joint Ventures of $5.7 million is
primarily attributable to losses of $4.0 million incurred as part of the
expansion of its cable TV operations, and the opening of a radio station in
Moscow which resulted in a loss of $1.3 million. As of September 30, 1995, there
were six cable TV Joint Ventures in operation as compared to four in the prior
year. The Communications Group's cable TV Joint Ventures in Moscow and Riga were
responsible for $2.1 million and $1.3 million, respectively, of this increased
loss. These losses were due to one-time writedowns of older equipment and
additional expenses incurred for programming and marketing related to expanding
the services provided and ultimately increasing the number of subscribers. All
other cable TV operations, including two new Joint Ventures and the expansion of
two others that were in their second year of operations, increased losses by
$700,000. The increased loss experienced by the radio station in Moscow was
attributable to a substantial revision in its programming format and the
establishment of sales and related support staff needed to successfully compete
in the Moscow market.
Losses from the Communications Group's other operations, including five paging
entities, three of which were started in calendar 1995, and one telephony
operation, increased by $400,000 in calendar 1995.
46
<PAGE>
The losses recorded for calendar 1995 represent the Communications Group's
equity in losses of the Joint Ventures for the twelve months ended September 30,
1995. On January 1, 1994, the Communications Group changed its policy of
accounting for the Joint Ventures by recording its equity in their losses based
upon a three month lag. Accordingly, results of operations for calendar 1995,
reflect equity in the losses of the Joint Ventures for the period from October
1, 1994 to September 30, 1995. Had the Communications Group applied this method
from October 1, 1993, the effect on reported operating results for calendar 1994
would not have been material.
Foreign Currency
The Communications Group's strategy is to minimize its foreign currency exposure
risk. To the extent possible, in countries that have experienced high rates of
inflation, the Communications Group bills and collects all revenues in US
dollars or an equivalent local currency amount adjusted on a monthly basis for
exchange rate fluctuations. The Communications Group's Joint Ventures are
generally permitted to maintain US dollar accounts to service their US dollar
denominated credit lines, thereby reducing foreign currency risk. As the
Communications Group and its Joint Ventures expand their operations and become
more dependent on local currency based transactions, the Communications Group
expects that its foreign currency exposure will increase. The Communications
Group does not hedge against foreign exchange rate risks at the current time and
therefore could be subject in the future to any declines in exchange rates
between the time a Joint Venture receives its funds in local currencies and the
time it distributes such funds in US dollars to the Company.
Snapper - Results of Operations
Operations for the Two-months Ended December 31, 1996
Revenues
Snapper's 1996 period sales were $22.5 million. Snapper continued to implement
its program to sell products directly to dealers. In implementing this program
to restructure its distribution network, Snapper repurchased certain distributor
inventory which resulted in sales reductions of $3.1 million. Sales of
snowthrowers contributed the majority of the revenues during the two-month
period. In addition, Snapper sold older lawn and garden equipment repurchased
from distributors at close-out pricing during the period. Due to the seasonal
nature of selling lawn and garden equipment, these two-months do not reflect an
average sales period for Snapper.
Gross profit during the period was $1.8 million. These low profit results were
caused by reduced production due to the normal factory shut down periods in the
holiday season. In addition, a lower sales margin was realized on the close-out
pricing for the older lawn and garden equipment sold during the period.
Selling, General and Administrative Expenses
Selling, general, and administrative expenses were $10.0 million for the period.
In addition to normal selling, general and administrative expenses, these
expenses reflect expenditures relating to the acquisition of 16 distributorships
during the final two-months of 1996.
Operating Losses
Snapper experienced an operating loss of $9.4 million during this two-month
period. This loss was the result of the reduced production levels and the
acquisition of the distributorships during the period. Management anticipates
that Snapper will not be profitable for the full year of 1997 as it continues to
repurchase certain finished goods from distributors for resale to dealers in
subsequent periods. Management believes that these actions will benefit
Snapper's operating and financial performance in the future.
47
<PAGE>
Liquidity and Capital Resources
MMG Consolidated
Year Ended December 31, 1996 Compared to Year Ended December 31, 1995.
Cash Flows from Operating Activities
Cash used in operations for calendar 1996 was $16.6 million compared to cash
provided by operations of $22.1 million for calendar 1995, a decrease of $38.7
million.
The calendar 1996 net loss of $115.2 million includes a loss on discontinued
operations of $16.3 million and a loss on early extinguishment of debt of $4.5
million. The calendar 1995 net loss of $413.0 million includes a loss on
discontinued operations of $293.6 million and a loss on early extinguishment of
debt of $32.4 million. The calendar 1996 net loss, exclusive of the losses on
discontinued operations and extraordinary items was $94.4 million compared to a
$87.0 million loss in calendar 1995.
Losses from operations include significant non-cash items of depreciation,
amortization and equity in losses of Joint Ventures. Non-cash items decreased
$25.0 million from $115.6 million in calendar 1995 to $90.6 million in calendar
1996. The decrease in non-cash items principally relates to reduced amortization
of film costs, partially offset by increased depreciation and amortization
related to the November 1 Merger and the Goldwyn and MPCA acquisitions.
Net changes in assets and liabilities decreased cash flows from operations in
calendar 1996 and calendar 1995 by $12.8 million and $6.5 million, respectively.
After adjusting net losses for discontinued operations, extraordinary items,
non-cash items and net changes in assets and liabilities, the Company utilized
$16.6 million of cash in operations in calendar 1996 as compared to operations
providing $22.1 million of cash flow for calendar 1995.
The decrease in cash flows for 1996 generally resulted from the increased losses
in the Communications Group's consolidated and equity Joint Ventures due to the
start-up nature of these operations and increases in selling, general and
administrative expenses at the Communications Group and corporate headquarters.
Net interest expense has decreased principally due to the increase in interest
income resulting from the increase in borrowings by the Joint Ventures under the
various credit agreements with the Communications Group for their operating and
investing cash requirements and from funds invested at corporate headquarters.
Cash Flows from Investing Activities
Net cash used in investing activities amounted to $102.9 million for the
calendar 1996. During calendar 1996 the Company collected $5.4 million from the
proceeds from sale of short-term investments and paid $41.0 million and $67.2
million for investments in and advances to Joint Ventures and investments in
film inventories, respectively.
The increase in investment in film inventories reflects the removal of the
restrictions of the Plan in connection with the November 1 Merger. The
Entertainment Group has begun to increase its investing activities by increasing
its investment in films as well as the related costs and expenses associated
with releasing the films.
Cash Flows from Financing Activities
Cash provided by financing activities was $183.8 million for calendar 1996 as
compared to cash used in financing activities of $85.2 million for calendar
1995.
48
<PAGE>
The principal reason for the increase of $269.0 million for calendar 1996 was
the completion of a public offering pursuant to which the Company issued 18.4
million shares of common stock, the proceeds of which, net of transaction costs,
was $190.6 million. Of the $360.3 million in additions to long-term debt, $29.0
million was borrowed under the Old Orion Credit Facility, $200.0 million
represents the new Entertainment Group Term Loan, and $77.3 million was borrowed
under the Entertainment Group Revolving Credit Facility (see note 9). Such
borrowings were principally for the acquisition, production and distribution of
theatrical product as well as the payments on outstanding obligations. Of the
$357.3 million payments of long term debt, $152.7 million were payments of the
Old Orion Credit Facility, $87.9 million were payments on the outstanding debt
of Goldwyn and MPCA, $14.8 million were payments on the new Entertainment Group
Revolving Credit Facility, $15.0 million was payment under the new Entertainment
Group Term Loan, $28.8 million was the repayment of the revolving credit
agreement by MMG. In addition, during 1996 Snapper refinanced its credit
facility which resulted in a payment of $38.6 million on the old credit facility
and borrowings of $46.6 million on the new credit facility.
Year Ended December 31, 1995 Compared to Year Ended February 28, 1995.
Cash Flows from Operating Activities
Cash provided by operating activities decreased $54.8 million or 71% from fiscal
1995 to calendar 1995.
The calendar 1995 net loss of $413.0 million includes a loss on discontinued
operations of $293.6 million and a loss on early extinguishment of debt of $32.4
million. The calendar 1995 net loss, exclusive of the losses on discontinued
operations and extraordinary items was $87.0 million compared to a $69.4 million
net loss in fiscal 1995.
Losses from operations include significant non-cash items of depreciation,
amortization and equity in loss of Joint Ventures. Non-cash items decreased
$46.0 million or 28% from $161.6 million in fiscal 1995 to $115.6 million in
calendar 1995. The decrease in non-cash items principally relates to
amortization of film costs. Net changes in assets and liabilities decreased cash
flows from operations in calendar 1995 and fiscal 1995 by $6.5 million and $15.2
million, respectively. After adjusting net losses for discontinued operations,
extraordinary items, non-cash items and net changes in assets and liabilities,
the Company's cash flow from operating activities was $22.1 million and $76.9
million in calendar 1995 and fiscal 1995, respectively.
As discussed below, the decrease in cash flows in calendar 1995 generally
resulted from the reduction in revenues caused by the Entertainment Group's
reduced release schedule and increases in selling, general and administrative
expenses at the Communications Group and the Entertainment Group. Net interest
expense remained relatively constant from fiscal 1995 to calendar 1995. The
Entertainment Group's reduced release schedule, which is the result of the
restrictions imposed upon the Entertainment Group while operating under the
Plan, has negatively impacted and will continue to negatively impact cash
provided from operations.
Cash Flows from Investing Activities
Cash flows from investing activities increased $126.1 million from a use of
funds in fiscal 1995 of $49.9 million to cash provided in calendar 1995 of $76.2
million.
The principal reasons for this increase in cash from investing activities was
the collection of notes receivable from Metromedia Company of $45.3 million and
net cash acquired in the November 1 Merger of $66.7 million, net of advances to
Snapper of $4.2 million in calendar 1995.
49
<PAGE>
Investments in film inventories decreased $18.1 million or 79% from $22.8
million in fiscal 1995 to $4.7 million in calendar 1995. Such decrease reflects
the releasing costs of the last five pictures fully or substantially financed by
the Entertainment Group in fiscal 1995 compared to minimal investments in films
since the removal of the restrictions of the Plan in connection with the
November 1 Merger for calendar 1995.
Investments in the Communications Group Joint Ventures increased $5.5 million or
34% from $16.4 million in fiscal 1995 to $21.9 million in calendar 1995. The
increase represents an increase in the number of the Communications Group Joint
Ventures as well as additional funding of existing ventures. In addition, fiscal
1995 included net cash paid for East News Channel Trading and Service, Kft of
$7.0 million.
Cash Flows from Financing Activities
Cash used in financing activities increased $48.3 million or 131% from $36.9
million in fiscal 1995 to $85.2 million in calendar 1995.
The increase in cash used in financing activities principally resulted from the
repayment of approximately $210.0 million of Plan debt of the Entertainment
Group in connection with the November 1 Merger (see note 9). The Entertainment
Group repaid its outstanding plan debt with $135.0 million of proceeds from the
Entertainment Group Term Loan and amounts advanced from the Company.
The remaining payments on notes and subordinated debt in calendar 1995 and
fiscal 1995 principally represent the Entertainment Group's repayments of Plan
debt under the requirements of the Plan.
In addition to the Entertainment Group Term Loan, proceeds from the issuance of
long-term debt in calendar 1995 includes the Company and Entertainment Group
borrowings under revolving credit agreements of $28.8 million and $11.9 million
respectively. Proceeds from the issuance of long-term debt in fiscal 1995
represent borrowings by the Entertainment Group and the Communications Group
from Metromedia Company.
Proceeds from the issuance of stock decreased $15.4 million from $17.7 million
in fiscal 1995 to $2.3 million in calendar 1995.
The Company
MMG is a holding company and, accordingly, does not generate cash flows. The
Entertainment Group and Snapper are restricted under covenants contained in
their respective credit agreements from making dividend payments or advances to
MMG. The Communications Group is dependent on MMG for significant capital
infusions to fund its operations and make acquisitions, as well as fulfill its
commitments to make capital contributions and loans to its Joint Ventures. Such
funding requirements are based on the anticipated funding needs of its Joint
Ventures and certain acquisitions committed to by the Company. Future capital
requirements of the Communications Group including future acquisitions will
depend on available funding from the Company and on the ability of the
Communications Group's Joint Ventures to generate positive cash flows. There can
be no assurance that the Company will have the funds necessary to support the
current needs of the Communications Group's current investments or any of the
Communications Group's additional opportunities or that the Communications Group
will be able to obtain financing from third parties. If such financing is
unavailable, the Group may not be able to further develop existing ventures and
the number of additional ventures in which it invests may be significantly
curtailed.
MMG is obligated to make principal and interest payments under its own various
debt agreements (see note 9 in the notes to the consolidated financial
statements), in addition to funding its working capital needs, which consist
principally of corporate overhead and payments on self insurance claims (see
note 1 in the notes in the consolidated financial statements). MMG does not
currently anticipate receiving dividends from its subsidiaries but intends to
use its cash on hand and proceeds from asset sales described below to meet these
cash requirements.
50
<PAGE>
MMG's 97/8% Senior Subordinated Debentures due in 1997 require it to make annual
sinking fund payments in March of each year of $3,000,000. At December 31, 1996,
$15.0 million remained outstanding under the 97/8% Senior Subordinated
Debentures, which was subsequently paid on March 17, 1997.
MMG's 9 1/2% Subordinated Debentures are due in 1998 and approximately $59.5
million remained outstanding at December 31, 1996. These debentures do not
require annual principal payments.
MMG's $75.0 million face value 6 1/2% Convertible Subordinated Debentures are
due in 2002. The debentures are convertible into common stock at a conversion
price of $415/8 per share at the holder's option and do not require annual
principal payments.
Interest on MMG's outstanding indebtedness is approximately $11.8 million for
1997.
At December 31, 1996, the Company had $82.7 million of cash on hand remaining
from the public offering of 18.4 million shares of common stock. Net proceeds
from the public offering were $190.6 million.
The Company anticipates disposing of its investment in RDM during 1997. The
carrying value of the Company's investment in RDM at December 31, 1996 was
approximately $31.2 million. However, no assurances can be given that the
Company will be able to dispose of RDM in a timely fashion and on favorable
terms.
The Company expects that it will sell either equity or debt securities in a
public or private offering during the remainder of 1997. The Company intends to
use the proceeds from the sale of these securities to finance the continued
build-out of the Communications Group's systems and for general corporate
purposes, including working capital needs of the Company and its subsidiaries,
the repayment of certain indebtedness of the Company and its subsidiaries and
potential future acquisitions. However, no assurances can be given that the
Company will be able to successfully complete the sale of its securities in a
timely fashion or on favorable terms.
Management believes that its long term liquidity needs will be satisfied through
a combination of (i) the Company's successful implementation and execution of
its growth strategy to become a global communications, media and entertainment
company, (ii) the Communications Group's Joint Ventures achieving positive
operating results and cash flows through revenue and subscriber growth and
control of operating expenses, and (iii) the Entertainment Group's ability to
generate positive cash flows sufficient to meet its planned film production
release schedule and service the new Entertainment Group Credit Facility. If the
Company is unable to successfully implement its strategy, the Company may be
required to (i) seek, in addition to the offering described above, financing
through public or private sale of debt or equity securities of the Company or
one of its subsidiaries, (ii) otherwise restructure its capitalization or (iii)
seek a waiver or waivers under one or more of its subsidiaries' credit
facilities to permit the payment of dividends to the Company.
The Company believes that it will report significant operating losses for the
year ended December 31, 1997. In addition, because its Communications Group is
in the early stages of development, the Company expects this group to generate
significant net losses as it continues to build out and market its services.
Accordingly, the Company expects to generate consolidated net losses for the
foreseeable future.
51
<PAGE>
The Entertainment Group
Since the November 1 Merger, the restrictions imposed by the agreements entered
into in connection with the Plan, which hindered the Entertainment Group's
ability to produce and acquire new motion picture product, were eliminated. As a
result, the Entertainment Group has begun producing, acquiring and financing
theatrical films consistent with the covenants set forth in the credit agreement
relating to the Entertainment Group Credit Facility. The principal sources of
funds required for the Entertainment Group's motion picture production,
acquisition and distribution activities will be cash generated from operations,
proceeds from the presale of subdistribution and exhibition rights, primarily in
foreign markets, and borrowings under the Entertainment Group's Revolving Credit
Facility. In addition, the Company is exploring various off balance sheet
financing arrangements to augment its resources.
The cost of producing theatrical films varies depending on the type of film
produced, casting of stars or established actors, and many other factors. The
industry-wide trend over recent years has been an increase in the average cost
of producing and releasing films. The revenues derived from the production and
distribution of a motion picture depend primarily upon its acceptance by the
public, which cannot be predicted, and does not necessarily correlate to the
production or distribution costs incurred. The Company will attempt to reduce
the risks inherent in its motion picture production activities by closely
monitoring the production and distribution costs of individual films and
limiting the Entertainment Group's investment in any single film.
The Entertainment Group Credit Facility consists of a $200 million Term Loan
which requires quarterly repayments of $7.5 million commencing September 1996
and a final payment of $50 million on maturity (June 30, 2001), and a Revolving
Credit Facility, which has a final maturity of June 30, 2001. For the years
ended December 31, 1997 and 1998, the Entertainment Group will be required to
make principal payments of approximately $38.4 million, and $32.5 million,
respectively, to meet the scheduled maturities of its outstanding long-term
debt.
The Entertainment Group Credit Facility contains customary covenants, including
limitations on the incurrence of additional indebtedness and guarantees, the
creation of new liens, restrictions on the development costs and budgets for new
films, limitations on the aggregate amount of unrecouped print and advertising
costs the Entertainment Group may incur, limitations on the amount of the
Entertainment Group's leases, capital and overhead expenses, (including specific
limitations on the capital expenditures of the Entertainment Group's theatre
group subsidiary) prohibitions on the declaration of dividends or distributions
by the Entertainment Group to MMG (other than $15 million of subordinated loans
which may be repaid to MMG), limitations on the merger or consolidation of the
Entertainment Group or the sale by the Entertainment Group of any substantial
portion of its assets or stock and restrictions on the Entertainment Group's
line of business, other than activities relating to the production and
distribution of entertainment product and other covenants and provisions
described above. See note 9 to the notes to the consolidated financial
statements. The Entertainment Group Credit Facility is secured by a security
interest in all of the Entertainment Group's assets and the Revolving Credit
Facility is guaranteed by the Company's largest shareholder, Metromedia Company
and its Chairman, John W. Kluge.
At December 31, 1996, the Entertainment Group had $52.5 million available under
its $100 million Revolving Credit Facility which management intends to utilize
together with cash generated from operations to finance its operations in 1997.
In addition to the Entertainment Group Credit Facility and cash generated from
operations, management intends to explore such alternatives as increasing its
revolving line of credit, obtaining off balance sheet financing, or obtaining
short term funding from MMG in order to augment its resources to finance
anticipated levels of production and distribution activities and to meet debt
obligations as they become due during 1997 and 1998.
The Communications Group
The Communications Group has invested significantly (in cash through capital
contributions, loans and management assistance and training) in its Joint
Ventures. The Communications Group has also incurred significant expenses in
identifying, negotiating and pursuing new wireless telecommunications
opportunities in emerging markets. The Communications Group and primarily all of
its Joint Ventures are experiencing continuing losses and negative operating
cash flow since the businesses are in the development and start up phase of
operations.
52
<PAGE>
The wireless cable television, paging, fixed wireless loop telephony, GSM and
international toll calling businesses are capital intensive. The Communications
Group generally provides the primary source of funding for its Joint Ventures
both for working capital and capital expenditures with the exception of its GSM
Joint Ventures. The GSM ventures have been funded to date on a pro rata basis by
western sponsors, and the Communications Group has funded its pro rata share of
the GSM Joint Venture obligations. The Communications Group has and continues to
have discussions with vendors, commercial lenders and international financial
institutions to provide funding for the GSM Joint Ventures. The Communications
Group's Joint Venture agreements generally provide for the initial contribution
of assets or cash by the Joint Venture partners, and for the provision of a line
of credit from the Communications Group to the Joint Venture. Under a typical
arrangement, the Communications Group's Joint Venture partner contributes the
necessary licenses or permits under which the Joint Venture will conduct its
business, studio or office space, transmitting tower rights and other equipment.
The Communications Group's contribution is generally cash and equipment, but may
consist of other specific assets as required by the Joint Venture agreement.
Credit agreements between the Joint Ventures and the Communications Group are
intended to provide such ventures with sufficient funds for operations and
equipment purchases. The credit agreements generally provide for interest to be
accrued at rates ranging from the prime rate to the prime rate plus 6% and for
payment of principal and interest from 90% of the Joint Venture's available cash
flow, as defined, prior to any distributions of dividends to the Communications
Group or its Joint Venture partners. The credit agreements also often provide
the Communications Group the right to appoint the general director of the Joint
Venture and the right to approve the annual business plan of the Joint Venture.
Advances under the credit agreements are made to the Joint Ventures in the form
of cash, for working capital purposes, as direct payment of expenses or
expenditures, or in the form of equipment, at the cost of the equipment plus
cost of shipping. As of December 31, 1996, the Communications Group was
committed to provide funding under the various credit lines in an aggregate
amount of approximately $69.6 million, of which $12.0 million remained unfunded.
The Communications Group's funding commitments under a credit agreement are
contingent upon its approval of the Joint Venture's business plan. The
Communications Group reviews the actual results compared to the approved
business plan on a periodic basis. If the review indicates a material variance
from the approved business plan, the Communications Group may terminate or
revise its commitment to fund the credit agreements.
The Communications Group's consolidated and unconsolidated Joint Ventures'
ability to generate positive operating results is dependent upon their ability
to attract subscribers to their systems, and their ability to control operating
expenses and the sale of commercial advertising time. Management's current plans
with respect to the Joint Ventures are to increase subscriber and advertiser
bases and thereby operating revenues by developing a broader band of programming
packages for wireless cable and radio broadcasting and offering additional
services and options for paging and telephony services. By offering the large
local populations of the countries in which the Joint Ventures operate desired
services at attractive prices, management believes that the Joint Ventures can
increase their subscriber and advertiser bases and generate positive operating
cash flow, reducing their dependence on the Communications Group for funding of
working capital. Additionally, advances in wireless subscriber equipment
technology are expected to reduce capital requirements per subscriber. Further
initiatives to develop and establish profitable operations include reducing
operating costs as a percentage of revenue and assisting Joint Ventures in
developing management information systems and automated customer care and
service systems. No assurances can be given that such initiatives will be
successful.
Additionally, if the Joint Ventures do become profitable and generate sufficient
cash flows in the future, there can be no assurance that the Joint Ventures will
pay dividends or return capital at any time.
53
<PAGE>
The ability of the Communications Group and its consolidated and unconsolidated
Joint Ventures to establish profitable operations is also subject to special
political, economic and social risks inherent in doing business in emerging
markets such as Eastern Europe, the former Soviet Republics and other emerging
markets. These include matters arising out of government policies, economic
conditions, imposition of or changes to taxes or other similar charges by
governmental bodies, foreign exchange rate fluctuations and controls, civil
disturbances, deprivation or unenforceablility of contractual rights, and taking
of property without fair compensation.
For the year ended December 31, 1996, the Communications Group's primary source
of funds was from the Company in the form of non-interest bearing intercompany
loans.
Until the Communications Group's consolidated and unconsolidated operations
generate positive cash flow, the Communications Group will require significant
capital to fund its operations, and to make capital contributions and loans to
its Joint Ventures. The Communications Group relies on the Company to provide
the financing for these activities. The Company believes that as more of the
Communications Group's Joint Ventures commence operations and reduce their
dependence on the Communications Group for funding, the Communications Group
will be able to finance its own operations and commitments from its operating
cash flow and the Communications Group will be able to attract its own financing
from third parties. There can, however, be no assurance that additional capital
in the form of debt or equity will be available to the Communications Group at
all or on terms and conditions that are acceptable to the Company, and as a
result, the Communications Group will continue to depend upon the Company for
its financing needs.
54
<PAGE>
Snapper
Cash flows used in operations totaled $7.1 million dollars for the two-month
period ended December 31, 1996. This shortfall in cash generated by the
operations was due to the seasonality of sales and related cash collections and
the repurchase of distributor inventories.
Snapper's liquidity is generated from operations and borrowings. On November 26,
1996, Snapper entered into a credit agreement (the "Snapper Credit Agreement")
with AmSouth Bank of Alabama ("AmSouth"), pursuant to which AmSouth has agreed
to make available to Snapper a revolving line of credit up to $55.0 million,
upon the terms and subject to conditions contained in the Snapper Credit
Agreement (the "Snapper Revolver") for a period ending on January 1, 1999 (the
"Snapper Revolver Termination Date"). The Snapper Revolver is guaranteed by the
Company.
The Snapper Revolver contains customary covenants, including delivery of certain
monthly, quarterly and annual financial information, delivery of budgets and
other information related to Snapper. See note 9.
At December 31, 1996 Snapper was not in compliance with certain financial
covenants under the Snapper Revolver. Subsequent to December 31, 1996, Snapper
and AmSouth amended the Snapper Credit Agreement. As part of the amendment to
the Snapper Credit Agreement, AmSouth waived the covenant defaults as of
December 31, 1996. Furthermore, the amendment replaces certain existing
financial covenants with covenants regarding minimum quarterly cash flow and
equity requirements, as defined. In addition, Snapper and AmSouth have agreed to
the major terms and conditions of a $10.0 million credit facility. The closing
of the credit facility remains subject to the execution of definitive loan
documentation.
Management believes that available cash on hand, borrowings from the Snapper
Revolver are Working Captial Facility, and the cash flow generated by operating
activities will provide sufficient funds for Snapper to meet its obligations.
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS.
Certain statements under the captions "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and "Business" and elsewhere in
this Form 10-K constitute "forward-looking statements" within the meaning of the
Private Securities Litigation Reform Act of 1995 (the "Reform Act"). Such
forward-looking statements involve known and unknown risks, uncertainties and
other factors which may cause the actual results, performance or achievements of
the Company, or industry results, to be materially different from any future
results, performance or achievements expressed or implied by such
forward-looking statements. Such factors include among others, general
economic and business conditions, which will, among other things, impact demand
for the Company's products and services; industry capacity, which tends to
increase during strong years of the business cycle; changes in public taste,
industry trends and demographic changes, which may influence the exhibition of
films in certain areas; competition from other entertainment and communications
companies, which may affect the Company's ability to generate revenues;
political, social and economic conditions and laws, rules and regulations,
particularly in Eastern Europe, the former Soviet Republics, the PRC and other
emerging markets, which may affect the Company's results of operations; timely
completion of construction projects for new systems for the Joint Ventures in
which the Company has invested; developing legal structures in Eastern Europe,
the former Soviet Republics, the PRC and other emerging markets, which may
affect the Company's results of operations; cooperation of local partners for
the Company's communications investments in Eastern Europe, the former Soviet
Republics and the PRC; exchange rate fluctuations; license renewals for the
Company's communications investments in Eastern Europe, the former Soviet
Republics and the PRC; the loss of any significant customers (especially clients
of the Communications Group); changes in business strategy or development plans;
the significant indebtedness of the Company; quality of management; availability
of qualified personnel; changes in, or the failure to comply with, government
regulations; and other factors referenced in the Form 10-K.
Item 8. Financial Statements and Supplementary Data
The financial statements and supplementary data required under this item are
included in Item 14 of this Report.
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
None.
55
<PAGE>
PART III
The information called for by this PART III (Items 10, 11, 12 and 13) is not set
forth herein because the Company intends to file with the SEC not later than 120
days after the end of the fiscal year ended December 31, 1996 the Joint Proxy
Statement/Prospectus for the 1997 Annual Meeting of Stockholders, except that
certain of the information regarding the Company's executive officers called for
by Item 10 has been included in Part I of this Annual Report on Form 10-K under
the caption "Executive Officers of the Company." Such information to be included
in the Joint Proxy Statement/Prospectus is hereby incorporated into these Items
10, 11, 12 and 13 by this reference.
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K
(a)(1) and (a)(2) Financial Statements and Schedules
The financial statements and schedules listed in the accompanying
Index to Financial Statements are filed as part of this Annual Report
on Form 10-K.
(a)(3) Exhibits
The exhibits listed in the accompanying Exhibit Index are filed as
part of this Annual Report on Form 10-K.
(b) Current Reports on Form 8-K
One (1) Current Report on Form 8-K was filed during the fourth quarter
of 1996:
(i) On December 5,1996 a Form 8-K was filed to report the resignation
of John D. Phillips as President and Chief Executive Officer of
the Company and the appointment of Stuart Subotnick as President
and Chief Executive Officer.
(ii) On February 11, 1997, a Form 8-K was filed to report the
Company's intention to actively manage the operations of its
wholly-owned subsidiary, Snapper, Inc.
56
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities and
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
METROMEDIA INTERNATIONAL GROUP, INC.
By: /s/ SILVIA KESSEL
-------------------------------------
Silvia Kessel
Executive Vice President
Dated: March 31, 1997
Pursuant to the requirements of the Securities Exchange Act of 1934, as amended,
this report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
Signature Title Date
--------- ----- ----
/s/ JOHN W. KLUGE Chairman of the Board March 31, 1997
- -------------------------
John W. Kluge
/s/ STUART SUBOTNICK Vice Chairman of the Board, March 31, 1997
- ------------------------- President and Chief Executive
Stuart Subotnick Officer (Principal Executive
Officer)
/s/ SILVIA KESSEL Executive Vice President, Chief March 31, 1997
- ------------------------- Financial Officer and Director
Silvia Kessel (Principal Financial Officer)
/s/ ARNOLD L. WADLER Executive Vice President, March 31, 1997
- ------------------------- General Counsel, Secretary
Arnold L. Wadler and Director
/s/ ROBERT A. MARESCA Senior Vice President (Principal March 31, 1997
- ------------------------- Accounting Officer)
Robert A. Maresca
/s/ JOHN P. IMLAY, JR. Director March 31, 1997
- -------------------------
John P. Imlay, Jr.
/s/ CLARK A. JOHNSON Director March 31, 1997
- -------------------------
Clark A. Johnson
/s/ RICHARD J. SHERWIN Director March 31, 1997
- -------------------------
Richard J. Sherwin
/s/ LEONARD WHITE Director March 31, 1997
- -------------------------
Leonard White
/s/ CARL E. SANDERS Director March 31, 1997
- -------------------------
Carl E. Sanders
57
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibits Incorporated Herein by Reference
-----------------------------------------
Designation of Document with Which Exhibit
Exhibit in This Was Previously Filed with
Form 10-K Description of Exhibits Commission
--------- ----------------------- ----------
<C> <S> <C>
2.2 Agreement and Plan of Reorganization Quarterly Report on Form 10-Q for the
dated as of July 20, 1994 by and three months ended June 30, 1994,
among, The Actava Group Inc., Exhibit 99.1
Diversified Products Corporation,
Hutch Sports USA Inc.,
Nelson/Weather-Rite, Inc., Willow
Hosiery Company, Inc. and Roadmaster
Industries, Inc.
2.3 Amended and Restated Agreement and Current Report on Form 8-K for event
Plan of Merger dated as of occurring on September 27, 1995,
September 27, 1995 by and among The Exhibit 99(a)
Actava Group Inc., Orion Pictures
Corporation, MCEG Sterling
Incorporated, Metromedia
International Telecommunications,
Inc., OPG Merger Corp. and MITI
Merger Corp. and exhibits thereto.
The Registrant agrees to furnish
copies of the schedules
supplementally to the Commission on
request.
2.5 Agreement and Plan of Merger dated as Current Report on Form 8-K dated
of January 31, 1996 by and among January 31, 1996, Exhibit 99.1
Metromedia International Group, Inc.,
The Samuel Goldwyn Company and SGC
Merger Corp. and exhibits thereto.
The registrant agrees to furnish
copies of the schedules to the
Commission upon request.
3.1 Restated Certificate of Incorporation Registration Statement on Form S-3
of Metromedia International Group, (Registration No. 33-63853), Exhibit
Inc. 3.1
3.2 Restated By-laws of Metromedia Registration Statement on Form S-3
International Group, Inc. (Registration No. 33-6353), Exhibit
3.2
4.1 Indenture dated as of August 1, 1973, Application of Form T-3 for
with respect to 9 1/2% Subordinated Qualification of Indenture under the
Debentures due August 1, 1998, Trust Indenture Act of 1939 (File
between The Actava Group Inc. and No. 22-7615), Exhibit 4.1
Chemical Bank, as Trustee.
4.2 Agreement among The Actava Group, Registration Statement on Form S-14
Inc., Chemical Bank and Manufacturers (Registration No. 2-81094),
Hanover Trust Company, dated as of Exhibit 4.2
September 26, 1980, with respect to
successor trusteeship of the 9 1/2%
Subordinated Debentures due August 1,
1998.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Exhibits Incorporated Herein by Reference
-----------------------------------------
Designation of Document with Which Exhibit
Exhibit in This Was Previously Filed with
Form 10-K Description of Exhibits Commission
--------- ----------------------- ----------
<C> <S> <C>
4.3 Instrument of registration, Annual Report on Form 10-K for the
appointment and acceptance dated as year ended December 31, 1986,
of June 9, 1986 among The Actava Exhibit 4.3
Group Inc., Manufacturers Hanover
Trust Company and Irving Trust
Company, with respect to successor
trusteeship of the 9 1/2% Subordinated
Debentures due August 1, 1998.
4.4 Indenture dated as of March 15, 1977, Registration Statement on Form S-7
with respect to 97/8% Senior (Registration No. 2-58317),
Subordinated Debentures due March 15, Exhibit 4.4
1997, between The Actava Group Inc.
and The Chase Manhattan Bank, N.A.,
as Trustee.
4.5 Agreement among The Actava Group Registration Statement on Form S-14
Inc., The Chase Manhattan Bank, N.A. (Registration No. 2-281094),
and United States Trust Company of Exhibit 4.5
New York, dated as of June 14, 1982,
with respect to successor trusteeship
of the 97/8% Senior Subordinated
Debentures due March 15, 1997.
4.6 Indenture between National Post-Effective Amendment No. 1 to
Industries, Inc. and First National Application on Form T-3 for
City Bank, dated October 1, 1974, Qualification of Indenture Under The
with respect to the 10% Subordinated Trust Indenture Act of 1939 (File
Debentures, due October 1, 1999. No. 22-8076), Exhibit 4.6
4.7 Agreement among National Industries, Registration Statement on Form S-14
Inc., The Actava Group Inc., (Registration No. 2-81094), Exhibit
Citibank, N.A., and Marine Midland 4.7
Bank, dated as of December 20, 1977,
with respect to successor trusteeship
of the 10% Subordinated Debentures
due October 1, 1999.
4.8 First Supplemental Indenture among Registration Statement on Form S-7
The Actava Group Inc., National (Registration No. 2-60566), Exhibit
Industries, Inc. and Marine Midland 4.8
Bank, dated January 3, 1978,
supplemental to the Indenture dated
October 1, 1974 between National and
First National City Bank for the
10% Subordinated Debentures due
October 1, 1999.
4.9 Indenture dated as of August 1, 1987 Annual Report on Form 10-K for the
with respect to 6 1/2% Convertible year ended December 31, 1987, Exhibit
Subordinated Debentures due August 4, 4.9
2002, between The Actava Group Inc.
and Chemical Bank, as Trustee.
10.1 1982 Stock Option Plan of The Actava Proxy Statement dated March 31, 1982,
Group Inc. Exhibit A
10.2 1989 Stock Option Plan of The Actava Proxy Statement dated March 31, 1989,
Group Inc. Exhibit A
10.3 1969 Restricted Stock Plan of The Annual Report on Form 10-K for the
Actava Group Inc. year ended December 31, 1990, Exhibit
10.3
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Exhibits Incorporated Herein by Reference
-----------------------------------------
Designation of Document with Which Exhibit
Exhibit in This Was Previously Filed with
Form 10-K Description of Exhibits Commission
--------- ----------------------- ----------
<C> <S> <C>
10.4 1991 Non-Employee Director Stock Annual Report on Form 10-K for the
Option Plan. year ended December 31, 1991, Exhibit
10.4
10.5 Amendment to 1991 Non-Employee Annual Report on Form 10-K for the
Director Stock Option Plan. year ended December 31, 1992, Exhibit
10.5
10.6 Snapper Power Equipment Profit Annual Report on Form 10-K for the
Sharing Plan. year ended December 31, 1987, Exhibit
10.6
10.7 Retirement Plan executed November 1, Annual Report on Form 10-K for the
1990, as amended effective January 1, year ended December 31, 1990, Exhibit
1989. 10.7
10.8 Supplemental Retirement Plan of The Annual Report on Form 10-K for
Actava Group Inc. the year ended December 31, 1983,
Exhibit 10.8
10.9 Supplemental Executive Medical Annual Report on Form 10-K for the
Reimbursement Plan. year ended December 31, 1990, Exhibit
10.9
10.10 Amendment to Supplemental Retirement Annual Report on Form 10-K for the
Plan of The Actava Group Inc., year ended December 31, 1991, Exhibit
effective April 1, 1992. 10.10
10.11 1992 Officer and Director Stock Annual Report on Form 10-K for the
Purchase Plan. year ended December 31, 1991, Exhibit
10.11
10.12 Form of Restricted Purchase Agreement Annual Report on Form 10-K for the
between certain officers of The year ended December 31, 1991, Exhibit
Actava Group Inc. and The Actava 10.12
Group Inc.
10.14 Form of Indemnification Agreement Annual Report on Form 10-K for the
between Actava and certain of its year ended December 31, 1993, Exhibit
directors and executive officers. 10.14
10.15 Employment Agreement between The Current Report on Form 8-K dated
Actava Group Inc. and John D. April 19, 1994, Exhibit 10.15
Phillips dated April 19, 1994.
10.16 First Amendment to Employment Annual Report on Form 10-K for the
Agreement dated November 1, 1995 year ended December 31, 1995, Exhibit
between Metromedia International 10.16
Group and John D. Phillips.
10.17 Option Agreement between The Actava Current Report on Form 8-K dated
Group Inc. and John D. Phillips dated April 19, 1994, Exhibit 10.17
April 19, 1994.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Exhibits Incorporated Herein by Reference
-----------------------------------------
Designation of Document with Which Exhibit
Exhibit in This Was Previously Filed with
Form 10-K Description of Exhibits Commission
--------- ----------------------- ----------
<C> <S> <C>
10.18 Registration Rights Agreement among Current Report on Form 8-K dated
The Actava Group Inc., Renaissance April 19, 1994, Exhibit 10.18
Partners and John D. Phillips dated
April 19, 1994.
10.19 Shareholders Agreement dated as of Annual Report on Form 10-K for the
December 6, 1994 among The Actava year ended December 31, 1994, Exhibit
Group Inc., Roadmaster, Henry Fong 10.19
and Edward Shake.
10.20 Registration Rights Agreement dated Annual Report on Form 10-K for the
as of December 6, 1994 between The year ended December 31, 1994, Exhibit
Actava Group Inc. and Roadmaster. 10.20
10.21 Environmental Indemnity Agreement Annual Report on Form 10-K for the
dated as of December 6, 1994 between year ended December 31, 1994, Exhibit
The Actava Group Inc. and Roadmaster. 10.21
10.22 Lease Agreement dated October 21, Annual Report on Form 10-K for the
1994 between JDP Aircraft II, Inc. year ended December 31, 1994, Exhibit
and The Actava Group Inc. 10.22
10.23 Lease Agreement dated as of October 4, Quarterly Report on Form 10-Q for the
1995 between JDP Aircraft II, Inc. and quarter ended September 30, 1995,
The Actava Group Inc. Exhibit 10.23
10.37 Management Agreement dated Annual Report on Form 10-K for
November 1, 1995 between Metromedia the year ended December 31, 1996,
Company and Metromedia International Exhibit 10.37
Group, Inc.
10.38 The Metromedia International Group, Proxy Statement dated August 6, 1996,
Inc. 1996 Incentive Stock Plan. Exhibit B
10.39 License Agreement dated November 1, Annual Report on Form 10-K for the
1995 between Metromedia Company and year ended December 31, 1996, Exhibit
Metromedia International Group, Inc. 10.39
10.40 MITI Bridge Loan Agreement dated Annual Report on Form 10-K for the
February 29, 1996, among Metromedia year ended December 31, 1996, Exhibit
Company and MITI 10.40
10.41 Metromedia International Quarterly Report on Form 10-Q ended
Telecommunications, Inc. 1994 Stock March 31, 1996, Exhibit 10.41
Plan
10.42 Amended and Restated Credit Security Quarterly Report on Form 10-Q for the
and Guaranty Agreement dated as of quarter ended June 30, 1996, Exhibit
November 1, 1995, by and among Orion 10.42
Pictures Corporation, the Corporate
Guarantors' referred to herein, and
Chemical Bank, as Agent for the
Lenders.
10.43 Metromedia International Group/Motion Quarterly Report or Form 10-Q for the
Picture Corporation of America quarter ended June 30, 1996, Exhibit
Restricted Stock Plan 10.43
10.44 The Samuel Goldwyn Company Stock Registration Statement on Form S-8
Awards Plan, as amended (Registration No. 333-6453), Exhibit
10.44
10.45* Credit Agreement, dated November 26,
1996 between Snapper, Inc. and
AmSouth Bank of Alabama
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Exhibits Incorporated Herein by Reference
-----------------------------------------
Designation of Document with Which Exhibit
Exhibit in This Was Previously Filed with
Form 10-K Description of Exhibits Commission
--------- ----------------------- ----------
<C> <S> <C>
10.46* Amendment No. 1 to License Agreement
dated June 13, 1996 between
Metromedia Company and Metromedia
International Group, Inc.
10.47* Amendment No. 1 to Management
Agreement dated as of January 1,
1997 between Metromedia Company and
Metromedia International Group, Inc.
10.48* Amended and Restated Agreement and
Plan of Merger, dated as of May 17,
1996 between Metromedia International
Group, Inc., MPCA Merger Corp. and
Bradley Krevoy and Steven Stabler and
Motion Picture Corporation of America
11* Statement of computation of earnings
per share.
16 Letter from Ernst & Young to the Current Report on Form 8-K dated
Securities and Exchange Commission. November 1, 1995
21 List of subsidiaries of Metromedia Annual Report on Form 10-K for the
International Group, Inc. year ended December 31, 1996, Exhibit
21
23.1* Consent of KPMG Peat Marwick LLP
regarding Metromedia International
Group, Inc.
27* Financial Data Schedule
</TABLE>
- ----------
*Filed herewith
<PAGE>
================================================================================
Metromedia International Group, Inc.
================================================================================
METROMEDIA INTERNATIONAL GROUP, INC. AND SUBSIDIARIES
INDEX TO FINANCIAL STATEMENTS
Page
----
Report of Independent Auditors' ........................................... F-1
Consolidated Statements of Operations for the
years ended December 31, 1996, December 31, 1995
and February 28, 1995 .................................................. F-2
Consolidated Balance Sheets as of December 31, 1996
and December 31, 1995 ................................................... F-3
Consolidated Statements of Cash Flows for the years
ended December 31, 1996, December 31, 1995 and
February 28, 1995 ....................................................... F-4
Consolidated Statements of Stockholders' Equity for
the years ended December 31, 1996, December 31, 1995
and February 28, 1995 ................................................... F-5
Notes to Consolidated Financial Statements ................................ F-6
Consolidated Financial Statement Schedules:
I. Condensed Financial Information of Registrant .................... S-1
II. Valuation and Qualifying Accounts ................................ S-5
All other schedules have been omitted either as inapplicable or not
required under the Instructions contained in Regulation S-X or because the
information included in the Consolidated Financial Statements or the Notes
thereto listed above.
<PAGE>
Independent Auditors' Report
The Board of Directors and Stockholders
Metromedia International Group, Inc.:
We have audited the accompanying consolidated financial statements of Metromedia
International Group, Inc. and subsidiaries as listed in the accompanying index.
In connection with our audits of the consolidated financial statements, we also
have audited the financial statement schedules as listed in the accompanying
index. These consolidated financial statements and financial statement schedules
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these consolidated financial statements and financial
statement schedules based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Metromedia
International Group, Inc. and subsidiaries as of December 31, 1996 and 1995, and
the results of their operations and their cash flows for each of the years in
the two-year period ended December 31, 1996 and for the year ended February 28,
1995, in conformity with generally accepted accounting principles. Also in our
opinion, the related financial statement schedules, when considered in relation
to the basic consolidated financial statements taken as a whole, present fairly,
in all material respects, the information set forth therein.
KPMG Peat Marwick LLP
New York, New York
March 27, 1997
F-1
<PAGE>
METROMEDIA INTERNATIONAL GROUP, INC.
Consolidated Statements of Operations
(in thousands, except per share amounts)
<TABLE>
<CAPTION>
Years Ended
----------------------------------------
December 31, December 31, February 28,
1996 1995 1995
---------- --------- -----------
(Note 1)
<S> <C> <C> <C>
Revenues $ 201,755 $ 138,970 $ 194,789
Cost and expenses:
Cost of sales and rentals and operating expenses 161,564 132,951 187,477
Selling, general and administrative 81,481 51,961 41,955
Depreciation and amortization 13,232 2,795 1,916
--------- --------- ---------
Operating loss (54,522) (48,737) (36,559)
Interest expense, including amortization of debt discount
of $4,850 in December 31, 1996, $10,436 in December
31, 1995, and $12,153 in February 28, 1995 36,256 33,114 32,389
Interest income 8,838 3,575 3,094
--------- --------- ---------
Interest expense, net 27,418 29,539 29,295
Loss before provision for income taxes,
equity in losses of Joint Ventures, discontinued
operations and extraordinary item (81,940) (78,276) (65,854)
Provision for income taxes 1,414 767 1,300
Equity in losses of Joint Ventures 11,079 7,981 2,257
--------- --------- ---------
Loss from continuing operations
before discontinued operations and
extraordinary item (94,433) (87,024) (69,411)
Discontinued operations:
Loss on disposal of assets held for sale (16,305) (293,570) --
--------- --------- ---------
Loss before extraordinary item (110,738) (380,594) (69,411)
Extraordinary item:
Early extinguishment of debt (4,505) (32,382) --
--------- --------- ---------
Net loss $(115,243) $(412,976) $ (69,411)
========= ========= =========
Primary loss per common share:
Continuing operations $ (1.74) $ (3.54) $ (3.43)
========= ========= =========
Discontinued operations $ (0.30) $ (11.97) $ --
========= ========= =========
Extraordinary item $ (0.08) $ (1.32) $ --
========= ========= =========
Net loss $ (2.12) $ (16.83) $ (3.43)
========= ========= =========
</TABLE>
See accompanying notes to consolidated financial statements
F-2
<PAGE>
METROMEDIA INTERNATIONAL GROUP, INC.
Consolidated Balance Sheets
(in thousands, except share amounts)
<TABLE>
<CAPTION>
December 31, December 31,
1996 1995
------------ ------------
<S> <C> <C>
ASSETS:
Current Assets:
Cash and cash equivalents $ 91,130 $ 26,889
Short-term investments -- 5,366
Accounts receivable:
Film, net of allowance for doubtful accounts
of $11,600 at December 31, 1996 and 1995 30,447 27,306
Other, net of allowance for doubtful accounts
of $1,691 and $313 at December 31, 1996 and
1995, respectively 40,287 2,146
Film inventories 66,156 59,430
Inventories 54,404 224
Other assets 8,123 6,314
--------- ---------
Total current assets 290,547 127,675
Investments in and advances to Joint Ventures 65,447 36,934
Asset held for sale - RDM Sports Group, Inc. 31,150 47,455
Asset held for sale - Snapper, Inc. -- 79,200
Property, plant and equipment, net of accumulated
depreciation 73,928 5,797
Film inventories 186,143 137,233
Long-term film accounts receivable 20,214 31,308
Intangible assets, less accumulated amortization 258,783 119,485
Other assets 18,528 14,551
--------- ---------
Total assets $ 944,740 $ 599,638
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY:
Current Liabilities:
Accounts payable $ 25,968 $ 4,695
Accrued expenses 108,082 96,113
Participations and residuals 36,529 19,143
Current portion of long-term debt 55,638 40,597
Deferred revenues 16,724 15,097
--------- ---------
Total current liabilities 242,941 175,645
Long-term debt 403,421 264,046
Participations and residuals 26,387 28,465
Deferred revenues 48,188 47,249
Other long-term liabilities 4,121 395
--------- ---------
Total liabilities 725,058 515,800
--------- ---------
Commitments and contingencies
Stockholders' equity:
Preferred Stock, authorized 70,000,000 shares,
none issued -- --
Common Stock, $1.00 par value, authorized
400,000,000 and 110,000,000 shares, issued and
outstanding 66,153,439 and 42,613,738 shares at
December 31, 1996 and 1995, respectively 66,153 42,614
Paid-in surplus 959,558 728,747
Other (2,680) 583
Accumulated deficit (803,349) (688,106)
--------- ---------
Total stockholders' equity 219,682 83,838
--------- ---------
Total liabilities and stockholders' equity $ 944,740 $ 599,638
========= =========
</TABLE>
See accompanying notes to consolidated financial statements.
F-3
<PAGE>
METROMEDIA INTERNATIONAL GROUP, INC.
Consolidated Statements of Cash Flows
(in thousands)
<TABLE>
<CAPTION>
Years Ended
----------------------------------------
December 31, December 31, February 28,
1996 1995 1995
----------- ---------- -----------
<S> <C> <C> <C>
Operations:
Net loss $(115,243) $(412,976) $ (69,411)
Adjustments to reconcile net loss to
net cash provided by (used in) operating activities:
Loss on disposal of assets held for sale 16,305 293,570 --
Equity in losses of Joint Ventures 11,079 7,981 2,257
Amortization of film costs 61,472 91,466 140,318
Amortization of bank guarantee -- 2,956 4,951
Amortization of debt discounts 4,850 10,436 12,153
Depreciation and amortization 13,232 2,795 1,916
Loss on early extinguishment of debt 4,505 32,382 --
Changes in assets and liabilities, net of effect
of acquisitions and consolidation of Snapper:
Decrease in accounts receivable 15,211 15,114 21,575
Increase in inventories (2,697) (224) --
Increase in other assets (10,079) -- --
Decrease in accounts payable and accrued expenses (621) (4,723) (3,160)
Accrual of participations and residuals 34,255 18,464 25,628
Payments of participations and residuals (27,362) (20,737) (32,353)
Decrease in deferred revenues (20,984) (12,269) (30,041)
Other operating activities, net (568) (2,125) 3,112
--------- --------- ---------
Cash provided by (used in) operations (16,645) 22,110 76,945
--------- --------- ---------
Investing activities:
Proceeds from Metromedia Company notes receivable -- 45,320 --
Investments in and advances to Joint Ventures (40,999) (21,949) (16,409)
Distributions from Joint Ventures 3,438 784 --
Investment in film inventories (67,176) (4,684) (22,840)
Cash paid for acquisitions (2,545) -- (7,033)
Cash acquired in acquisitions 8,238 66,702 --
Additions to property, plant and equipment (8,729) (3,475) (4,808)
Other investing activities, net 4,855 (6,521) 1,233
--------- --------- ---------
Cash provided by (used in) investing activities (102,918) 76,177 (49,857)
--------- --------- ---------
Financing activities:
Proceeds from issuance of long-term debt 360,252 176,938 40,278
Proceeds from issuance of common stock 190,604 2,282 17,690
Payments on notes and subordinated debt (357,324) (264,856) (95,037)
Proceeds from issuance of stock related to incentive plans 972 -- --
Payment of deferred financing costs (10,700) -- --
Other financing activities, net -- 399 184
--------- --------- ---------
Cash provided by (used in) financing activities 183,804 (85,237) (36,885)
--------- --------- ---------
Net increase (decrease) in cash and cash equivalents 64,241 13,050 (9,797)
Effect of change in fiscal year -- (13,583) --
Cash and cash equivalents at beginning of year 26,889 27,422 37,219
--------- --------- ---------
Cash and cash equivalents at end of year $ 91,130 $ 26,889 $ 27,422
========= ========= =========
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
<PAGE>
METROMEDIA INTERNATIONAL GROUP, INC.
Consolidated Statements of Stockholders' Equity
(in thousands, except share amounts))
<TABLE>
<CAPTION>
Years Ended
-----------------------------------------------------------------------
Common Stock
---------------------
Number of Paid-in Accumulated
Shares Amount Surplus Other Deficit Total
---------- ------ -------- ----- ----------- -----
<S> <C> <C> <C> <C> <C> <C>
Balances, February 28, 1994 17,188,408 $17,189 $265,156 $ -- $(240,727) $ 41,618
Issuance of stock related to private offerings 3,735,370 3,735 20,455 -- -- 24,190
Issuance of stock related to incentive plans 11,120 11 3,618 -- -- 3,629
Foreign currently translation adjustment -- -- -- 184 -- 184
Net loss -- -- -- -- (69,411) (69,411)
---------- ------- -------- ------- --------- ---------
Balances, February 28, 1995 20,934,898 20,935 289,229 184 (310,138) 210
November 1 Merger:
Issuance of stock related to the
acquisition of Actava and Sterling 17,974,155 17,974 316,791 -- -- 334,765
Issuance of stock in exchange for
MetProductions and Met International 3,530,314 3,530 33,538 -- -- 37,068
Valuation of Actava and MITI options -- -- 25,677 -- -- 25,677
Revaluation of MITI minority interest -- -- 60,923 -- 23,608 84,531
Adjustment for change in fiscal year -- -- -- -- 11,400 11,400
Issuance of stock related to incentive plans 174,371 175 2,589 -- -- 2,764
Foreign currency translation adjustment -- -- -- 399 -- 399
Net loss -- -- -- -- (412,976) (412,976)
---------- ------- -------- ------- --------- ---------
Balances, December 31, 1995 42,613,738 42,614 728,747 583 (688,106) 83,838
Issuance of stock related to public
offering, net 18,400,000 18,400 172,204 -- -- 190,604
Issuance of stock related to the
acquisitions of the Samuel Goldwyn
Company and Motion Picture
Corporation of America 4,715,869 4,716 54,610 -- -- 59,326
Issuance of stock related to incentive plans 423,832 423 3,997 (3,174) -- 1,246
Foreign currency translation adjustment -- -- -- (618) -- (618)
Amortization of restricted stock -- -- -- 529 -- 529
Net loss -- -- -- -- (115,243) (115,243)
---------- ------- -------- ------- --------- ---------
Balances, December 31, 1996 66,153,439 $66,153 $959,558 $(2,680) $(803,349) $ 219,682
========== ======= ======== ======= ========= =========
</TABLE>
See accompanying notes to consolidated financial statements.
F-5
<PAGE>
================================================================================
Metromedia International Group, Inc.
================================================================================
================================================================================
Notes to Consolidated Financial Statements
================================================================================
1. Basis of Presentation, Description of the Business, Liquidity and Summary
of Significant Accounting Policies
================================================================================
Basis of Presentation (see Note 2)
The accompanying consolidated financial statements include the accounts of
Metromedia International Group, Inc. ("MMG" or the "Company") and its
wholly-owned subsidiaries, Orion Pictures Corporation ("Orion" or the
"Entertainment Group"), and Metromedia International Telecommunications, Inc.
("MITI" or the "Communications Group"). In connection with the November 1 Merger
(see note 2), Snapper, Inc. ("Snapper"), a wholly-owned subsidiary of the
Company, was included in the accompanying consolidated financial statements as
an asset held for sale. Subsequently, the Company announced its intention not to
continue to pursue its previously adopted plan to dispose of Snapper and to
actively manage Snapper to maximize its long term value. As of November 1, 1996,
the Company has consolidated Snapper and has included Snapper's operating
results for the two-month period ended December 31, 1996 in its statement of
operations (see notes 2 and 4). All significant intercompany transactions and
accounts have been eliminated.
Certain reclassifications have been made to prior year financial statements to
conform to the December 31, 1996 presentation.
Different Fiscal Year Ends
The Company reports on the basis of a December 31 year end. In connection with
the November 1 Merger discussed in note 2, Orion and MITI, for accounting
purposes only, were deemed to be the joint acquirers of the Actava Group Inc.
("Actava") in a reverse acquisition. As a result, the historical financial
statements of the Company for periods prior to the November 1 Merger are the
combined financial statements of Orion and MITI. Orion historically reported on
the basis of a February 28 year end.
The consolidated financial statements for the twelve months ended December 31,
1995 include two months for Orion (January and February 1995) that were included
in the February 28, 1995 consolidated financial statements. The revenues and net
loss for the two month duplicate period are $22.5 and $11.4 million,
respectively. The December 31, 1995 accumulated deficit has been adjusted to
eliminate the duplication of the January and February 1995 net losses.
Description of the Business
The Company is a global communications, media and entertainment company engaged
in two strategic businesses: (i) the development and operation of communications
businesses, including wireless cable television services, radio stations, paging
systems, an international toll calling service and trunked mobile radio
services, in the republics of the former Soviet Union, Eastern Europe, the
Peoples Republic of China (the "PRC"), and other selected emerging markets,
through its Communications Group and (ii) the production and worldwide
distribution in all media of motion pictures, television programming and other
filmed entertainment product and the exploitation of its library of over 2,200
film and television titles, through its Entertainment Group. Through these
individual operating businesses, the Company has established a significant
presence in many aspects of the rapidly evolving communications, media and
entertainment industries. Each of these businesses currently operates on a
stand-alone basis, pursuing distinct business plans designed to capitalize on
the growth opportunities within their individual industries.
F-6
<PAGE>
================================================================================
Metromedia International Group, Inc.
================================================================================
In addition, the Company manufacturers Snapper(R) brand premium-priced power
lawnmowers, lawn tractors, garden tillers, snowthrowers and related parts and
accessories and distributes edgers. The lawnmowers include rear engine riding
mowers, front engine riding mowers or lawn tractors, and self-propelled and
push-type walk-behind mowers. The Company also manufactures a line of commercial
lawn and turf equipment under the Snapper(R) brand.
Liquidity
MMG is a holding company, and accordingly, does not generate cash flows. The
Entertainment Group and Snapper are restricted under covenants contained in
their respective credit agreements from making dividend payments or advances to
MMG. The Communications Group is dependent on MMG for significant capital
infusions to fund its operations, its commitments to make capital contributions
and loans to its Joint Ventures and any acquisitions. Such funding requirements
are based on the anticipated funding needs of its Joint Ventures and certain
acquisitions committed to by the Company. Future capital requirements of the
Communications Group including future acquisitions will depend on available
funding from the Company and on the ability of the Communications Group's Joint
Ventures to generate positive cash flows. There can be no assurance that the
Company will have the funds necessary to support the current needs of the
Communications Group's current investments or any of the Communications Group's
additional opportunities or that the Communications Group will be able to obtain
financing from third parties. If such financing is unavailable, the Group may
not be able to further develop existing ventures and the number of additional
ventures in which it invests may be significantly curtailed.
MMG is obligated to make principal and interest payments under its own various
debt agreements and has debt repayment requirements of $17.1 million and $60.3
million in 1997 and 1998, respectively (see note 9), in addition to funding its
working capital needs, which consist principally of corporate overhead and
payments on self insurance claims.
In the short term, MMG intends to satisfy its current obligations and
commitments with available cash on hand and the proceeds from the sale of RDM
Sports Group, Inc. (see note 5). At December 31, 1996 MMG had approximately
$82.7 million of available cash on hand. The Company anticipates disposing of
its investment in RDM Sports Group, Inc. during 1997. The carrying value of the
Company's investment in RDM Sports Group, Inc. at December 31, 1996 was $31.2
million.
Management believes that its available cash on hand and proceeds from the
disposition of its investment in RDM Sports Group, Inc., will provide sufficient
funds for the Company to meet its obligations, including the Communications
Group's funding requirements, in the short term. However, no assurances can be
given that the Company will be able to dispose of RDM Sports Group, Inc. in a
timely fashion and on favorable terms. Any delay in the sale of RDM Sports
Group, Inc. or reductions in the proceeds anticipated to be received upon this
disposition may result in the Company's inability to satisfy its obligations,
including the funding of the Communications Group during the year ended December
31, 1997. Delays in funding the Communications Group's capital requirements may
have a material adverse impact on the results of operations of the
Communications Group's Joint Ventures.
The Company expects that it will sell either equity or debt securities in a
public or private offering during the remainder of 1997. The Company intends to
use the proceeds from the sale of these securities to finance the continued
build-out of the Communications Group's systems and for general corporate
purposes, including working capital needs of the Company and its subsidiaries,
the repayment of certain indebtedness of the Company and its subsidiaries and
potential future acquisitions. However, no assurances can be given that the
Company will be able to successfully complete the sale of its securities in a
timely fashion or on favorable terms.
F-7
<PAGE>
================================================================================
Metromedia International Group, Inc.
================================================================================
In addition, management believes that its long term liquidity needs will be
satisfied through a combination of (i) the Company's successful implementation
and execution of its growth strategy to become a global communications, media
and entertainment company, (ii) the Communications Group's Joint Ventures
achieving positive operating results and cash flows through revenue and
subscriber growth and control of operating expenses, and (iii) the Entertainment
Group's ability to generate positive cash flows sufficient to meet its planned
film production release schedule and service the Entertainment Group Credit
Facility. In addition to disposing of its investment in RDM Sports Group, Inc.,
the Company may be required to (i) attempt to obtain financing in addition to
the offering described above, through the public or private sale of debt or
equity securities of the Company or one of its subsidiaries, (ii) otherwise
restructure its capitalization or (iii) seek a waiver or waivers under one or
more of its subsidiaries' credit facilities to permit the payment of dividends
to the Company.
Summary of Significant Accounting Policies
Investments
Equity Method Investments
Investments in other companies and Joint Ventures ("Joint Ventures") which are
not majority owned, or which the Company does not control but in which it
exercises significant influence are accounted for using the equity method. The
Company reflects its net investments in Joint Ventures under the caption
"Investments in and advances to Joint Ventures". Generally, under the equity
method of accounting, original investments are recorded at cost and are adjusted
by the Company's share of undistributed earnings or losses of the Joint Venture.
Equity in the losses of the Joint Ventures are recognized according to the
percentage ownership in each Joint Venture until the Company's Joint Venture
partner's contributed capital has been fully depleted. Subsequently, the Company
recognizes the full amount of losses generated by the Joint Venture if it is the
principal funding source for the Joint Venture.
During the year ended February 28, 1995 ("fiscal 1995"), the Company changed its
policy of accounting for the Joint Ventures by recording its equity in their
earnings and losses based upon a three-month lag. As a result, the December 31,
1996 and 1995 consolidated statement of operations reflects twelve months of
operations through September 30, 1996 and 1995, respectively, for the Joint
Ventures and the February 28, 1995 consolidated statement of operations reflects
nine months of operations through September 30, 1994 for the Joint Ventures. The
effect of this change in accounting policy in fiscal 1995 is not material to the
consolidated financial statements.
During the year ended December 31, 1995 ("calendar 1995"), the Company changed
its policy of consolidating two indirectly owned subsidiaries by recording the
related assets and liabilities and results of operations based on a three-month
lag. As a result, the December 31, 1996 and 1995 balance sheets includes the
accounts of these subsidiaries at September 30, 1996 and 1995, respectively, and
the calendar 1995 statement of operations reflects the results of operations of
these subsidiaries for the nine months ended September 30, 1995. Had the Company
applied this method from October 1, 1994, the effect on reported December 31,
1995 results would not have been material. For the year ended December 31, 1996
("calendar 1996") the results of operations reflect twelve months of activity
based upon a September 30 fiscal year end of these subsidiaries.
F-8
<PAGE>
================================================================================
Metromedia International Group, Inc.
================================================================================
Short-Term Investments
The Company classifies its debt and equity securities in one of three
categories: trading, available-for-sale, or held-to-maturity. Trading securities
are bought and held principally for the purpose of selling them in the near
term. Held-to-maturity securities are those securities in which the Company has
the ability and intent to hold the securities until maturity. All other
securities not classified as trading or held-to-maturity are classified as
available-for-sale.
Management determines the appropriate classification of investments as trading,
held-to-maturity or available-for-sale at the time of purchase and reevaluates
such designation as of each balance sheet date. The Company has classified all
investments as available-for-sale. Available-for-sale securities are carried at
fair value, with the unrealized gains and losses, net of tax, reported in
stockholders' equity. The amortized cost of debt securities in this category is
adjusted for amortization of premiums and accretion of discounts to maturity.
Such amortization is included in investment income. Realized gains and losses,
and declines in value judged to be other-than-temporary on available-for-sale
securities, are included in investment income. The cost of securities sold is
based on the specific identification method. Interest and dividends on
securities classified as available-for-sale are included in investment income.
At December 31, 1995 short-term investments of $5.4 million, classified as
available-for-sale, had an amortized cost that approximated fair value. The
short-term investments were sold during calendar 1996.
Revenue Recognition
The Communications Group
The Communications Group and its Joint Ventures' cable, paging and telephony
operations recognize revenues in the period the service is provided.
Installation fees are recognized as revenues upon subscriber hook-up to the
extent installation costs are incurred. Installation fees in excess of
installation costs are deferred and recognized over the length of the related
individual contract. The Communications Group and its Joint Ventures' radio
operations recognize advertising revenue when commercials are broadcast.
The Entertainment Group
Revenue from the theatrical distribution of films is recognized as the films are
exhibited. The Entertainment Group distributes its films to the home video
market in the United States and Canada. The Entertainment Group's home video
revenue, less a provision for returns, is recognized when the video cassettes
are shipped. Distribution of the Entertainment Group's films to the home video
markets in foreign countries is generally effected through subdistributors who
control various aspects of distribution. When the terms of sale to such
subdistributors include the receipt of nonrefundable guaranteed amounts by the
Entertainment Group, revenue is recognized when the film is available to the
subdistributors for exhibition or exploitation and other conditions of sale are
met. When the arrangements with such subdistributors call for distribution of
the Entertainment Group's product without a minimum amount guaranteed to the
Entertainment Group, such sales are recognized when the Entertainment Group's
share of the income from exhibition or exploitation is earned.
F-9
<PAGE>
================================================================================
Metromedia International Group, Inc.
================================================================================
Revenue from the licensing of the Entertainment Group's film product to
networks, basic and pay cable companies and television stations or groups of
stations in the United States and Canada, as well as in foreign territories, is
recognized when the license period begins and when certain other conditions are
met, including the availability of such product for exhibition.
Snapper
Sales are recognized when the products are shipped to distributors or dealers.
Film Inventories and Cost of Rentals
Theatrical and television program inventories consist of direct production
costs, production overhead and capitalized interest, print and exploitation
costs, less accumulated amortization. Film inventories are stated at the lower
of unamortized cost or estimated net realizable value. Selling costs and other
distribution costs are charged to expense as incurred.
Film inventories and estimated total costs of participations and residuals are
charged to cost of rentals under the individual film forecast method in the
ratio that current period revenue recognized bears to management's estimate of
total gross revenue to be realized. Such estimates are re-evaluated quarterly in
connection with a comprehensive review of the Company's inventory of film
product, and estimated losses, if any, are provided for in full. Such losses
include provisions for estimated future distribution costs and fees, as well as
participation and residual costs expected to be incurred.
Inventories
Lawn and garden equipment inventories and pager inventories are stated at the
lower of cost or market. Lawn and garden equipment inventories are valued
utilizing the last-in, first-out (LIFO) method. Pager inventories are calculated
on the weighted average method.
Inventories consist of the following as of December 31, 1996 and 1995 (in
thousands):
1996 1995
---- ----
Lawn and garden equipment:
Raw materials $ 18,733 $ --
Finished goods 34,822 --
--------- ---------
53,555 --
Telecommunications:
Pagers 849 224
--------- ---------
$ 54,404 $ 224
========= =========
F-10
<PAGE>
================================================================================
Metromedia International Group, Inc.
================================================================================
Property Plant and Equipment
Property, plant and equipment at December 31, 1996 and 1995 consists of the
following (in thousands):
1996 1995
---- ----
Land $ 2,270 $ --
Buildings and improvements 12,409 --
Machinery and equipment 39,723 7,764
Theatre and other
leasehold improvements 26,698 419
--------- --------
81,100 8,183
Less: Accumulated depreciation and
amortization (7,172) (2,386)
--------- --------
$ 73,928 $ 5,797
========= ========
Property, plant and equipment are recorded at cost and are depreciated over
their expected useful lives. Generally, depreciation is provided on the
straight-line method for financial reporting purposes. Theatre and other
leasehold improvements are amortized using the straight-line method over the
life of the improvements or the life of the lease, whichever is shorter.
Intangible Assets
Intangible assets are stated at historical cost, net of accumulated
amortization. Intangibles such as broadcasting licenses and frequency rights are
amortized over periods of 20 to 25 years. Goodwill has been recognized for the
excess of the purchase price over the value of the identifiable net assets
acquired. Such amount is amortized over 25 years using the straight-line method.
Management continuously monitors and evaluates the realizability of recorded
intangibles to determine whether their carrying values have been impaired. In
evaluating the value and future benefits of intangible assets, their carrying
value is compared to management's best estimate of undiscounted future cash
flows over the remaining amortization period. If such assets are considered to
be impaired, the impairment to be recognized is measured by the amount by which
the carrying value of the assets exceeds the fair value of the assets. The
Company believes that the carrying value of recorded intangibles is not
impaired.
Impairment of Long-Lived Assets
The Company adopted the provisions of Statement of Financial Accounting
Standards No. 121, ("SFAS 121") "Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to Be Disposed of," on January 1, 1996. SFAS
121 requires that long-lived assets and certain identifiable intangibles be
reviewed for impairment whenever events or changes in circumstances indicate
that the carrying amount of an asset may not be recoverable. Recoverability of
assets to be held and used is measured by a comparison of the carrying amount of
an asset to future net cash flows expected to be generated by the asset. If such
assets are considered to be impaired, the impairment to be recognized is
measured by the amount by which the carrying amount of the assets exceeds the
fair value of the assets. Assets to be disposed of are reported at the lower of
the carrying amount or fair value less costs to sell. Adoption of SFAS 121 did
not have any impact on the Company's financial position, results of operations,
or liquidity.
F-11
<PAGE>
================================================================================
Metromedia International Group, Inc.
================================================================================
Earnings Per Share of Common Stock
Primary earnings per share are computed by dividing net income (loss) by the
weighted average number of common and common equivalent shares outstanding
during the year. Common equivalent shares include shares issuable upon the
assumed exercise of stock options using the treasury stock method when dilutive.
Computations of common equivalent shares are based upon average prices during
each period.
Fully diluted earnings per share are computed using such average shares adjusted
for any additional shares which would result from using end-of-year prices in
the above computations, plus the additional shares that would result from the
conversion of the 6 1/2% Convertible Subordinated Debentures (see note 9). Net
income (loss) is adjusted by interest (net of income taxes) on the 6 1/2%
Convertible Subordinated Debentures. The computation of fully diluted earnings
per share is used only when it results in an earnings per share number which is
lower than primary earnings per share.
The loss per share amounts for fiscal 1995 represent combined Orion and MITI's
common shares converted at the exchange ratios used in the November 1 Merger
(see note 2).
Fair Value of Financial Instruments
Statement of Financial Accounting Standards No. 107 ("SFAS 107") "Disclosures
about Fair Value of Financial Instruments," requires disclosure of fair value
information about financial instruments, whether or not recognized in the
balance sheet, for which it is practicable to estimate that value. In cases
where quoted market prices are not available, fair values are based on
settlements using present value or other valuation techniques. These techniques
are significantly affected by the assumptions used, including discount rates and
estimates of future cash flows. In that regard, the derived fair value estimates
cannot be substantiated by comparison to independent markets and, in many cases,
could not be realized in immediate settlement of the instruments. SFAS 107
excludes certain financial instruments and all non-financial instruments from
its disclosure requirements. Accordingly, the aggregate fair value amounts
presented do not represent the underlying value to the Company.
The following methods and assumptions were used in estimating the fair value
disclosures for financial instruments:
Cash and Cash Equivalents, Receivables, Notes Receivable and Accounts
Payable
The carrying amounts reported in the consolidated balance sheets for cash
and cash equivalents, current receivables, notes receivable and accounts
payable approximate fair values. The carrying value of receivables with
maturities greater than one year have been discounted, and if such
receivables were discounted based on current market rates, the fair value
of these receivables would not be materially different than their carrying
values.
Short-term Investments
For short-term investments, fair values are based on quoted market prices.
If a quoted market price is not available, fair value is estimated using
quoted market prices for similar securities or dealer quotes.
F-12
<PAGE>
================================================================================
Metromedia International Group, Inc.
================================================================================
Long-term Debt
For long-term and subordinated debt, fair values are based on quoted market
prices, if available. If the debt is not traded, fair value is estimated
based on the present value of expected cash flows. See note 9 for the fair
values of long-term debt.
Income Taxes
The Company accounts for deferred income taxes using the asset and liability
method of accounting. Under the asset and liability method, deferred tax assets
and liabilities are recognized for the future tax consequences attributable to
differences between the financial statement carrying amounts of existing assets
and liabilities and their respective tax bases. Deferred tax assets and
liabilities are measured using rates expected to be in effect when those assets
and liabilities are recovered or settled. The effect on deferred tax assets and
liabilities of a change in tax rates is recognized in income in the period that
includes the enactment date.
Stock Option Plans
Prior to January 1, 1996, the Company accounted for its stock option plans in
accordance with the provisions of Accounting Principles Board Opinion No. 25
("APB 25"), "Accounting for Stock Issued to Employees," and related
interpretations. As such, compensation expense would be recorded on the date of
grant only if the current market price of the underlying stock exceeded the
exercise price. On January 1, 1996, the Company adopted Statement of Financial
Accounting Standards No. 123 ("SFAS 123"), "Accounting for Stock-Based
Compensation," which permits entities to recognize as expense over the vesting
period the fair value of all stock-based awards on the date of grant.
Alternatively, SFAS 123 also allows entities to continue to apply the provisions
of APB 25 and provide pro forma net income and pro forma earnings per share
disclosures for employee stock option grants made in 1995 and future years as if
the fair-value-based method defined in SFAS 123 had been applied. The Company
has elected to continue to apply the provisions of APB 25 and provide the pro
forma disclosure requirements of SFAS 123.
Pension and Other Postretirement Plans
Snapper has a defined benefit pension plan covering substantially all of its
collective bargaining unit employees. The benefits are based on years of service
multiplied by a fixed dollar amount and the employee's compensation during the
five years before retirement. The cost of this program is funded currently.
Snapper also sponsors a defined benefit health care plan for substantially all
of its retirees and employees. Snapper measures the costs of its obligation
based on its best estimate. The net periodic costs are recognized as employees
render the services necessary to earn postretirement benefits.
Barter Transactions
In connection with its AM/FM radio broadcast business, the Company trades
commercial air time for goods and services used principally for promotional,
sales and other business activities. An asset and a liability are recorded at
the fair market value of the goods or services received. Barter revenue is
recorded and the liability is relieved when commercials are broadcast, and
barter expense is recorded and the assets are relieved when the goods or
services are received or used.
F-13
<PAGE>
================================================================================
Metromedia International Group, Inc.
================================================================================
Foreign Currency Translation
The statutory accounts of the Company's consolidated foreign subsidiaries and
Joint Ventures are maintained in accordance with local accounting regulations
and are stated in local currencies. Local statements are translated into U.S.
generally accepted accounting principles and U.S. dollars in accordance with
Statement of Financial Accounting Standards No. 52 ("SFAS 52"), "Accounting for
Foreign Currency Translation".
Under SFAS 52, foreign currency assets and liabilities are generally translated
using the exchange rates in effect at the balance sheet date. Results of
operations are generally translated using the average exchange rates prevailing
throughout the year. The effects of exchange rate fluctuations on translating
foreign currency assets and liabilities into U.S. dollars are accumulated as
part of the foreign currency translation adjustment in stockholders' equity.
Gains and losses from foreign currency transactions are included in net income
in the period in which they occur.
Under SFAS 52, the financial statements of foreign entities in highly
inflationary economies are remeasured, in all cases using the U.S. dollar as the
functional currency. U.S. dollar transactions are shown at their historical
value. Monetary assets and liabilities denominated in local currencies are
translated into U.S. dollars at the prevailing period-end exchange rate. All
other assets and liabilities are translated at historical exchange rates.
Results of operations have been translated using the monthly average exchange
rates. Translation differences resulting from the use of these different rates
are included in the accompanying consolidated statements of operations. Such
differences amounted to $255,000, $54,000 and $69,000 for calendar 1996,
calendar 1995, and fiscal 1995, respectively, and were immaterial to the
Company's results of operations for each of the periods presented. In addition,
translation differences resulting from the effect of exchange rate changes on
cash and cash equivalents were immaterial and are not reflected in the Company's
statements of cash flow for each of the periods presented.
Accrued Expenses
Accrued expenses at December 31, 1996 and 1995 consist of the following (in
thousands):
1996 1995
---- ----
Accrued salaries and wages $ 4,919 $ 9,627
Accrued taxes 25,467 11,000
Accrued interest 7,176 9,822
Self-insurance claims payable 29,833 31,549
Accrued warranty costs 4,317 -
Accrued film distribution costs 7,742 6,328
Other 28,628 27,787
-------- --------
$108,082 $ 96,113
======== ========
F-14
<PAGE>
================================================================================
Metromedia International Group, Inc.
================================================================================
Self-Insurance
The Company is self-insured for workers' compensation, health, automobile,
product and general liability costs for its lawn and garden operation and for
certain former subsidiaries. The self-insurance claim liability is determined
based on claims filed and an estimate of claims incurred but not yet reported.
Cash and Cash Equivalents
Cash equivalents consists of highly liquid instruments with maturities of three
months or less at the time of purchase. Included in cash at December 31, 1996,
is approximately $1.0 million of restricted cash which represents collateral
pursuant to the terms of the Snapper Credit Agreement (see note 9).
Use of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of the
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
Supplemental Disclosure of Cash Flow Information
Supplemental disclosure of cash flow information (in thousands):
Calendar Calendar Fiscal
1996 1995 1995
---- ---- ----
Cash paid during the year for:
Interest $ 32,015 $ 12,270 $ 13,108
======== ======== =========
Taxes $ 728 $ 996 $ 1,804
======== ======== =========
Supplemental schedule of non-cash investing and financing activities (in
thousands):
Calendar Calendar Fiscal
1996 1995 1995
---- ---- ----
Acquisition of business:
Fair value of assets acquired $ 120,882 $ 290,456 $ --
Fair value of liabilities assumed 180,591 239,109 --
--------- --------- ----------
Net value $ (59,709) $ 51,347 $ --
========= ========= ==========
In connection with acquisition of Motion Picture Corporation of America in
1996, the Company issued debt of $1.2 million and restricted common stock valued
at $3.2 million.
See note 4 regarding the consolidation of Snapper.
F-15
<PAGE>
================================================================================
Metromedia International Group, Inc.
================================================================================
================================================================================
2. The November 1 Merger
================================================================================
On November 1, 1995, (the "Merger Date") Orion, MITI, the Company and MCEG
Sterling Incorporated ("Sterling"), consummated the mergers contemplated by the
Amended and Restated Agreement and Plan of Merger (the "Merger Agreement") dated
as of September 27, 1995. The Merger Agreement provided for, among other things,
the simultaneous mergers of each of Orion and MITI with and into OPC Merger
Corp. and MITI Merger Corp., the Company's recently-formed subsidiaries, and the
merger of Sterling with and into the Company (the "November 1 Merger"). In
connection with the November 1 Merger, the Company changed its name from The
Actava Group Inc. to Metromedia International Group, Inc.
Upon consummation of the November 1 Merger, all of the outstanding shares of the
common stock, par value $.25 per share of Orion (the "Orion Common Stock"), the
common stock, par value $.001 per share, of MITI (the "MITI Common Stock") and
the common stock, par value $.001 per share, of Sterling (the "Sterling Common
Stock") were exchanged for shares of the Company's common stock, par value $1.00
per share, pursuant to exchange ratios contained in the Merger Agreement.
Pursuant to such ratios, holders of Orion Common Stock received .57143 shares of
the Company's common stock for each share of Orion Common Stock (resulting in
the issuance of 11,428,600 shares of common stock to the holders of Orion Common
Stock), holders of MITI Common Stock received 5.54937 shares of the Company's
common stock for each share of MITI Common Stock (resulting in the issuance of
9,523,817 shares of the Company's common stock to the holders of MITI Common
Stock) and holders of Sterling Common Stock received .04309 shares of the
Company's common stock for each share of Sterling Common Stock (resulting in the
issuance of 483,254 shares of the Company's common stock to the holders of
Sterling Common Stock).
In addition, pursuant to the terms of a contribution agreement dated as of
November 1, 1995 among the Company and two affiliates of Metromedia Company
("Metromedia"), MetProductions, Inc. ("MetProductions") and Met International,
Inc. ("Met International"), MetProductions and Met International contributed to
the Company an aggregate of $37,068,303 consisting of (i) interests in a
partnership and (ii) the principal amount of indebtedness of Orion and its
affiliate, and indebtedness of an affiliate of MITI, owed to MetProductions and
Met International respectively, in exchange for an aggregate of 3,530,314 shares
of the Company's common stock.
Immediately prior to the consummation of the November 1 Merger, there were
17,490,901 shares of the Company's common stock outstanding. As a result of the
consummation of the November 1 Merger and the transactions contemplated by the
contribution agreement, the Company issued an aggregate of 24,965,985 shares of
common stock. Following consummation of the November 1 Merger and the
transactions contemplated by the contribution agreement, Metromedia Company (an
affiliate of the Company) and its affiliates (the "Metromedia Holders")
collectively held an aggregate of 15,252,128 shares of common stock (or 35.9% of
the issued and outstanding shares of common stock).
Due to the existence of the Metromedia Holders' common control of Orion and MITI
prior to consummation of the November 1 Merger, their combination pursuant to
the November 1 Merger was accounted for as a combination of entities under
common control. Orion was deemed to be the acquirer in the common control
merger. As a result, the combination of Orion and MITI was effected utilizing
historical costs for the ownership interests of the Metromedia Holders in MITI.
The remaining ownership interests of MITI, were accounted for in accordance with
the purchase method of accounting based on the fair value of such ownership
interests, as determined by the value of the shares received by the holders of
such interests at the effective time of the November 1 Merger.
F-16
<PAGE>
================================================================================
Metromedia International Group, Inc.
================================================================================
For accounting purposes only, Orion and MITI were deemed to be the joint
acquirers of Actava and Sterling. The acquisition of Actava and Sterling has
been accounted for as a reverse acquisition. As a result of the reverse
acquisition, the historical financial statements of the Company for periods
prior to the November 1 Merger are those of Orion and MITI, rather than Actava.
The operations of Actava and Sterling have been included in the accompanying
consolidated financial statements from November 1, 1995, the date of
acquisition. During December 1995, the Company adopted a formal plan to dispose
of Snapper (see notes 1 and 4). In addition, the Company's investment in RDM
Sports Group, Inc. (formerly Roadmaster Industries, Inc.), was deemed to be a
non-strategic asset (see note 5).
At December 31, 1995, Snapper was included in the accompanying balance sheet in
an amount equal to the sum of estimated cash flows from the operations of
Snapper plus the anticipated proceeds from the sale of Snapper which amounted to
$79.2 million. The excess of the purchase price allocated to Snapper in the
November 1 Merger over the expected estimated cash flows from the operations and
sale of Snapper in the amount of $293.6 million has been reflected in the
accompanying consolidated statement of operations as a loss on disposal of a
discontinued operation. No income tax benefits were recognized in connection
with this loss on disposal because of the Company's losses from continuing
operations and net operating loss carryforwards.
The purchase price of Actava, Sterling and MITI minority interests, exclusive of
transaction costs, amounted to $438.9 million at November 1, 1995. The excess
purchase price over the net fair value of assets acquired amounted to $404
million at November 1, 1995, before the write-off of Snapper goodwill of $293.6
million.
Orion, MITI and Sterling were parties to a number of material contracts and
other arrangements under which Metromedia Company and certain of its affiliates
had, among other things, made loans or provided financing to, or paid
obligations on behalf of, each of Orion, MITI and Sterling. On November 1, 1995
such indebtedness, financing and other obligations of Orion, MITI and Sterling
to Metromedia and its affiliates were refinanced, repaid or converted into
equity of MMG.
Certain of the amounts owed by Orion ($20.4 million), MITI ($34.1 million) and
Sterling ($524,000) to Metromedia were financed by Metromedia through borrowings
under a $55.0 million credit agreement between the Company and Metromedia (the
"Actava-Metromedia Credit Agreement"). Orion, MITI and Sterling repaid such
amounts to Metromedia, and Metromedia repaid the Company the amounts owed by
Metromedia to the Company under the Actava-Metromedia Credit Agreement. In
addition, certain amounts owed by Orion to Metromedia were repaid on November 1,
1995.
================================================================================
3. Entertainment Group Acquisitions
================================================================================
On July 2, 1996, the Entertainment Group consummated the acquisition (the
"Goldwyn Merger") of the Samuel Goldwyn Company ("Goldwyn") by merging the
Company's newly formed subsidiary, SGC Merger Corp., into Goldwyn. Upon
consummation of the Goldwyn Merger, Goldwyn was renamed Goldwyn Entertainment
Company. Holders of common stock received .3335 shares of the Company's common
stock (the "Common Stock") for each share of Goldwyn Common Stock in accordance
with a formula set forth in the Agreement and Plan of Merger relating to the
Goldwyn Merger (the "Goldwyn Merger Agreement"). Pursuant to the Goldwyn Merger,
the Company issued 3,130,277 shares of common stock.
The purchase price, including the value of existing Goldwyn stock options and
transaction costs related to the Goldwyn Merger, was approximately $43.8
million.
F-17
<PAGE>
Also on July 2, 1996, the Entertainment Group consummated the acquisition (the
"MPCA Merger", together with the Goldwyn Merger, the "July 2 Mergers") of Motion
Picture Corporation of America ("MPCA") by merging the Company's recently formed
subsidiary, MPCA Merger Corp., with MPCA. In connection with the MPCA Merger,
the Company (i) issued 1,585,592 shares of common stock to MPCA's sole
stockholders, and (ii) paid such stockholders approximately $1.2 million in
additional consideration, consisting of promissory notes. The purchase price,
including transaction costs, related to the acquisition of MPCA was
approximately $21.9 million.
The excess of the purchase price over the net fair value of liabilities assumed
in the July 2 Mergers amounted to $125.4 million.
Following the consummation of the July 2 Mergers, the Company contributed its
interests in Goldwyn and MPCA to Orion, with Goldwyn and MPCA becoming
wholly-owned subsidiaries of Orion. Orion, Goldwyn and MPCA are collectively
referred to as the Entertainment Group. The July 2 Mergers have been recorded in
accordance with the purchase method of accounting for business combinations. The
purchase price to acquire both Goldwyn and MPCA were allocated to the net assets
acquired according to management's estimate of their respective fair values and
the results of those purchased businesses have been included in the accompanying
consolidated condensed financial statements from July 2, 1996, the date of
acquisition.
The following unaudited pro forma information illustrates the effect of the July
2 Mergers on revenues, loss from continuing operations, net loss and net loss
per share for the years ended December 31, 1996 and 1995, and assumes that the
July 2 Mergers occurred at the beginning of each period, the November 1 Merger
occurred at the beginning of 1995, Snapper was included in consolidated results
of operations at the beginning of 1995 and does not account for refinancing of
certain indebtedness of Goldwyn and MPCA debt as discussed in note 9 (in
thousands, except per share amounts):
1996 1995
---- ----
(Unaudited) (Unaudited)
Revenues $ 419,960 $ 401,132
========== ===========
Loss from continuing operations (144,897) (185,865)
========== ===========
Net loss (165,707) (511,817)
========== ===========
Net loss per share $ (2.92) $ (10.76)
========== ===========
F-18
<PAGE>
================================================================================
Metromedia International Group, Inc.
================================================================================
================================================================================
4. Snapper, Inc.
================================================================================
In connection with the November 1 Merger, Snapper was classified as an asset
held for sale. Subsequently, the Company has announced its intention not to
continue to pursue its previously adopted plan to dispose of Snapper and to
actively manage Snapper in order to grow and develop Snapper so as to maximize
its long term value to the Company. Snapper has been included in the
consolidated financial statements as of November 1, 1996. The allocation of the
November 1, 1996 carrying value of Snapper, $73.8 million, which included an
intercompany receivable of $23.8 million, is as follows (in thousands):
Cash $ 7,395
Accounts receivable 36,544
Inventories 51,707
Property, plant and equipment 29,118
Other assets 773
Accounts payable and accrued expenses (25,693)
Debt (40,059)
Other liabilities (3,200)
--------
Excess of assets over liabilities 56,585
Carrying value at November 1, 1996 73,800
--------
Excess of carrying value over fair
value of net assets $ 17,215
========
The following table summarizes the operating results of Snapper for the
ten-months ended October 31, 1996 and for the period November 1, 1995 to
December 31, 1995 (in thousands):
1996 1995
---- ----
Net sales $ 130,623 $ 14,385
Operating expenses 148,556 34,646
--------- --------
Operating loss (17,933) (20,261)
Interest expense (6,859) (1,213)
Other income (expenses) 1,210 (259)
--------- --------
Loss before taxes (23,582) (21,733)
Income taxes -- --
--------- --------
Net loss $ (23,582) $(21,733)
========= ========
As part of Snapper's transition to the dealer-direct business, Snapper has from
time to time reacquired the inventories and less frequently has purchased the
accounts receivable of distributors it has canceled. The purchase of inventories
is recorded by reducing sales for the amount credited to accounts receivable
from the canceled distributor and recording the repurchased inventory at the
lower of cost or market. During 1996 and 1995, 18 and 7 distributors were
canceled, respectively. Inventories purchased (and/or credited to the account of
canceled distributors) under such arrangements amounted to (in thousands):
Two-months Ten-months Two-months
ended ended ended
December 31, 1996 October 31, 1996 December 31, 1995
----------------- ---------------- -----------------
Inventories $ 2,438 $ 15,550 $ 4,596
Decrease in gross profit 2,106 5,967 1,245
F-19
<PAGE>
================================================================================
Metromedia International Group, Inc.
================================================================================
================================================================================
5. RDM Sports Group, Inc.
================================================================================
The Company has identified its investment in RDM Sports Group, Inc. ("RDM") as a
non-strategic asset and the Company's investment in RDM is included in the
balance sheet at December 31, 1996 and 1995 as an asset held for sale. As of
November 1, 1995, the Company's investment in RDM was adjusted to the
anticipated proceeds from its sale under the purchase method of accounting.
Management regularly monitors and evaluates the net realizable value of its
assets held for sale to determine whether their carrying values have been
impaired. During 1996, the Company reduced the carrying value of its investment
in RDM to $31.2 million. The Company's write-down of its investment in RDM of
$16.3 million is reflected as a discontinued operation in the 1996 consolidated
statement of operations. The Company intends to dispose of its RDM stock during
1997. The equity in earnings and losses of RDM have been excluded from the
Company's results of operations since the November 1 Merger.
As of December 31, 1996, the Company owned 39% of the issued and outstanding
shares of RDM Common Stock based on approximately 49,507,000 shares of RDM
Common Stock outstanding at November 8, 1996. Summarized financial information
for RDM is shown below (in thousands):
As of, and for the As of, and for the
nine months ended year ended
September 28, December 31,
1996 1995
---- ----
(Unaudited)
Net sales $ 304,235 $ 730,875
Gross profit 12,369 86,607
Interest expense 19,920 35,470
Gain on sale of subsidiaries 98,475 --
Net income (loss) 412 (51,004)
Current assets 209,272 406,586
Non-current assets 82,657 170,521
Current liabilities 126,144 232,502
Non-current liabilities 110,730 289,081
Total shareholders' equity 55,055 55,524
================================================================================
6. Film Accounts Receivable and Deferred Revenues
================================================================================
Film accounts receivable consists primarily of trade receivables due from film
distribution, including theatrical, home video, basic cable and pay television,
network, television syndication, and other licensing sources which have payment
terms generally covered under contractual arrangements. Film accounts receivable
is stated net of an allowance for doubtful accounts of $11.6 million at both
December 31, 1996 and 1995.
The Entertainment Group has entered into contracts for licensing of theatrical
and television product to the pay cable, home video and free television markets,
for which the revenue and the related accounts receivable will be recorded in
future periods when the films are available for broadcast or exploitation. These
contracts, net of advance payments received and recorded in deferred revenues as
described below, aggregated approximately $175.0 million at December 31, 1996.
Included in this amount is $61.5 million of license fees for which the revenue
and the related accounts receivable will be recorded only when the Entertainment
Group produces or acquires new products.
F-20
<PAGE>
================================================================================
Metromedia International Group, Inc.
================================================================================
Deferred revenues consist principally of advance payments received on pay cable,
home video and other television contracts for which the films are not yet
available for broadcast or exploitation.
================================================================================
7. Film Inventories
================================================================================
The following is an analysis of film inventories at December 31, 1996 and 1995
(in thousands):
1996 1995
---- ----
Current:
Theatrical and television product
released less amortization $ 60,377 $ 59,430
Completed not released 5,779 --
-------- --------
66,156 59,430
-------- --------
Non Current:
Theatrical and television product
released less amortization 133,014 137,233
Completed not released 2,476 --
In process and other 50,653 --
-------- --------
186,143 137,233
-------- --------
$252,299 $196,663
======== ========
The Entertainment Group has in prior years recorded substantial writeoffs to its
released product. As a result, approximately one-half of the gross cost of film
inventories 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. The Entertainment Group has amortized 94% of such gross cost of its
film inventories. Approximately 98% of such gross film inventory costs will have
been amortized by December 31, 1999. As of December 31, 1996, approximately 62%
of the unamortized balance of such film inventories will be amortized within the
next three-year period based upon the Company's revenue estimates at that date.
For the year ended December 31, 1996 interest costs of $1.2 million were
capitalized to film inventories.
================================================================================
8. Investments in and Advances to Joint Ventures
================================================================================
The Communications Group has recorded its investments in Joint Ventures at cost,
net of its equity in earnings or losses. Advances to the Joint Ventures under
the line of credit agreements are reflected based on amounts recoverable under
the credit agreement, plus accrued interest.
Advances are made to Joint Ventures in the form of cash, for working capital
purposes and for payment of expenses or capital expenditures, or in the form of
equipment purchased on behalf of the Joint Ventures. Interest rates charged to
the Joint Ventures under the credit agreement range from prime rate to prime
rate plus 6%. The credit agreements generally provide for the payment of
principal and interest from 90% of the Joint Ventures' available cash flow, as
defined, prior to any substantial distributions of dividends to the Joint
Venture partners. The Communications Group has entered into credit agreements
with its Joint Ventures to provide up to $69.6 million in funding of which $18.9
million remains unfunded at December 31, 1996. Under its credit agreements the
Communications Group's funding commitments are contingent on its approval of the
Joint Ventures' business plans.
F-21
<PAGE>
================================================================================
Metromedia International Group, Inc.
================================================================================
At December 31, 1996 and 1995 the Communications Group's investments in the
Joint Ventures, at cost, net of adjustments for its equity in earnings or
losses, were as follows (in thousands):
Investments in and advances to Joint Ventures
<TABLE>
<CAPTION>
Year
Venture Date Operations
1996 1995 Ownership % Formed Commenced
---- ---- ----------- ------ ---------
<S> <C> <C> <C> <C> <C>
Name
Wireless Cable TV
Kosmos TV, Moscow, Russia $ 759 $ 4,317 50% 1991 1992
Baltcom TV, Riga, Latvia 8,513 6,983 50% 1991 1992
Ayety TV, Tbilisi, Georgia 4,691 3,630 49% 1991 1993
Kamalak, Tashkent, Uzbekistan(1) 6,031 3,731 50% 1992 1993
Sun TV, Kishinev, Moldova 3,590 1,613 50% 1993 1994
Alma-TV, Almaty, Kazakhstan(1) 2,840 1,318 50% 1994 1995
-------- ---------
26,424 21,592
-------- ---------
Paging
Baltcom Paging, Tallinn, Estonia 3,154 2,585 39% 1992 1993
Baltcom Plus, Riga, Latvia 1,711 1,412 50% 1994 1995
Tbilisi Paging, Tbilisi, Georgia 829 619 45% 1993 1994
Raduga Paging, Nizhny Novgorod, Russia 450 364 45% 1993 1994
St. Petersburg Paging, St. Petersburg, Russia 963 527 40% 1994 1995
-------- ---------
7,107 5,507
-------- ---------
Radio Broadcasting
SAC/Radio 7, Moscow, Russia -- 1,174 51% (2) 1994 1994
Eldoradio, St. Petersburg, Russia 435 561 50% 1993 1995
Radio Socci, Socci, Russia 361 269 51% 1995 1995
-------- ---------
796 2,004
-------- ---------
Telephony
Telecom Georgia, Tbilisi, Georgia 2,704 2,078 30% 1994 1994
Trunk mobile radio ventures 2,049 --
-------- ---------
4,753 2,078
-------- ---------
Pre-Operational
St. Petersburg Cable, St. Petersburg, Russia 554 -- 45% 1996 Pre-Operational
Minsk Cable, Minsk, Belarus 1,980 918 50% 1993 Pre-Operational
Kazpage, Kazakhstan 350 -- 51% 1996 Pre-Operational
Magticom, Tbilisi, Georgia 2,450 -- 34% 1996 Pre-Operational
Batumi Paging, Batumi, Georgia 256 -- 35% 1996 Pre-Operatoinal
Balcom GSM 7,874 -- 24% 1996 Pre-Operational
PRC Telephony ventures and equipment 9,712 2,378
Other 3,191 2,457
------ -------
26,367 5,753
------ -------
Total $65,447 $36,934
======= =======
</TABLE>
(1) Includes paging operations
(2) During 1996, the Communications Group purchased an additional 32% of
SAC/Radio 7, increasing the ownership percentage to 83% and acquiring
control of its business. Accordingly, this investment is now accounted for
on a consolidated basis.
F-22
<PAGE>
================================================================================
Metromedia International Group, Inc.
================================================================================
The ability of the Communications Group and its Joint Ventures to establish
profitable operations is subject to, among other things, special political,
economic and social risks inherent in doing business in the republics of the
former Soviet Union, Eastern Europe and the PRC. These include matters arising
out of government policies, economic conditions, imposition of taxes or other
similar charges by governmental bodies, foreign exchange fluctuations and
controls, civil disturbances, deprivation or unenforceability of contractual
rights, and taking of property without fair compensation.
MITI has obtained political risk insurance policies from the Overseas Private
Investment Corporation ("OPIC") for two of its Joint Ventures. The policies
cover loss of investment and losses due to business interruption caused by
political violence or expropriation. Recently, the United States House of
Representatives extended the insuring authority of OPIC for one year. If such
authority is not further renewed, OPIC may be unable to write any new insurance
policies or underwrite new investments.
Summarized combined balance sheet financial information as of September 30, 1996
and 1995 and combined statement of operations financial information for the
years ended September 30, 1996 and 1995 and for the nine months ended September
30, 1994 of Joint Ventures accounted for under the equity method that have
commenced operations as of the dates indicated are as follows (in thousands):
Combined Balance Sheets 1996 1995
---- ----
Assets
Current assets $ 16,073 $ 6,937
Investments in wireless systems and equipment 38,447 31,349
Other assets 3,100 2,940
--------- --------
Total Assets $ 57,620 $ 41,226
========= ========
Liabilities and Joint Ventures' Equity (Deficit)
Current liabilities $ 18,544 $ 10,954
Amount payable under MITI credit facility 41,055 33,699
Other long-term liabilities 6,043 --
--------- --------
65,642 44,653
Joint Ventures' Equity (Deficit) (8,022) (3,427)
--------- --------
Total Liabilities and Joint Ventures' Equity (Deficit) $ 57,620 $ 41,226
========= ========
F-23
<PAGE>
================================================================================
Metromedia International Group, Inc.
================================================================================
Combined Statement of Operations
1996 1995 1994
---- ---- ----
Revenue $ 43,768 $ 19,344 $ 3,280
Expenses:
Cost of service 15,171 9,993 2,026
Selling, general and administrative 23,387 11,746 2,411
Depreciation and amortization 7,989 3,917 1,684
Other 1,674 -- 203
-------- -------- -------
Total expenses 48,221 25,656 6,324
-------- -------- -------
Operating loss (4,453) (6,312) (3,044)
Interest expense (3,655) (1,960) (632)
Other income (expense) (391) (1,920) 47
Foreign currency translation (356) (203) 15
-------- -------- -------
Net loss $ (8,855) $(10,395) $(3,614)
======== ======== =======
Financial information for Joint Ventures which are not yet operational is not
included in the above summary. The Communication Group's investment in and
advances to those Joint Ventures and for those entities whose venture agreements
are not yet finalized at December 31, 1996 amounted to approximately $26.4
million.
F-24
<PAGE>
================================================================================
Metromedia International Group, Inc.
================================================================================
The following table represents summary financial information for all operating
entities being grouped as indicated as of and for the year ended December 31,
1996 and totals for the years ended December 31, 1995 and February 28, 1995 (in
thousands):
<TABLE>
<CAPTION>
Calendar Calendar Fiscal
Wireless Radio 1996 1995 1995
Cable TV Paging Broadcasting Telephony Total Total Total
-------- ------ ------------ --------- ----- ----- -----
<S> <C> <C> <C> <C> <C> <C> <C>
Consolidated Subsidiaries and Joint
Ventures
Revenues $ 170 $ 2,880 $ 9,363 $ 52 $ 12,465(1) $ 4,569(1) $ 3,545
Depreciation and amortization 302 461 174 4 941 498 635
Operating income (loss) before taxes (832) (427) 2,102 (298) 545 (260) (1,485)
Assets 2,017 3,232 3,483 2,179 10,911 10,397 12,795
Capital expenditures 1,813 443 555 6 2,817 212 146
Unconsolidated Equity
Joint Ventures
Revenues $ 17,850 $ 5,207 $ 504 $ 20,207 $ 43,768 $ 19,344 $ 3,280
Depreciation and amortization 5,816 1,030 33 1,110 7,989 3,917 1,684
Operating income (loss)
before taxes (4,398) (1,276) (492) 1,713 (4,453) (6,312) (3,044)
Assets 29,490 5,328 642 22,160 57,620 41,226 19,523
Capital expenditures 7,889 1,238 234 2,096 11,457 21,446 8,333
Net investment in Joint Ventures 26,424 7,107 796 4,753 39,080 29,824 18,603
Equity in earnings (losses) of
consolidated investees (7,281) (1,950) (2,152) 304 (11,079) (7,981) (2,257)
Combined
Revenues $ 18,020 $ 8,087 $ 9,867 $ 20,259 $ 56,233 $ 23,913 $ 6,825
Depreciation and amortization 6,118 1,491 207 1,114 8,930 4,415 2,319
Operating income (loss) before taxes (5,230) (1,703) 1,610 1,415 (3,908) (6,572) (4,529)
Assets 31,507 8,560 4,125 24,339 68,531 51,623 32,318
Capital expenditures 9,702 1,681 789 2,102 14,274 21,658 8,479
Subscribers (unaudited) 69,118 44,836 n/a 6,642 120,596 52,360 17,773
</TABLE>
(1) Does not reflect revenues for the Communications Group's headquarters of
approximately $1.6 million for calendar 1996 and $600,000 for calendar
1995.
F-25
<PAGE>
================================================================================
Metromedia International Group, Inc.
================================================================================
The following table represents information about the Communication Group's
operations in different geographic locations:
Republics of
Former
Soviet Union
United and Other
States Eastern Europe PRC Foreign Total
------ -------------- --- ------- -----
Calendar
1996
- --------
Revenues $ 1,582 $12,413 $ -- $ 52 $ 14,047
Assets 118,670 61,319 10,105 4,911 195,005
======== ======= ======= ======== ========
Calendar
1995
- --------
Revenues 589 4,569 -- -- 5,158
Assets 119,280 39,269 2,384 156 161,089
======== ======= ======= ======== ========
Fiscal
1995
- ------
Revenues 417 3,128 -- -- 3,545
Assets 12,518 27,764 -- -- 40,282
======== ======= ======= ======== ========
In December 1995, the Communications Group and Protocall Ventures, Ltd.
("Protocall") executed a letter of intent together with a loan agreement. The
letter of intent called for the Communications Group to loan up to $1.5 million
to Protocall and negotiate for the purchase by the Communications Group from
Protocall of 51% of Protocall for $2.6 million. This letter was amended on April
12, 1996 to allow for a total borrowing of $1.9 million against the purchase
price and to increase the Communications Group's ownership to 56% of Protocall.
Upon closing of the purchase agreement, the principal and accrued interest under
the loan were offset against the purchase price otherwise payable to Protocall.
On May 17, 1996 the acquisition of Protocall by the Communications Group was
completed with final payment of $600,000 to Protocall and all prior amounts
loaned to Protocol were offset against the purchase price of $2.6 million. The
transaction was accounted for under the purchase method of accounting.
Accordingly, the difference between the purchase price and the underlying equity
in the net assets of Protocall of approximately $1.5 million has been allocated
to goodwill and is being amortized over 25 years.
In October 1996, The Communications Group entered into a Joint Venture agreement
to design, construct, install and operate Magticom, a mobile radio network in
Tbilisi, Georgia. The equity contribution to the Joint Venture is $5.0 million
of which 49% was contributed by the Communications Group.
In December 1996, the Communications Group, through its 50% owned Moldovan Joint
Venture, Sun-TV, acquired the assets of Eurocable Moldova, Ltd., a wired cable
television company with approximately 30,000 subscribers, for approximately $1.5
million.
In January 1997, the Communication Group's 99% owned Joint Venture, Romsat
Cable TV and Radio, S.A., acquired the cable-television assets of Standard Ideal
Consulting, S.A., a wired cable television company with approximately 37,000
subscribers, for approximately $2.8 million.
F-26
<PAGE>
================================================================================
Metromedia International Group, Inc.
================================================================================
On March 18, 1996 Metromedia Asia Limited ("MAC," n/k/a Metromedia Asia
Corporation), entered into a Joint Venture agreement with Golden Cellular
Communications, Ltd, ("GCC") a company located in the PRC. The purpose of the
Joint Venture is to provide wireless local loop telephony equipment, network
planning, technical support and training to domestic telephone operators
throughout the PRC. Total required equity contributions to the venture is $8.0
million, 60% of which is to be contributed by MAC and 40% by GCC.
The equipment contributed by MAC as an in-kind capital contribution must be
verified by a Chinese registered accountant in order to obtain a business
license. Although the capital verification process has not yet been successfully
completed, MAC is continuing its efforts towards completion. Management believes
that the capital verification will be completed successfully. In addition, GCC's
potential customers require an allocation of an appropriate frequency spectrum
to utilize the equipment contributed to the Venture.
In February 1997, MAC acquired Asian American Telecommunications Corporation
("AAT") pursuant to a Business Combination Agreement (the "BCA") in which MAC
and AAT agreed to combine their businesses and operations. Pursuant to the BCA,
each AAT shareholder and warrant holder exchanged (the "Exchange") (i) one AAT
common share for one share of MAC common stock, par value $.01 per share ("MAC
Common Stock"), (ii) one warrant to acquire one AAT common share at an exercise
price of $4.00 per share for one warrant to acquire one share of MAC Common
Stock at an exercise price of $4.00 per share and (iii) one warrant to acquire
one AAT common share at an exercise price of $6.00 per share for one warrant to
acquire one share of MAC Common Stock at an exercise price of $6.00 per share.
AAT is engaged in the development and construction of communications services in
the PRC. AAT, through a joint venture, has a contract with one of the PRC's two
major providers of telephony services to provide telecommunications services in
the Sichuan Province of the PRC. This transaction will be accounted for under
the purchase method of accounting with MAC as the acquiring entity. Since the
consummation of the acquisition the Communications Group owns 57% of MAC.
As a condition to the closing of the BCA, the Communications Group purchased
from MAC, for an aggregate purchase price of $10.0 million, 3,000,000 shares of
MAC's Class A Common Stock, par value $.01 per share (the "MAC Class A Common
Stock") and 1,250,000 warrants to purchase an additional 1,250,000 shares of MAC
Class A Common Stock, at an exercise price of $6.00 per share (the "MAC
Purchase"). The securities received by the Communications Group in the MAC
Purchase are not registered under the Securities Act, but have certain demand
and piggyback registration rights as provided in the MAC Purchase Agreement.
F-27
<PAGE>
================================================================================
Metromedia International Group, Inc.
================================================================================
================================================================================
9. Long-term Debt
================================================================================
Long-term debt at December 31, 1996 and 1995 consisted of the following (in
thousands):
1996 1995
---- ----
MMG (excluding Communications Group, Entertainment
Group and Snapper)
MMG Credit Facility $ -- $ 28,754
6 1/2% Convertible Debentures due 2002, net of
unamortized discount of $15,261 and $17,994 59,739 57,006
9 1/2% Debentures due 1998, net of unamortized discount
of $86 and $140 59,398 59,344
9 7/8% Senior Debentures due 1997, net of
unamortized premium of $38 and $217 15,038 18,217
10% Debentures due 1999 5,467 6,075
MPCA Acquisition Notes Payable due 1997 1,179 --
6 1/4% Secured Note Payable due 1998 700 1,020
-------- --------
141,521 170,416
-------- --------
Entertainment Group
Notes payable to banks under Credit, Security
and Guaranty Agreements 247,500 123,700
Other guarantees and contracts payable, net of
unamortized discounts of $2,699 and $2,402 16,138 9,939
-------- --------
263,638 133,639
-------- --------
Communications Group
Hungarian Foreign Trade Bank 246 588
-------- --------
246 588
-------- --------
Snapper
Snapper Revolver 46,419 --
Industrial Development Bonds 1,050 --
-------- --------
47,469 --
-------- --------
Capital lease obligations, interest rates of 9% to 13% 6,185 --
-------- --------
Less: current portion 55,638 40,597
-------- --------
Long-term debt, net of current portion $403,421 $264,046
======== ========
Aggregate annual repayments of long-term debt over the next five years and
thereafter are as follows (in thousands):
1997 $ 56,138
1998 93,293
1999 83,464
2000 32,042
2001 130,530
Thereafter 81,600
F-28
<PAGE>
================================================================================
Metromedia International Group, Inc.
================================================================================
MMG Debt (excluding Communications Group, Entertainment Group and Snapper)
In 1987 the Company issued $75.0 million of 6 1/2% Convertible Subordinated
Debentures due in 2002 in the Euro-dollar market. The Debentures are convertible
into common stock at a conversion price of $41 5/8 per share. At the Company's
option, the Debentures may be redeemed at 100% plus accrued interest until
maturity.
The 9 1/2% Subordinated Debentures are due in 1998. These debentures do not
require annual principal payments.
The 9 7/8% Senior Subordinated Debentures are redeemable at the option of the
Company, in whole or in part, at 100% of the principal amount plus accrued
interest. Mandatory sinking fund payments of $3.0 million (which the Company may
increase to $6.0 million annually) began in 1982 and are intended to retire, at
par plus accrued interest, 75% of the issue prior to maturity. The Senior
Subordinated Debetures were paid in March 1997.
At the option of the Company, the 10% Subordinated Debentures are redeemable, in
whole or in part, at the principal amount plus accrued interest. Mandatory
sinking fund payments of 10% of the outstanding principal amount commenced in
1989, however, the Company receives credit for debentures redeemed or otherwise
acquired in excess of sinking fund payments.
During 1996 the Company repaid its outstanding balance of $28.8 million under
its revolving Credit Facility.
The carrying value of the Company's long-term and subordinated debt, including
the current portion at December 31, 1996, approximates fair value. Estimated
fair value is based on a discounted cash flow analysis using current incremental
borrowing rates for similar types of agreements and quoted market prices for
issues which are traded.
Entertainment Group Credit Facility
On July 2, 1996, the Entertainment Group entered into a credit agreement with
Chase Bank as agent for a syndicate of lenders, pursuant to which the lenders
provided to the Entertainment Group and its subsidiaries a $300 million credit
facility (the "Entertainment Group Credit Facility"). The $300 million facility
consists of a secured term loan of $200 million (the "Term Loan") and a
revolving credit facility of $100 million, including a $10 million letter of
credit subfacility, (the "Revolving Credit Facility"). Proceeds from the Term
Loan and $24.0 million of the Revolving Credit Facility were used to refinance
the existing indebtedness of Orion (the "Old Orion Credit Facility"), Goldwyn
and MPCA. In connection with the refinancing of the Old Orion Credit Facility,
the Entertainment Group expensed the deferred financing costs associated with
the Old Orion Credit Facility and recorded an extraordinary loss of
approximately $4.5 million.
F-29
<PAGE>
================================================================================
Metromedia International Group, Inc.
================================================================================
Borrowings under the Entertainment Group's Credit Facility which do not exceed
the "borrowing base" as defined in the agreement will bear interest, at the
Entertainment Group's option, at a rate of LIBOR plus 2.5% or Chase's
alternative base rate plus 1.5%, and borrowings in excess of the borrowing base,
which have the benefit of the guarantee referred to below, will bear interest,
at the Entertainment Group's option, at a rate of LIBOR plus 1% or Chase's
alternative base rate. The Term Loan has a final maturity date of June 30, 2001
and amortizes in 20 equal quarterly installments of $7.5 million commencing on
September 30, 1996, with the remaining principal amount due at the final
maturity date. If the outstanding balance under the Term Loan exceeds the
borrowing base, the Company will be required to pay down such excess amount. The
Term Loan and the Revolving Credit Facility are secured by a first priority lien
on all of the stock of Orion and its subsidiaries and on substantially all of
the Entertainment Group's assets, including its accounts receivable and film and
television libraries. Amounts outstanding under the Revolving Credit Facility in
excess of the applicable borrowing base are also guaranteed jointly and
severally by Metromedia Company, and John W. Kluge, a general partner. To the
extent the borrowing base exceeds the amount outstanding under the Term Loan,
such excess will be used to support the Revolving Credit Facility so as to
reduce the exposure of the guarantors under such facility.
The Entertainment Group Credit Facility contains customary convenants including
limitations on the issuance of additional indebtedness and guarantees, on the
creation of new liens, development costs and budgets and other information
regarding motion picture production and made-for television movies, the
aggregate amount of unrecouped print and advertising costs the Entertainment
Group may incur, on the amount of the Entertainment Group's leases, capital and
overhead expenses (including specific limitations on the Entertainment Group's
theatrical exhibition subsidiary's capital expenditures), prohibitions of the
declaration of dividends or distributions by the Entertainment Group (except as
defined in the agreement), limitations on the merger or consolidation of the
Entertainment Group or the sale by the Entertainment Group of any substantial
portion of its assets or stock and restrictions on the Entertainment Group's
line of business, other than activities relating to the production, distribution
and exhibition of entertainment product. The Entertainment Group's Credit
Facility also contains financial covenants, including requiring maintenance by
the Entertainment Group of certain cash flow and operational ratios.
The Revolving Credit Facility contains certain events of default, including
nonpayment of principal or interest on the facility, the occurrence of a "change
of control" (as defined in the agreement) or an assertion by the guarantors of
such facility that the guarantee of such facility is unenforceable. The Term
Loan portion of the Entertainment Group's Credit Facility also contains a number
of customary events of default, including non-payment of principal and interest
and the occurrence of a "change of management" (as defined in the agreement),
violation of covenants, falsity of representations and warranties in any
material respect, certain cross-default and cross-acceleration provisions, and
bankruptcy or insolvency of Orion or its material subsidiaries.
At the November 1 Merger date (see note 2), proceeds from the Old Orion Credit
Facility as well as amounts advanced from MMG under a subordinated promissory
note, were used to repay and terminate all outstanding Plan debt obligations
($210.7 million) and to pay certain transaction costs. To record the repayment
and termination of the Plan debt, the Entertainment Group removed certain
unamortized discounts associated with such obligations from its accounts and
recognized an extraordinary loss of $32.4 million on the extinguishment of debt.
It is assumed that the carrying value of the Entertainment Group's bank debt
approximates its face value because it is a floating rate instrument.
F-30
<PAGE>
================================================================================
Metromedia International Group, Inc.
================================================================================
Communications Group Debt
A loan from the Hungarian Foreign Trade Bank, which bears interest at 34.5%, is
due on September 14, 1997. The loan is a Hungarian Forint based loan and is
secured by a letter of credit in the amount of $1.2 million.
On November 1, 1995, MMG issued 2,537,309 shares of common stock in repayment of
$26.6 million of MITI notes payable.
Included in interest expense for calendar 1996, calendar 1995 and fiscal 1995
are $107,000, $3.8 million and $430,000, respectively, of interest on amounts
due to Metromedia Company, an affiliate of MMG.
Snapper Debt
On November 26, 1996, Snapper entered into a credit agreement (the "Snapper
Credit Agreement") with AmSouth Bank of Alabama ("AmSouth"), pursuant to which
AmSouth has agreed to make available to Snapper a revolving line of credit up to
$55.0 million, upon the terms and subject to conditions contained in the Snapper
Credit Agreement (the "Snapper Revolver") for a period ending on January 1, 1999
(the "Snapper Revolver Termination Date"). The Snapper Revolver is guaranteed by
the Company.
Interest under the Snapper Revolver is payable at Snapper's option at a rate
equal to either (i) prime plus .5% (from November 26, 1996 through May 25, 1997)
and prime plus 1.5% (from May 26, 1997 to the Snapper Revolver Termination Date)
and (ii) LIBOR (as defined in the Snapper Credit Agreement) plus 2.5% (from
November 26, 1996 through May 25, 1997) or LIBOR plus 3.5% (from May 26, 1997 to
the Snapper Revolver Termination Date).
The Snapper Revolver contains customary covenants, including delivery of certain
monthly, quarterly and annual financial information, delivery of budgets and
other information related to Snapper, limitations on Snapper's ability to (i)
sell, transfer, lease (including sale-leaseback) or otherwise dispose of all or
any material portion of its assets or merge with any person; (ii) acquire an
equity interest in another business; (iii) enter into any contracts, leases,
sales or other transactions with any division or an affiliate of Snapper,
without the prior written consent of AmSouth; (iv) declare or pay any dividends
or make any distributions upon any of its stock or directly or indirectly apply
any of its assets to the redemption, retirement, purchase or other acquisition
of its stock; (v) make any payments to the Company on a subordinated promissory
note issued by Snapper to the Company at any time (a) an Event of Default (as
defined in the Snapper Credit Agreement) exists or would result because of such
payment, (b) there would be less than $10 million available to Snapper under the
terms of the Snapper Credit Agreement, (c) a single payment would exceed $3
million, (d) prior to January 1, 1998, and (e) such payment would occur more
frequently than quarterly after January 1, 1998; (vi) make loans, issue
additional indebtedness or make any guarantees. In addition, Snapper is required
to maintain at all times as of the last day of each month a specified net worth.
The Snapper Credit Agreement is secured by a first priority security interest in
all of Snapper's assets and properties and is also entitled to the benefit of a
replenishable $1.0 million cash collateral account, which was initially funded
by Snapper. Under the Snapper Credit Agreement, AmSouth may draw upon amounts in
the cash collateral account to satisfy any payment defaults by Snapper and
Messrs. Kluge and Subotnick, general partners of Metromedia, are obligated to
replenish such account any time amounts are so withdrawn up to the entire amount
of the Snapper Revolver.
F-31
<PAGE>
================================================================================
Metromedia International Group, Inc.
================================================================================
Under the Snapper Credit Agreement, the following events, among others, each
constitute an "Event of Default": (i) breach of any representation or warranty,
certification or certain covenants made by Snapper or any due observance or
performance to be observed or performed by Snapper; (ii) failure to pay within 5
days after payment is due; and (iii) a "change of control" shall occur. For
purposes of the Snapper Credit Agreement, "change of control" means (i) a change
of ownership of Snapper that results in the Company not owning at least 80% of
all the outstanding stock of Snapper, (ii) a change of ownership of the Company
that results in (a) Messrs. Kluge and Subotnick not having beneficial ownership
or common voting power of at least 15% of the common voting power of the
Company, (b) any person having more common voting power than Messrs. Kluge and
Subotnick, or (c) any person other than Messrs. Kluge and Subotnick for any
reason obtaining the right to appoint a majority of the board of directors of
the Company.
At December 31, 1996 Snapper was not in compliance with certain of these
covenants. The Company and AmSouth have amended the Snapper Credit Agreement to
provide for (i) an annual administrative fee to be paid on December 31, 1997,
(ii) an increase in Snapper's borrowing rates as of December 31, 1997 (from
prime rate to prime rate plus 1.50% and from LIBOR plus 2.50% to LIBOR plus
4.00%), and (iii) an increase in Snapper's commitment fee as of December 31,
1997 from .50% per annum to .75% per annum. As part of the amendment to the
Snapper Credit Agreement AmSouth waived: (i) the covenant defaults as of
December 31, 1996, (ii) the $250,000 semi-annual administrative fee requirement
which was set to commence on May 26, 1997 and (iii) the mandatory borrowing rate
and commitment fee increase that was to occur on May 26, 1997. Furthermore, the
amendment replaces certain existing financial covenants with covenants on
minimum quarterly cash flow and equity requirements, as defined. In addition,
the Company and AmSouth have agreed to the major terms and conditions of a $10.0
million credit facility. The closing of the credit facility shall remain subject
to the delivery of satisfactory loan documentation.
The $10.0 million working capital facility will: (i) have a pari passu
collateral interest (including rights under the Make-Whole and Pledge Agreement)
with the Credit Facility, (ii) accrue interest on borrowings at AmSouth's prime
rate, floating (same borrowing rate as the Credit Facility), (iii) become due
and payable on October 1, 1997. As additional consideration for AmSouth making
this new facility available, Snapper shall provide AmSouth with either: (i) the
joint and several guarantees of Messrs. Kluge and Subotnick on the new facility
only, or (ii) a $10.0 million interest-bearing deposit made by MMG at AmSouth
(this deposit will not be specifically pledged to secure the Snapper facility or
to secure MMG's obligations thereunder, but AmSouth shall have the right of
offset against such deposit as granted by law and spelled out within the Credit
Agreement).
It is assumed that the carrying value of Snapper's bank debt approximates its
face value because it is a floating rate instrument.
In addition, Snapper has industrial development bonds with certain
municipalities. The industrial development bonds mature in 1999 and 2001, and
their interest rates range from 62% to 75% of the prime rate.
================================================================================
10. Stockholders' Equity
================================================================================
Preferred Stock
There are 70,000,000 shares of Preferred Stock authorized, none of which were
outstanding or designated as to a particular series at December 31, 1996.
Common Stock
On July 2, 1996, the Company completed a public offering of 18.4 million shares
of common stock, generating net proceeds of approximately $190.6 million.
On August 29, 1996, the Company increased the number of authorized shares of
common stock from 110,000,000 to 400,000,000. At December 31, 1996 and 1995 and
February 28, 1995 there were 66,153,439, 42,613,738 and 20,934,898 shares issued
and outstanding, respectively.
At December 31, 1996, the Company has reserved for future issuance shares of
Common Stock in connection with the plans and debentures listed below:
Stock option plans 10,067,603
6 1/2% Convertible Debentures 1,801,802
Restricted stock plan 132,800
----------
12,002,205
==========
F-32
<PAGE>
================================================================================
Metromedia International Group, Inc.
================================================================================
Stock Option Plans
On August 29, 1996, the stockholders of MMG approved the Metromedia
International Group, Inc. 1996 Incentive Stock Option Plan (the "MMG Plan"). The
aggregate number of shares of common stock that may be the subject of awards
under the MMG Plan is 8,000,000. The maximum number of shares which may be the
subject of awards to any one grantee under the MMG Plan may not exceed 250,000
in the aggregate. The MMG Plan provides for the issuance of incentive stock
options and nonqualified stock options. Incentive stock options may not be
issued at a per share price less than the market value at the date of grant.
Nonqualified stock options may be issued at prices and on terms determined in
the case of each stock option grant. Stock options may be granted for terms of
up to but not exceeding ten years and vest and become fully exercisable after
four years from the date of grant. At December 31, 1996 there were 5,210,279
additional shares available for grant under the MMG Plan.
Following the November 1 Merger, options granted pursuant to each of the MITI
stock option plan and the Actava stock option plans and, following the Goldwyn
Merger, the Goldwyn stock option plans were converted into stock options
exercisable for common stock of MMG in accordance with their respective exchange
ratios.
The per share weighted-average fair value of stock options granted during 1996
was $7.36 on the date of grant using the Black Scholes option-pricing model with
the following weighted average assumptions: expected volatility of 49%, expected
dividend yield of zero percent, risk-free interest rate of 5.2% and an expected
life of 7 years.
The Company applies APB 25 in recording the value of stock options granted
pursuant to its plans. No compensation cost has been recognized for stock
options granted under the MMG Plan and compensation expense of $153,000 has been
recorded for stock options under the MITI stock option plan in the financial
statements. Had the Company determined compensation cost based on the fair value
at the grant date for its stock options under SFAS 123, the Company's net loss
would have increased to the pro forma amounts indicated below (in thousands,
except per share amount):
1996
Net loss As reported ($115,243)
Pro forma ($118,966)
Primary loss per
common share As reported ($2.12)
Pro forma ($2.19)
Pro forma net income reflects only options granted under the MMG Plan and MITI
stock option plan in 1996. MITI and Actava stock options granted prior to the
November 1 Merger were recorded at fair value. In addition, Goldwyn stock
options granted prior to the Goldwyn Merger, were recorded at fair value and
included in the Goldwyn purchase price.
F-33
<PAGE>
================================================================================
Metromedia International Group, Inc.
================================================================================
Stock option activity during the periods indicated is as follows:
Weighted
Number Average
of Shares Option Price
--------- ------------
Balance at December 31, 1994 941,000 $ 2.38
Transfer of Actava options in merger 737,000 $ 8.17
Options granted 367,000 $ 5.41
Options exercised (93,000) $ 8.63
Options canceled (89,000) $ 5.41
---------
Balance at December 31, 1995 1,863,000 $ 4.81
Transfer of Goldwyn options in acquisition 202,000 $ 23.33
Options granted 2,945,000 $ 12.63
Options exercised (167,000) $ 7.46
Options canceled (264,000) $ 13.03
---------
Balance at December 31, 1996 4,579,000 $ 10.09
=========
At December 31, 1996 the range of exercise prices and the weighted-average
remaining contractual lives of outstanding options was $1.08 - $97.45 and 8.4
years, respectively.
In addition to the MMG Plan, at December 31, 1996, there were 278,000 shares
that may be the subject of awards under other existing stock option plans.
At December 31, 1996 and 1995, the number of stock options exercisable was
2,031,000 and 1,214,000, respectively, and the weighted-average exercise price
of these options was $7.92 and $3.97, respectively
During 1994, an officer of the Communications Group was granted an option, not
pursuant to any plan, to purchase 657,908 shares of common stock (the "MITI
Options") at a purchase price of $1.08 per share. The MITI Options expire on
September 30, 2004, or earlier if the officer's employment is terminated.
Included in the fiscal 1995 statement of operations is $3.6 million of
compensation expense in connection with these options.
Prior to the November 1 Merger, an officer of Actava was granted an option, not
pursuant to any plan, to purchase 300,000 shares of common stock (the "Actava
Options") at a purchase price of $6.375 per share.
The Actava Options expire on April 18, 2001.
As part of the MPCA Merger, the Company issued 256,504 shares of restricted
common stock to certain employees. The common stock vests on a pro-rata basis
over a three year period ending in July 1999. The total market value of the
shares at the time of issuance is treated as unearned compensation and is
charged to expense over the vesting period. Unearned compensation charged to
expense for the period ended December 31, 1996 was $529,000.
F-34
<PAGE>
================================================================================
Metromedia International Group, Inc.
================================================================================
On December 13, 1995, the Board of Directors of the Company terminated the
Actava 1991 Non-Employee Director Stock Option Plan. The Company had previously
reserved 150,000 shares for issuance upon the exercise of stock options granted
under this plan and had granted 20,000 options thereunder.
No shares have been granted under the Company's restricted stock plan during
1996 and 102,800 shares of common stock remain available under this plan.
================================================================================
11. Income Taxes
================================================================================
The provision for income taxes for calendar 1996, calendar 1995 and fiscal 1995
all of which is current, consists of the following (in thousands):
Calendar Calendar Fiscal
1996 1995 1995
---- ---- ----
Federal $ -- $ -- $ --
State and local 100 167 100
Foreign 1,314 600 1,200
-------- -------- -------
Current 1,414 767 1,300
Deferred -- -- --
-------- -------- -------
$ 1,414 $ 767 $ 1,300
======== ======== =======
The provision for income taxes for calendar 1996, calendar 1995 and fiscal 1995
applies to continuing operations before discontinued operations and
extraordinary items.
The federal income tax portion of the provision for income taxes includes the
benefit of state income taxes provided. The Company recognizes investment tax
credits on the flow-through method.
The Company had pre-tax losses from foreign operations of $4.4 million, $1.9
million and $9.5 million in calendar 1996, calendar 1995 and fiscal 1995,
respectively. Pre-tax losses from domestic operations were $88.6 million, $84.4
million and $58.6 million in calendar 1996, calendar 1995 and fiscal 1995,
respectively.
State and local income tax expense in calendar 1996, calendar 1995 and fiscal
1995 includes an estimate for franchise and other state tax levies required in
jurisdictions which do not permit the utilization of the Company's net operating
loss carryforwards to mitigate such taxes. Foreign tax expense in calendar 1996,
calendar 1995 and fiscal 1995 reflects estimates of withholding and remittance
taxes.
F-35
<PAGE>
================================================================================
Metromedia International Group, Inc.
================================================================================
The temporary differences and carryforwards which give rise to deferred tax
assets and (liabilities) at December 31, 1996 and 1995 are as follows (in
thousands):
1996 1995
--------- ---------
Net operating loss carryforward $ 237,713 $ 241,877
Deferred income 29,183 22,196
Investment credit carryforward 25,000 28,000
Allowance for doubtful accounts 7,471 4,395
Capital loss carryforward 6,292 3,850
Film costs (29,412) (1,832)
Shares payable 21,228 15,670
Reserves for self-insurance 10,415 10,970
Investment in equity investee 12,325 22,146
Purchase of safe harbor lease investment (7,903) (9,115)
Minimum tax credit (AMT) carryforward 8,805 8,805
Other reserves 11,790 6,331
Other (2,628) 7,654
--------- ---------
Subtotal before valuation allowance 330,279 360,947
Valuation allowance (330,279) (360,947)
--------- ---------
Deferred taxes $ -- $ --
========= =========
The net change in the total valuation allowance for calendar 1996, calendar 1995
and fiscal 1995 was an increase (decrease) of ($30.7) million, $119.9 million
and $51.3 million, respectively.
The Company's provision (benefit) for income taxes for calendar 1996, calendar
1995 and fiscal 1995, differs from the provision (benefit) that would have
resulted from applying the federal statutory rates during those periods to
income (loss) before the provision (benefit) for income taxes. The reasons for
these differences are explained in the following table (in thousands):
Calendar Calendar Fiscal
1996 1995 1995
---- ---- ----
Benefit based upon
federal statutory rate of 35% $(32,556) $(30,190) $(23,839)
State taxes, net of federal benefit 65 109 65
Foreign taxes in excess
of federal credit 1,314 600 1,200
Amortization of goodwill 2,510 17 --
Non-deductible direct expenses of
chapter 11 filing 76 448 214
Foreign operations 1,548 656 --
Current year operating loss
not benefited 17,632 26,725 22,832
Equity in losses of
Joint Ventures 10,690 2,376 790
Other, net 135 26 38
-------- -------- --------
Provision for income taxes $ 1,414 $ 767 $ 1,300
======== ======== ========
F-36
<PAGE>
================================================================================
Metromedia International Group, Inc.
================================================================================
At December 31, 1996 the Company had available net operating loss carryforwards,
capital loss carryforwards, unused minimum tax credits and unused investment tax
credits of approximately $615.0 million, $18.0 million, $9.0 million and $25.0
million, respectively, which can reduce future federal income taxes. These
carryforwards and credits began to expire in 1996. The minimum tax credit may be
carried forward indefinitely to offset regular tax in certain circumstances.
The use by the Company of the Pre-November 1, 1995 net operating loss
carryforwards reported by Orion, Actava, MITI and Sterling ("the Pre-November 1
Losses") (and the subsidiaries included in their respective affiliated groups of
corporations which filed consolidated Federal income tax returns with Orion,
Actava, MITI or Sterling as the parent corporations) are subject to certain
limitations as a result of the November 1 Merger, respectively.
Under Section 382 of the Internal Revenue Code, annual limitations generally
apply to the use of the Pre-November 1 Losses by the Company. The annual
limitations on the use of the Pre-November 1 Losses of Orion, Actava, MITI or
Sterling by the Company approximate $11.9 million, $18.3 million, $10.0
million, $510,000 per year, respectively. To the extent Pre-November 1 Losses
equal to the annual limitation with respect to Orion, Actava, MITI or Sterling
are not used in any year, the unused amount is generally available to be carried
forward and used to increase the applicable limitation in the succeeding year.
The use of Pre-November 1 Losses of Orion, MITI and Sterling is also separately
limited by the income and gains recognized by the corporations that were members
of the Orion, MITI and Sterling affiliated groups, respectively. Under proposed
Treasury regulations, such Pre-November 1 Losses of any such former members of
any such group, are usable on an aggregate basis to the extent of the income and
gains of such former members of such group.
As a result of the November 1 Merger, the Company succeeded to approximately
$92.2 million of Pre-November 1 Losses of the Actava Group. SFAS 109 requires
assets acquired and liabilities assumed to be recorded at their "gross" fair
value. Differences between the assigned values and tax bases of assets acquired
and liabilities assumed in purchase business combinations are temporary
differences under the provisions of SFAS 109. However, since all of the Actava
intangibles have been eliminated, when the Pre-November 1 Losses are utilized
they will reduce income tax expense.
F-37
<PAGE>
================================================================================
Metromedia International Group, Inc.
================================================================================
================================================================================
12. Employee Benefit Plans
================================================================================
Orion, MITI and Snapper have defined contribution plans which provide for
discretionary annual contributions covering substantially all of their
employees. Participating employees can defer receipt of up to 15% of their
compensation, subject to certain limitations. Orion matches 50% of amounts
contributed up to $1,000 per participant per plan year and may make
discretionary contributions on an annual basis. MITI has the discretion to match
amounts contributed by plan participants up to 3% of their compensation.
Snapper's employer match is determined each year, and was 50% of the first 6% of
compensation contributed by each participant for the period November 1, 1996 to
December 31, 1996. The contribution expense for calendar 1996, calendar 1995 and
fiscal 1995 was $375,000, $124,000 and $107,000, respectively.
In addition, Snapper has a profit sharing plan covering substantially all
non-bargaining unit employees. Contributions are made at the discretion of
management. No profit sharing amounts were approved by management in 1996.
Prior to the November 1 Merger, Actava had a noncontributory defined benefit
plan which was "qualified" under Federal tax law and covered substantially all
of Actava's employees. In addition, Actava had a "nonqualified" supplemental
retirement plan which provided for the payment of benefits to certain employees
in excess of those payable by the qualified plans. Following the November 1
Merger (see note 2), the Company froze the Actava noncontributory defined
benefit plan and the Actava nonqualified supplemental retirement plan effective
as of December 31, 1995. Employees no longer accumulate benefits under these
plans.
In connection with the November 1 Merger, the projected benefit obligation and
fair value of plan assets were remeasured considering the Company's freezing of
the plan. The excess of the projected benefit obligations over the fair value of
plan assets in the amount of $4.9 million was recorded in the allocation of
purchase price. The recognition of the net pension liability in the allocation
of the purchase price eliminated any previously existing unrecognized gain or
loss, prior service cost, and transition asset or obligation related to the
acquired enterprise's pension plan.
Snapper sponsors a defined benefit pension plan which covers substantially all
bargaining unit employees. Benefits are based upon the employee's years of
service multiplied by fixed dollar amounts. Snapper's funding policy is to
contribute annually such amounts as are necessary to provide assets sufficient
to meet the benefits to be paid to the plan's members and keep the plan
actuarially sound.
F-38
<PAGE>
================================================================================
Metromedia International Group, Inc.
================================================================================
In addition, Snapper provides a group medical plan and life insurance coverage
for certain employees subsequent to retirement. The plans have been funded on a
pay-as-you-go (cash) basis. The plans are contributory, with retiree
contributions adjusted annually, and contain other cost-sharing features such as
deductibles, coinsurance, and life-time maximums. The plan accounting
anticipates future cost-sharing changes that are consistent with Snapper's
expressed intent to increase the retiree contribution rate annually for the
expected medical trend rate for that year. The coordination of benefits with
Medicare uses a supplemental, or exclusion of benefits, approach. Snapper funds
the excess of the cost of benefits under the plans over the participants'
contributions as the costs are incurred.
The net periodic pension cost and net periodic post-retirement benefit cost
(income) for the year ended December 31, 1996 amounts to $128,000 and
($104,000), respectively. Snapper's defined benefit plan's projected benefit
obligation and fair value of plan assets at December 31 were $5.4 million and
$6.7 million, respectively. Accrued post-retirement benefit cost at December 31,
1996 was $3.1 million. Disclosures regarding the funded status of the plan have
not been included herein because they are not material to the Company's
consolidated financial statements at December 31, 1996.
F-39
<PAGE>
================================================================================
Metromedia International Group, Inc.
================================================================================
================================================================================
13. Business Segment Data
================================================================================
The business activities of the Company constitute three business segments (see
note 1 Description of the Business) and are set forth in the following table (in
thousands):
BUSINESS SEGMENT DATA
Calendar Calendar Fiscal
1996 1995 1995
---- ---- ----
Entertainment Group:
Net revenues $ 165,164 $ 133,812 $ 191,244
Direct operating costs (164,016) (157,000) (210,365)
Depreciation and amortization (5,555) (694) (767)
--------- --------- ---------
Loss from operations (4,407) (23,882) (19,888)
========= ========= =========
Assets at year end 490,288 283,093 351,588
Capital expenditures 3,648 1,151 1,198
========= ========= =========
Communications Group:
Net revenues 14,047 5,158 3,545
Direct operating costs (39,021) (26,803) (19,067)
Depreciation and amortization (6,403) (2,101) (1,149)
--------- --------- ---------
Loss from operations (31,377) (23,746) (16,671)
========= ========= =========
Equity in losses of Joint Ventures (11,079) (7,981) (2,257)
========= ========= =========
Assets at year end 195,005 161,089 40,282
Capital expenditures 3,829 2,324 3,610
========= ========= =========
Snapper (1):
Net revenues 22,544 -- --
Direct operating costs (30,653) -- --
Depreciation and amortization (1,256) -- --
--------- --------- ---------
Loss from operations (9,365) -- --
========= ========= =========
Assets at year end 140,327 -- --
Capital expenditures 1,252 -- --
========= ========= =========
Headquarters and Eliminations:
Net revenues -- -- --
Direct operating costs (9,355) (1,109) --
Depreciation and amortization (18) -- --
--------- --------- ---------
Income from operations (9,373) (1,109) --
========= ========= =========
Assets at year end including
discounted operations and
eliminations 119,120 155,456 --
========= ========= =========
Consolidated - Continuing Operations:
Net revenues 201,755 138,970 194,789
Direct operating costs (243,045) (184,912) (229,432)
Depreciation and amortization (13,232) (2,795) (1,916)
--------- --------- ---------
Loss from operations (54,522) (48,737) (36,559)
========= ========= =========
Equity in losses of joint ventures (11,079) (7,981) (2,257)
========= ========= =========
Assets at year end 944,740 599,638 391,870
Capital expenditures $ 8,729 $ 3,475 $ 4,808
========= ========= =========
(1) Represents operations from November 1, 1996 to December 31, 1996.
F-40
<PAGE>
================================================================================
Metromedia International Group, Inc.
================================================================================
The sources of the Company's revenues from continuing operations by market for
each of the last three fiscal years are set forth in "Management's Discussion
and Analysis of Financial Condition and Results of Operations". The Company
derives significant revenues from the foreign distribution of its theatrical
motion pictures and television programming. The following table sets forth the
Entertainment Group's export sales from continuing operations by major
geographic area for each of the last three fiscal years (in thousands):
Calendar Calendar Fiscal
1996 1995 1995
---- ---- ----
Canada $ 1,995 $ 4,150 $ 3,862
Europe 32,699 32,126 36,532
Mexico and South America 3,151 2,454 4,586
Asia and Australia 8,669 8,841 13,820
-------- -------- --------
$ 46,515 $ 47,571 $ 58,800
======== ======== ========
Revenues and assets of the Communications Group's foreign operations are
disclosed in note 8.
Showtime Networks, Inc. ("Showtime") and Lifetime Television ("Lifetime") have
been significant customers of the Company. During calendar 1996, calendar 1995
and fiscal 1995, the Company recorded approximately $800,000, $15.4 million and
$45.5 million, respectively, of revenues under its pay cable agreement with
Showtime, and during calendar 1996, calendar 1995 and fiscal 1995, the Company
recorded approximately $1.9 million, $15.0 million and $12.5 million of
revenues, respectively, under its basic cable agreement with Lifetime.
================================================================================
14. Commitments and Contingent Liabilities
================================================================================
Commitments
The Company is obligated under various operating and capital leases. Total rent
expense amounted to $5.7 million, $2.6 million and $2.3 million in calendar
1996, calendar 1995, and fiscal 1995, respectively. Plant, property and
equipment included capital leases of $7.2 million and related accumulated
amortization of $1.4 million at December 31, 1996.
Minimum rental commitments under noncancellable leases are set forth in the
following table (in thousands):
Year Capital Leases Operating Leases
---- -------------- ----------------
1997 $ 1,049 $ 8,731
1998 1,049 7,314
1999 1,515 5,598
2000 833 4,866
2001 538 4,757
Thereafter 8,761 24,187
-------- --------
Total 13,745 $ 55,453
========
Less: amount representing interest (7,560)
Present value of future minimum lease
payments $ 6,185
========
F-41
<PAGE>
================================================================================
Metromedia International Group, Inc.
================================================================================
The Company and certain of its subsidiaries have employment contracts with
various officers, with remaining terms of up to five years, at amounts
approximating their current levels of compensation. The Company's remaining
aggregate commitment at December 31, 1996 under such contracts is approximately
$30.3 million.
In addition, the Company and certain of its subsidiaries have postemployment
contracts with various officers. The Company's remaining aggregate commitment at
December 31, 1996 under such contracts is approximately $1.1 million.
The Company pays a management fee to Metromedia for certain general and
administrative services provided by Metromedia personnel. Such management fee
amounted to $1.5 million in calendar 1996 and $250,000 for the period November
1, 1995 to December 31, 1995. The management fee commitment for the year ended
December 31, 1997 is $3.3 million.
Snapper has entered into various long-term manufacturing and purchase agreements
with certain vendors for the purchase of manufactured products and raw
materials. As of December 31, 1996, noncancelable commitments under these
agreements amounted to approximately $25.0 million.
Snapper has an agreement with a financial institution which makes available
floor plan financing to distributors and dealers of Snapper products. This
agreement provides financing for dealer inventories and accelerates Snapper's
cash flow. Under the terms of the agreement, a default in payment by a dealer is
nonrecourse to both the distributor and to Snapper. However, the distributor is
obligated to repurchase any equipment recovered from the dealer and Snapper is
obligated to repurchase the recovered equipment if the distributor defaults. At
December 31, 1996, there was approximately, $35.3 million outstanding under this
floor plan financing arrangement.
Contingencies
The licenses pursuant to which the Communications Group's businesses operate are
issued for limited periods. Certain of these licenses expire over the next
several years. Two of the licenses held by the Communications Group have
recently expired, although the Communications Group has been permitted to
continue operations while the reissuance is pending. The Communications Group
has applied for renewals and expects new licenses to be issued. Six other
licenses held or used by the Communications Group will expire in 1997. While
there can be no assurance on this matter, based on past experience, the
Communications Group expects that all of these licenses will be renewed.
At December 31, 1996 the Company had $17.8 million of outstanding letters of
credit which principally collaterlizes certain liabilities under the Company's
self-insurance program.
F-42
<PAGE>
================================================================================
Metromedia International Group, Inc.
================================================================================
The Company may also be materially and adversely affected by laws restricting
foreign investment in the field of communications. Certain countries have
extensive restrictions on foreign investment in the communications field and the
Communications Group is attempting to structure its prospective projects in
order to comply with such laws. However, there can be no assurance that such
legal and regulatory restrictions will not increase in the future or, as
currently promulgated, will not be interpreted in a manner giving rise to
tighter restrictions, and thus may have a material adverse effect on the
Company's prospective projects in the country. The Russian Federation has
periodically proposed legislation that would limit the ownership percentage that
foreign companies can have in communications businesses. While such proposed
legislation has not been made into law, it is possible that such legislation
could be enacted in Russia and/or that other countries in Eastern Europe and the
republics of the former Soviet Union may enact similar legislation which could
have a material adverse effect on the business, operations, financial condition
or prospects of the Company. Such legislation could be similar to United States
federal law which limits the foreign ownership in entities owning broadcasting
licenses. Similarly, PRC law and regulation restrict and prohibit foreign
companies or joint ventures in which they participate from providing telephony
service to customers in the PRC and generally limit the role that foreign
companies or their joint ventures may play in the telecommunications industry.
As a result, a Communications Group affiliate that has invested in the PRC must
structure its transactions as a provider of telephony equipment and technical
support services as opposed to a direct provider of such services. In addition,
there is no way of predicting whether additional foreign ownership limitations
will be enacted in any of the Communications Group's markets, or whether any
such law, if enacted, will force the Communications Group to reduce or
restructure its ownership interest in any of the ventures in which the
Communications Group currently has an ownership interest. If foreign ownership
limitations are enacted in any of the Communications Group's markets and the
Communications Group is required to reduce or restructure its ownership
interests in any ventures, it is unclear how such reduction or restructuring
would be implemented, or what impact such reduction or restructuring would have
on the Communications Group.
The Republic of Latvia passed legislation in September, 1995 which purports to
limit to 20% the interest which a foreign person is permitted to own in entities
engaged in certain communications businesses such as radio, cable television and
other systems of broadcasting. This legislation will require the Communications
Group to reduce to 20% its existing ownership interest in Joint Ventures which
operate a wireless cable television system and an FM radio station in Riga,
Latvia. Management believes that the ultimate outcome of this matter will not
have a material adverse impact on the Company's financial position and results
of operations.
Acquisition Commitments
During December 1995, the Communications Group and the shareholders of AS Trio
LSL, executed a letter of intent together with a loan agreement. The letter of
intent states that the Communications Group will loan up to $1.0 million to the
shareholders and negotiate for the purchase of AS Trio LSL. Upon closing of the
purchase agreement, the principal and accrued interest under the loan will be
applied to the purchase price.
F-43
<PAGE>
================================================================================
Metromedia International Group, Inc.
================================================================================
In connection with the Communications Group's activities directed at entering
into joint venture agreements in the Pacific Rim, MAC has entered into certain
agreements with Communications Technology International, Inc., ("CTI"), owner of
7% of the equity of MAC. Under these agreements, MAC has agreed to loan up to
$2.5 million to CTI which would be used to fund certain of CTI's operations in
the Pacific Rim, and permit CTI to purchase up to an additional 7% of the equity
of MAC provided that CTI is successful in obtaining rights to operate certain
services, as defined, and MAC is provided with the right to participate in the
operation of such services. MAC has also agreed to loan the funds required to
purchase the equity interests in MAC to CTI. No amounts have been loaned under
this provision as of December 31, 1996.
Litigation
Fuqua Industries, Inc. Shareholder Litigation
Between February 25, 1991 and March 4, 1991, three lawsuits were filed against
the Company (formerly named Fuqua Industries, Inc.) in the Delaware Chancery
Court. On May 1, 1991, these three lawsuits were consolidated by the Delaware
Chancery Court in re Fuqua Industries, Inc. Shareholders Litigation, Civil
Action No. 11974. The named defendants are certain current and former members of
the Company's Board of Directors and certain former members of the Board of
Directors of Intermark, Inc. ("Intermark"). Intermark is a predecessor to Triton
Group Ltd., which at one time owned approximately 25% of the outstanding shares
of the Company's Common Stock. The Company was named as a nominal defendant in
this lawsuit. The action was brought derivatively in the right of and on behalf
of the Company and purportedly was filed as a class action lawsuit on behalf of
all holders of the Company's Common Stock other than the defendants. The
complaint alleges, among other things, a long-standing pattern and practice by
the defendants of misusing and abusing their power as directors and insiders of
the Company by manipulating the affairs of the Company to the detriment of the
Company's past and present stockholders. The complaint seeks (i) monetary
damages from the director defendants, including a joint and several judgment for
$15.7 million for alleged improper profits obtained by Mr. J.B. Fuqua in
connection with the sale of his shares in the Company to Intermark; (ii)
injunctive relief against the Company, Intermark and its former directors,
including a prohibition against approving or entering into any business
combination with Intermark without specified approval; and (iii) costs of suit
and attorneys' fees. On December 28, 1995, the plaintiffs filed a consolidated
second amended derivative and class action complaint, purporting to assert
additional facts in support of their claim regarding an alleged plan, but
deleting their prior request for injunctive relief. On January 31, 1996, all
defendants moved to dismiss the second amended complaint and filed a brief in
support of that motion. A hearing regarding the motion to dismiss was held on
November 6, 1996; the decision relating to the motion is pending.
Michael Shores v. Samuel Goldwyn Company
On May 20, 1996 a purported class action lawsuit against Goldwyn and its
directors was filed in the Superior Court of the State of California for the
County of Los Angeles in Michael Shores v. Samuel Goldwyn Company, et. al., case
no. BC 150360. In the complaint, the plaintiff alleged that Goldwyn's Board of
Directors breached its fiduciary duties to the stockholders of Goldwyn by
agreeing to sell Goldwyn to the Company at a premium, yet providing Mr. Samuel
Goldwyn, Jr., the Samuel Goldwyn Family Trust and Mr. Meyer Gottlieb with
additional consideration, and sought to enjoin consummation of the Goldwyn
Merger. The Company believes that the suit is without merit and intends to
vigorously defend such action.
The Company and its subsidiaries are contingently liable with respect to various
matters, including litigation in the ordinary course of business and otherwise.
Some of the pleadings in the various litigation matters contain prayers for
material awards. Based upon management's review of the underlying facts and
circumstances and consultation with counsel, management believes such matters
will not result in significant additional liabilities which would have a
material adverse effect upon the consolidated financial position or results of
operations of the Company.
F-44
<PAGE>
================================================================================
Metromedia International Group, Inc.
================================================================================
Environmental Protection
Snapper's manufacturing plant is subject to federal, state and local
environmental laws and regulations. Compliance with such laws and regulations
has not, and is not expected to, materially affect Snapper's competitive
position. Snapper's capital expenditures for environmental control facilities,
its incremental operating costs in connection therewith and Snapper's
environmental compliance costs were not material in 1996 and are not expected to
be material in future years.
The Company has agreed to indemnify the purchaser of a former subsidiary of the
Company for certain obligations, liabilities and costs incurred by such
subsidiary arising out of environmental conditions existing on or prior to the
date on which the subsidiary was sold by the Company. The Company sold the
subsidiary in 1987. Since that time, the Company has been involved in various
environmental matters involving property owned and operated by the subsidiary,
including clean-up efforts at landfill sites and the remediation of groundwater
contamination. The costs incurred by the Company with respect to these matters
have not been material during any year through and including the fiscal year
ended December 31, 1996. As of December 31, 1996, the Company had a remaining
reserve of approximately $1.3 million to cover its obligations of its former
subsidiary. During 1995, the Company was notified by certain potentially
responsible parties at a superfund site in Michigan that the former subsidiary
may be a potentially responsible party at such site. The former subsidiary's
liability, if any, has not been determined but the Company believes that such
liability will not be material.
The Company, through a wholly-owned subsidiary, owns approximately 17 acres of
real property located in Opelika, Alabama (the "Opelika Property"). The Opelika
Property was formerly owned by Diversified Products Corporation, a former
subsidiary of the Company ("DP"), and was transferred to a wholly-owned
subsidiary of the Company in connection with the sale of the Company's former
sporting goods business to RDM Sports Group, Inc. DP previously used the Opelika
Property as a storage area for stockpiling cement, sand, and mill scale
materials needed for or resulting from the manufacture of exercise weights. In
June 1994, DP discontinued the manufacture of exercise weights and no longer
needed to use the Opelika Property as a storage area. In connection with the
sale to RDM, RDM and the Company agreed that the Company, through a wholly-owned
subsidiary, would acquire the Opelika Property, together with any related
permits, licenses, and other authorizations under federal, state and local laws
governing pollution or protection of the environment. In connection with the
closing of the sale, the Company and RDM entered into an Environmental Indemnity
Agreement (the "Indemnity Agreement") under which the Company agreed to
indemnify RDM for costs and liabilities resulting from the presence on or
migration of regulated materials from the Opelika Property. The Company's
obligations under the Indemnity Agreement with respect to the Opelika Property
are not limited. The Indemnity Agreement does not cover environmental
liabilities relating to any property now or previously owned by DP except for
the Opelika Property.
The Company believes that the reserves of approximately $1.8 million previously
established by the Company for the Opelika Property will be adequate to cover
the cost of the remediation plan that has been developed.
F-45
<PAGE>
================================================================================
Metromedia International Group, Inc.
================================================================================
================================================================================
15. Selected Quarterly Financial Data (unaudited)
================================================================================
Selected financial information for the quarterly periods in calendar 1996 and
1995 is presented below (in thousands, except per-share amounts):
First Quarter of Second Quarter of
- --------------------------------------------------------------------------------
1996 1995 1996 1995
- --------------------------------------------------------------------------------
Revenues $ 30,808 $ 37,678 $ 37,988 $ 40,755
Operating loss (10,124) (11,459)(a) (10,154) (7,628)
Interest expense, net 7,034 8,119 6,520 7,353
Equity interest in losses of Joint
Ventures (1,783) (588) (1,985) (1,633)
Net loss (19,141) (20,366) (18,850) (16,714)
Primary loss per common share:
Net loss $ (0.45) $ (0.97) $ (0.44) $ (0.80)
<TABLE>
<CAPTION>
=========================================================================================
Third Quarter of Fourth Quarter of
- -----------------------------------------------------------------------------------------
1996(b) 1995 1996(e) 1995
- -----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Revenues $ 44,379 $ 35,468 $ 88,580 $ 25,069
Operating loss (12,573) (7,004) (21,671) (22,646)(f)
Interest expense, net 6,862 7,574 7,002 6,493
Equity interest in losses of Joint
Ventures (2,292) (1,568) (5,019) (4,192)
Loss before discontinued
operations and extraordinary item (22,050) (16,146) (34,392) (33,798)
Loss on disposal of discontinued
operations (16,305)(c) -- -- (293,570)(g)
Loss on early extinguishment of debt (4,505)(d) -- -- (32,382)(h)
Net loss (42,860) (16,146) (34,392) (359,750)
- -----------------------------------------------------------------------------------------
Primary loss per common share:
Continuing operations $ (0.34) $ (0.77) $ (0.52) $ (0.96)
Discontinued operations $ (0.25) $ -- $ -- $ (8.30)
Extraordinary item $ (0.07) $ -- $ -- $ (0.92)
Net loss $ (0.66) $ (0.77) $ (0.52) $ (10.18)
=========================================================================================
</TABLE>
(a) Includes $5.4 million of writedowns to previously released film product.
(b) Reflect the acquisition of Goldwyn and MPCA as of July 2, 1996.
(c) Reflects the writedown of the Company's investment in RDM.
(d) In connection with the refinancing of the Orion Credit Facility, the
Company expensed the deferred financing costs of $4.5 million.
(e) Reflects the consolidation of Snapper as of November 1, 1996.
(f) Includes writedowns to estimated realizable value of $3.0 million for
unreleased theatrical product and $4.8 million for writedowns of previously
released product.
(g) Represents the excess of the allocated purchase price attributed to Snapper
in the November 1 Merger, over the estimated cash flows from the operations
and the anticipated sale of Snapper.
(h) Orion removed certain unamortized discounts associated with such
obligations from the accounts and recognized an extraordinary loss on the
extinguishment of debt.
The quarterly financial information for calendar 1995 presented above differs
from amounts previously reported in Orion's quarterly financial statements due
to the restatement of historical financial statements to account for the common
control merger with MITI (see note 2). In addition, Orion's previously filed
fiscal 1996 quarters have been restated and presented on a calendar year basis
in calendar 1995.
================================================================================
F-46
<PAGE>
================================================================================
Metromedia International Group, Inc.
================================================================================
SCHEDULE I - CONDENSED FINANCIAL INFORMATION OF REGISTRANT
METROMEDIA INTERNATIONAL GROUP, INC.,
Statements of Operations
Year ended December 31, 1996
and the period ended December 31, 1995
(in thousands, except per share amounts)
1996 1995
--------- ---------
Revenues
Cost and Expenses: $ -- $ --
Selling, general and administrative 9,355 1,109
Depreciation and amortization 18 --
--------- ---------
Operating loss (9,373) (1,109)
Interest expense, net 13,313 2,208
Equity in losses of subsidiaries (71,747) (83,707)
--------- ---------
Loss from continuing operations
before discontinued operations (94,433) (87,024)
Discontinued operations:
Loss on disposal of assets held for sale (16,305) (293,570)
Extraordinary item:
Early extinguishment of debt (4,505) (32,382)
--------- ---------
Net loss $(115,243) $(412,976)
========= =========
Primary loss per common share:
Continuing operations $ (1.74) $ (3.54)
========= =========
Discontinued operations $ (0.30) $ (11.97)
========= =========
Extraordinary item $ (0.08) $ (1.32)
========= =========
Net loss $ (2.12) $ (16.83)
========= =========
The accompanying notes are an integral part of the
condensed financial information.
See notes to Condensed Financial Information on page S-4.
S-1
<PAGE>
================================================================================
Metromedia International Group, Inc.
================================================================================
SCHEDULE I - CONDENSED FINANCIAL INFORMATION OF REGISTRANT - continued
METROMEDIA INTERNATIONAL GROUP, INC.
Balance Sheets
December 31, 1996 and 1995
(in thousands)
1996 1995
--------- ---------
Current Assets:
Cash and cash equivalents $ 82,663 $ 16,482
Short-term investments -- 5,366
Other assets 2,765 3,010
--------- ---------
Total current assets 85,428 24,858
Investment in RDM Sports Group, Inc. 31,150 47,455
Investment in Snapper, Inc. -- 79,200
Investment in subsidiaries 114,442 80,189
Intercompany accounts 188,065 86,102
Other assets 2,542 4,525
--------- ---------
Total assets $ 421,627 $ 322,329
========= =========
Current Liabilities:
Accounts payable $ 2,453 $ 943
Accrued expenses 57,581 66,750
Current portion of long term debt 17,103 32,682
--------- ---------
Total current liabilities 77,137 100,375
Long term debt 124,418 137,734
Other long term liabilities 390 382
--------- ---------
Total liabilities 201,945 238,491
Stockholders' equity
Common stock 66,153 42,614
Paid-in surplus 959,558 728,747
Other (2,680) 583
Accumulated deficit (803,349) (688,106)
--------- ---------
Total stockholders' equity 219,682 83,838
--------- ---------
Total liabilities and stockholder equity $ 421,627 $ 322,329
========= =========
The accompanying notes are an integral part of the
condensed financial information.
See Notes to Condensed Financial Information on page S-4
S-2
<PAGE>
================================================================================
Metromedia International Group, Inc.
================================================================================
SCHEDULE I - CONDENSED FINANCIAL INFORMATION OF REGISTRANT - continued
METROMEDIA INTERNATIONAL GROUP, INC.
Statements of Cash Flows
Year ended December 31, 1996
and the period ended December 31, 1995
(in thousands)
<TABLE>
<CAPTION>
1996 1995
--------- ---------
<S> <C> <C>
Net loss $(115,243) $(412,976)
Adjustments to reconcile net loss to
net cash used in operating activities:
Loss on discontinued operations 16,305 293,570
Equity in losses of subsidiaries 76,252 116,089
Amortization of debt discounts and costs 2,607 434
Change in cumulative translation adjustment of subsidiaries (618) 399
Change in assets and liabilities:
(Increase) decrease in other current assets 245 (5,567)
Decrease in other assets 1,983 5,035
Increase (decrease) in accounts payable, accrued
expenses and other liabilities (7,651) 1,769
--------- ---------
Cash used in operating activities (26,120) (1,247)
--------- ---------
Investing activities:
Proceeds from notes receivable -- 45,320
Proceeds from sale of short-term investments 5,366 --
(Investment in) distribution from subsidiaries 5,400 (4,230)
Cash acquired, net in merger -- 66,702
Due from subsidiary (73,659) (72,877)
--------- ---------
Cash provided by (used in) investing activities (62,893) 34,915
--------- ---------
Financing activities:
Proceeds from (payment of) revolving term loan (28,754) 28,754
Payments on notes and subordinated debt (7,628) (48,222)
Proceeds from issuance of stock 191,576 2,282
--------- ---------
Cash provided by (used in) financing activities 155,194 (17,186)
--------- ---------
Net increase in cash and cash equivalents 66,181 16,482
Cash and cash equivalents at beginning of year 16,482 --
--------- ---------
Cash and cash equivalents at end of year $ 82,663 $ 16,482
========= =========
</TABLE>
The accompanying notes are an integral part of the
condensed financial information.
See Notes to Condensed Financial Information on page S-4
S-3
<PAGE>
================================================================================
Metromedia International Group, Inc.
================================================================================
SCHEDULE I - CONDENSED FINANCIAL INFORMATION OF REGISTRANT
NOTES TO CONDENSED FINANCIAL INFORMATION
December 31, 1996 and 1995
(A) Prior to the November 1 Merger discussed in note 2 to the consolidated
financial statements, there was no parent company. The accompanying parent
company financial statements reflect only the operations of MMG for the
year ended December 31, 1996 and from November 1, 1995 to December 31, 1995
and the equity in losses of subsidiaries for the years ended December 31,
1996 and 1995. The calendar 1995, prior to the November 1 Merger, and
fiscal 1995 amounts shown in the historical consolidated financial
statements represent the combined financial statements of Orion and MITI
prior to the November 1 Merger and formation of MMG.
(B) Principal repayments of the Registrant's borrowings under debt agreements
and other debt outstanding at December 31, 1996 are expected to be required
no earlier than as follows (in thousands):
1997 17,065
1998 60,336
1999 4,429
2000 --
Thereafter 75,000
For additional information regarding the Registrant's borrowings under debt
agreements and other debt, see note 9 to the consolidated financial
statements.
S-4
<PAGE>
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
METROMEDIA INTERNATIONAL GROUP, INC.
Allowances for doubtful accounts, etc. (deducted from current receivables)
(in thousands)
<TABLE>
<CAPTION>
Balance at Charged Balance at
Beginning to Costs Other Deductions/ End
of Period and Expenses Charges Write-offs of Period
--------- ------------ ------- ---------- ---------
<S> <C> <C> <C> <C> <C>
Year ended December 31, 1996 $ 11,913 $ 1,378 $ -- $ -- $ 13,291
========= ======== ======= ======== ========
Year ended December 31, 1995 $ 14,223 $ 90 $ -- $ (2,400) $ 11,913
========= ======== ======= ======== ========
Year ended February 28, 1995 $ 14,800 $ 2,064 $ 159 $ (2,800) $ 14,223
========= ======== ======= ======== ========
</TABLE>
S-5
===============================================================================
CREDIT AGREEMENT
Dated November 26, 1996
Between
SNAPPER, INC.
and
AMSOUTH BANK OF ALABAMA
Relating to a
$55,000,000 Credit Facility
===============================================================================
<PAGE>
TABLE OF CONTENTS
PAGE
ARTICLE 1
RULES OF CONSTRUCTION AND DEFINITIONS
SECTION 1.1 GENERAL RULES OF CONSTRUCTION.............................. 1
SECTION 1.2 Definitions................................................ 2
ARTICLE 2
CREDIT TO BE EXTENDED
UNDER THIS AGREEMENT
SECTION 2.1 Loan....................................................... 13
SECTION 2.2 Advances................................................... 13
SECTION 2.3 Payments................................................... 14
SECTION 2.4 Prepayment................................................. 14
SECTION 2.5 Reduction or Cancellation of Maximum Credit Amount. ...... 14
SECTION 2.6 Fees....................................................... 15
SECTION 2.7 Extension of Termination Date.............................. 15
SECTION 2.8 Place and Time of Payments................................. 15
SECTION 2.9 Security................................................... 16
SECTION 2.10 GUARANTY AGREEMENT......................................... 16
SECTION 2.12 Subordination Agreement.................................... 16
SECTION 2.13 Lock Box Agreement......................................... 17
ARTICLE 3
INTEREST
SECTION 3.1 Applicable Interest Rates.................................. 18
SECTION 3.2 Procedure for Exercising Interest Rate Options............. 18
SECTION 3.3 FLOATING RATE.............................................. 19
SECTION 3.4 LIBOR-Based Rate........................................... 19
SECTION 3.5 Termination of LIBOR-Based Rate; Increase in
LIBOR-Based Rate; Reduction of Return...................... 19
SECTION 3.6 Compensation............................................... 21
ARTICLE 4
REPRESENTATIONS AND WARRANTIES
SECTION 4.1 FINANCIAL STATEMENTS....................................... 21
SECTION 4.2 NON-EXISTENCE OF DEFAULTS.................................. 21
SECTION 4.3 LITIGATION................................................. 22
SECTION 4.4 MATERIAL ADVERSE CHANGES................................... 22
i
<PAGE>
SECTION 4.5 TITLE TO PROPERTY.......................................... 22
SECTION 4.6 CORPORATE STATUS........................................... 22
SECTION 4.7 Corporate Power and Authority.............................. 22
SECTION 4.8 PLACE OF BUSINESS.......................................... 22
SECTION 4.9 PLACE WHERE RECORDS MAINTAINED............................. 22
SECTION 4.10 Validity, Binding Nature and
Enforceability of the Credit Documents................... 23
SECTION 4.11 TAXES...................................................... 23
SECTION 4.12 Compliance with Laws....................................... 23
SECTION 4.13 Consents................................................... 23
SECTION 4.14 Purpose.................................................... 23
SECTION 4.15 Condition of the Business.................................. 23
SECTION 4.16 Labor Contracts............................................ 23
SECTION 4.17 ERISA...................................................... 23
SECTION 4.18 Patents and Trademarks..................................... 23
SECTION 4.19 Location of Property....................................... 24
SECTION 4.20 Real Property.............................................. 24
SECTION 4.21 Capitalization............................................. 24
SECTION 4.22 Subsidiaries............................................... 24
SECTION 4.23 Federal Reserve Board Regulations.......................... 24
SECTION 4.24 Investment Company Act..................................... 24
ARTICLE 5
CONDITIONS OF LENDING
SECTION 5.1 Representations and Warranties............................. 24
SECTION 5.2 No Default................................................. 25
SECTION 5.3 Automatic Representations and Warranties................... 25
SECTION 5.4 Required Items............................................. 25
SECTION 5.5 SUPPORTING DOCUMENTS....................................... 25
ARTICLE 6
COVENANTS
SECTION 6.1 PAYMENT AND PERFORMANCE.................................... 27
SECTION 6.2 INSURANCE.................................................. 28
SECTION 6.3 COLLECTION OF RECEIVABLES; SALE OF INVENTORY............... 28
SECTION 6.4 NOTICE OF LITIGATION AND PROCEEDINGS....................... 28
SECTION 6.5 Payment of Indebtedness to Third Persons................... 29
SECTION 6.6 NOTICE OF CHANGE OF BUSINESS LOCATION...................... 29
SECTION 6.7 PENSION PLANS.............................................. 29
SECTION 6.8 PAYMENT OF TAXES........................................... 29
SECTION 6.9 Further Assurances......................................... 29
SECTION 6.10 Advancements............................................... 30
SECTION 6.11 Maintenance of Status...................................... 30
ii
<PAGE>
SECTION 6.12 Financial Statements; Reporting
Requirements; Certification as to Events of Defaults..... 30
SECTION 6.13 NOTICE OF EXISTENCE OF DEFAULT............................ 32
SECTION 6.14 Compliance with Laws...................................... 32
SECTION 6.15 MAINTENANCE OF PROPERTY................................... 32
SECTION 6.16 Property Records and Statements........................... 32
SECTION 6.17 INSPECTION OF PROPERTY.................................... 32
SECTION 6.18 CHANGE OF NAME, ETC....................................... 33
SECTION 6.19 SALE OR TRANSFER OF ASSETS................................ 33
SECTION 6.20 ACQUISITION OF STOCK OF THIRD PERSON...................... 33
SECTION 6.21 FALSE CERTIFICATES OR DOCUMENTS........................... 33
SECTION 6.22 TRANSACTIONS WITH AFFILIATES.............................. 33
SECTION 6.23 DIVIDENDS................................................. 33
SECTION 6.24 PAYMENTS ON MIG NOTE...................................... 33
SECTION 6.26 Use of Credit Proceeds.................................... 34
SECTION 6.27 INDEBTEDNESS.............................................. 34
SECTION 6.28 GUARANTIES................................................ 34
SECTION 6.29 INVESTMENTS, ETC.......................................... 34
SECTION 6.30 Sale of Receivables....................................... 34
SECTION 6.31 SOLVENCY.................................................. 34
SECTION 6.32 LEASE OBLIGATIONS......................................... 35
SECTION 6.33 Financial Covenants....................................... 35
SECTION 6.34 ERISA COMPLIANCE.......................................... 36
SECTION 6.35 FISCAL YEAR............................................... 36
ARTICLE 7
EVENTS OF DEFAULT
SECTION 7.1 Events of Default.......................................... 37
SECTION 7.2 Lender's Remedies on Default............................... 39
ARTICLE 8
MISCELLANEOUS
SECTION 8.1 Notices.................................................... 40
SECTION 8.2 Expenses................................................... 42
SECTION 8.3 Independent Obligations.................................... 42
SECTION 8.4 Successors and Assigns..................................... 42
SECTION 8.5 Governing Law.............................................. 42
SECTION 8.6 Date of Agreement.......................................... 43
SECTION 8.7 Separability Clause........................................ 43
SECTION 8.8 Counterparts............................................... 43
SECTION 8.9 No Oral Agreements......................................... 43
SECTION 8.10 Waiver and Election........................................ 43
SECTION 8.11 No Obligations of Lender; Indemnification.................. 43
SECTION 8.12 Set-off.................................................... 44
SECTION 8.13 Participation.............................................. 44
SECTION 8.14 Submission to Jurisdiction................................. 45
SECTION 8.15 Usury Laws................................................. 46
SECTION 8.16 Arbitration; Dispute Resolution;
Preservation of Foreclosure Remedies....................... 46
iii
<PAGE>
CREDIT AGREEMENT
THIS CREDIT AGREEMENT ("this Agreement") dated November 26, 1996 is between
SNAPPER, INC., a Georgia corporation (the "Borrower"), and AMSOUTH BANK OF
ALABAMA, an Alabama banking corporation (the "Lender").
RECITALS
Capitalized terms used in these Recitals have the meanings defined for them
above or in Section 1.2. The Borrower has requested that the Lender extend
Credit to the Borrower under this Agreement and the other Credit Documents as
described herein. To induce the Lender to extend Credit to the Borrower, the
Borrower has agreed to execute and deliver this Agreement to the Lender.
AGREEMENT
NOW, THEREFORE, in consideration of the foregoing Recitals, and to induce
the Lender to extend credit to the Borrower under this Agreement and the other
Credit Documents, the Borrower agrees with the Lender as follows:
ARTICLE 1
RULES OF CONSTRUCTION AND DEFINITIONS
SECTION 1.1 GENERAL RULES OF CONSTRUCTION. For the purposes of this
Agreement, except as otherwise expressly provided or unless the context
otherwise requires:
(a) Words of masculine, feminine or neuter gender include the correlative
words of other genders. Singular terms include the plural as well as the
singular, and vice versa.
(b) All references herein to designated "Articles," "Sections" and other
subdivisions or to lettered Schedules are to the designated Articles, Sections
and subdivisions hereof and the Schedules annexed hereto unless expressly
otherwise designated in context. All Article, Section, other subdivision and
Schedule captions herein are used for reference only and do not limit or
describe the scope or intent of, or in any way affect, this Agreement.
(c) The terms "include," "including," and similar terms shall be construed
as if followed by the phrase "without being limited to."
(d) The terms "herein," "hereof" and "hereunder" and other words of
similar import refer to this Agreement as a whole and not to any particular
Article, Section, other subdivision or Schedule.
<PAGE>
(e) All Recitals set forth in, and all Schedules to, this Agreement are
hereby incorporated in this Agreement by reference.
(f) No inference in favor of or against any party shall be drawn from the
fact that such party or such party's counsel has drafted any portion hereof.
(g) All references in this Agreement to a separate instrument are to such
separate instrument as the same may be amended or supplemented from time to time
pursuant to the applicable provisions thereof.
(h) If the Borrower now or hereafter has any Subsidiaries, all
computations required in connection with the covenants contained in Article 6
shall be made for the Borrower and its Subsidiaries on a combined or
consolidated basis, after elimination of intercompany items, and all financial
statements, reports and certificates required hereunder shall be prepared on the
same basis.
SECTION 1.2 DEFINITIONS. As used in this Agreement, capitalized terms
that are not otherwise defined herein have the meanings defined for them in the
Security Agreement and the following terms are defined as follows:
(a) ACTUAL/360 DAY BASIS means a method of computing interest and other
charges on the basis of an assumed year of 360 days for the actual number of
days elapsed, meaning that the interest accrued for each day will be computed by
multiplying the interest rate applicable on that day by the unpaid principal
balance on that day and dividing the result by 360.
(b) ADVANCE is defined in Section 2.1.
(c) AFFILIATE of any specified person means any other person directly or
indirectly controlling or controlled by or under direct or indirect common
control with such specified person. For purposes of this definition, "control"
when used with respect to any specified person means the power to direct the
management and policies of such person, directly or indirectly, whether through
the ownership of voting securities, by contract or otherwise; and the terms
"controlling" and "controlled" have meanings correlative to the foregoing.
(d) AGREEMENT means, on any date, this Credit Agreement, as originally in
effect on the Closing Date and as thereafter from time to time amended,
supplemented, restated or otherwise modified and in effect on such date.
(e) AUTHORIZED REPRESENTATIVE means the officer or officers of the
Borrower that are duly authorized to act for the Borrower in the specified
capacity under the Governing Documents of the Borrower or applicable law.
2
<PAGE>
(f) BORROWING BASE means, at any time, the sum of:
(a) eighty percent (80.0%) of the Net Outstanding Amount of Eligible
Accounts at such time consisting of Accounts arising from the sale of Inventory
to (1) Home Depot; (2) a dealer which has financed the purchase of such
Inventory by means of a floor planning arrangement; (3) a dealer pursuant to
Extended Terms, on any date when the due date with respect to such Account is
fewer than ninety-one (91) days after such date or on which such Account is past
due but not more than sixty (60) days past due; (4) a dealer pursuant to Thirty
Day Terms; or (5) a dealer or distributor located outside the United States
whose Inventory has been shipped on the security of a letter of credit
acceptable to the Lender;
(b) the lesser of (A) the applicable Distributor A/R Sublimit in
effect from time to time and (B) an amount equal to sixty percent (60.0%) of (1)
the Net Outstanding Amount of Eligible Accounts at such time consisting of
Accounts arising from the sale of Inventory to a distributor times (2) a
distributor cost conversion factor of 76.3%, or such other factor as the
Borrower and the Lender may mutually agree to from time to time;
(c) the lesser of (A) $10,000,000 and (B) fifty-five percent (55.0%)
of (1) the Net Outstanding Amount of Eligible Accounts at such time consisting
of Accounts arising from the sale of Inventory to a dealer pursuant to Extended
Terms, on any date when the due date with respect to such Account is more than
ninety (90) days after such date (provided, that with respect to Accounts
arising from sales to dealers of Inventory consisting of snow products, which
Inventory has not been sold by the dealer or financed by the dealer by means of
a floor planning arrangement, the Borrower shall be permitted to extend the due
date with respect to such Account from March 10 of any year to December 10 of
such year) times (2) a dealer cost conversion factor of 65.8%, or such other
factor as the Borrower and the Lender may mutually agree to from time to time;
and
(d) an amount equal to the lesser of
(1) $45,000,000, and
(2) the sum of
(A) sixty percent (60.0%) of Eligible Inventory at such
time consisting of finished goods that are ready for sale in the
ordinary course of business, identified by serial numbers and
located at the Borrower's factory in McDonough, Georgia or at the
Borrower's other distribution centers and commissioned
distributor warehouses,
(B) the lesser of (i) $5,000,000 and (ii) fifty percent
(50.0%) of Eligible Inventory at such time consisting of engines,
and
3
<PAGE>
(C) an amount equal to the lesser of (i) $5,000,000 and
(ii) thirty-five (35.0%) of Eligible Inventory at such time
consisting of parts and accessories other than engines; and
(e) an amount equal to seventy-five percent (75%) of the Eligible
Adjusted Equipment Value.
(g) BUSINESS means the manufacture, distribution and/or sale of lawn,
garden, snow removal or outdoor power equipment and other products by the
Borrower.
(h) BUSINESS DAY means (a) any day on which commercial banks located in
Birmingham, Alabama are generally open for business and (b) if such day relates
to the giving of notices or quotes in connection with a LIBOR Quote or to a
borrowing of, a payment or prepayment of principal of or interest on, or a
LIBOR-Based Rate Period for, a LIBOR-Based Rate Segment or a notice by the
Borrower with respect to any such borrowing, payment, prepayment or LIBOR-Based
Rate Period, any day on which dealings in Dollar deposits are carried out in the
London interbank market.
(i) CLOSING DATE means November 26, 1996.
(j) CODE means the Internal Revenue Code of 1986, as amended from time to
time.
(k) COMMITMENT AMOUNT means $55,000,000 (as the same may be reduced at any
time or from time to time pursuant to Section 2.5).
(l) CONTROLLED GROUP means all members of a controlled group of
corporations and all trade or business (whether or not incorporated) under
common control which, together with the Borrower, are treated as a single
employer under Section 414(c) of the Code.
(m) CREDIT means, individually and collectively, all loans, forbearances,
renewals, extensions, advances, disbursements and other extensions of credit now
or hereafter made by the Lender to or for the account of the Borrower under this
Agreement and the other Credit Documents, including the Loan.
(n) CREDIT DOCUMENTS means this Agreement and the documents described in
SCHEDULE A and all other documents now or hereafter executed or delivered in
connection with the transactions contemplated thereby.
(o) DEBT of any person means (1) all indebtedness, whether or not
represented by bonds, debentures, notes or other securities, for the repayment
of borrowed money, (2) all deferred indebtedness for the payment of the purchase
price of property or assets purchased, (3) all capitalized lease obligations,
(4) all indebtedness secured by any Lien on any property of such person, whether
or not indebtedness secured thereby has been assumed, (5) all obligations with
respect to any conditional sale contract or title retention agreement, (6) all
indebtedness and
4
<PAGE>
obligations arising under acceptance facilities or in connection with surety or
similar bonds, and the outstanding amount of all letters of credit issued for
the account of such person, and (7) all obligations with respect to interest
rate swap agreements.
(p) DEFAULT RATE means a rate of interest equal to two percentage points
(200 basis points) in excess of the Floating Rate in effect from time to time,
or the maximum rate permitted by law, whichever is less.
(q) DISTRIBUTOR A/R SUBLIMIT means the maximum amount of distributor
accounts receivable set forth below for the periods set forth below to be
included in the Borrowing Base:
DATE SUBLIMIT
---- --------
12/96 - 2/97 10,000,000
3/97 9,000,000
4/97 8,000,000
5/97 7,000,000
6/97 6,000,000
7/97 5,000,000
8/97 4,000,000
9/97 3,000,000
10/97 2,000,000
11/97 1,000,000
12/97 and thereafter 0
(r) DOLLAR and the symbol $ means dollars constituting legal tender for
the payment of public and private debts in the United States of America.
(s) ELIGIBLE ACCOUNT means only Accounts that are not more than 60 days
past due (provided, that with respect to Accounts arising from sales to dealers
of Inventory consisting of snow products, which Inventory has not been sold by
the dealer or financed by the dealer by means of a floor planning arrangement,
the Borrower shall be permitted to extend the due date with respect to such
Account from March 10 of any year to December 10 of such year), according to the
terms shown on the invoice (or the date of the invoice where terms are not
specifically stated). Without limiting the generality of the foregoing, the
Lender may exclude any Account from Eligible Accounts if:
5
<PAGE>
(1) the subject goods have been shipped or delivered to an Account
Debtor on a bill-and-hold, guaranteed sale, consignment, approval or
sale-or-return basis or subject to any other repurchase or return
agreement; or
(2) any material part of the subject goods has been returned,
rejected, lost or damaged; or
(3) the Account Debtor is located outside the United States, and the
subject goods have not been shipped on the security of a banker's
acceptance or letter of credit acceptable to the Lender and pledged to the
Lender, or the Account is not payable in United States dollars; or
(4) the Account Debtor is also the Borrower's supplier or creditor;
or
(5) more than 50% in amount of the other Accounts of the Account
Debtor are more than 90 days past due; or
(6) the Account arises out of transactions with an employee, officer,
agent, director, stockholder, partner, member of the Borrower or the
Guarantor and its subsidiaries; or
(7) any of the representations or warranties set forth in Section 3.2
of the Security Agreement are not true and correct in all material respects
with respect to such Account.
(t) ELIGIBLE ADJUSTED EQUIPMENT VALUE means the value of the Borrower's
Equipment assumed by the Lender in the amounts and for the periods set forth on
SCHEDULE B, which amount shall be included as part of the Borrowing Base.
(u) ELIGIBLE INVENTORY means Inventory, less any amount reserved on the
Borrower's books for surplus or obsolescence, consisting of factory whole goods,
engines or other parts and accessories held for sale by the Borrower that meet
all of the following specifications:
DOCUMENTS. If it is represented or covered by documents of title, the
Borrower is the owner of the documents free of all Liens except the
Permitted Encumbrances.
LOCATION. It is stored at such locations in the United States of
which the Borrower has given the Lender notice and where the Lender
has perfected its security interest, and is in the possession or
control of the Borrower or its consignee. If it is located on leased
premises, the Lender has received a landlord's waiver of rights with
respect to such Inventory. If it is held by a bailee, warehouseman or
similar party, the Lender shall have received from such bailee,
warehouseman or similar party such acknowledgements of the Lender's
Lien, warehouse receipts or other agreements, each in form and
substance acceptable to the Lender, as the Lender
6
<PAGE>
may require in its reasonable discretion. If it is held by a
consignee: (a) the Lender shall have received a copy of a consignment
agreement in form and substance reasonably satisfactory to the Lender,
(b) the Borrower shall have filed all necessary or appropriate UCC
consignment financing statements in form and substance reasonably
satisfactory to the Lender as reasonably requested by the Lender, (c)
the Borrower shall have sent to the consignee's prior filed secured
parties a consignment notification letter in form and substance
reasonably satisfactory to the Lender, (d) the prior filed secured
parties of the consignee shall have subordinated their security
interest in the consigned inventory and all proceeds thereof in favor
of the Borrower, the Lender and Chase Manhattan Bank, in form and
substance reasonably satisfactory to the Lender, (e) consignee and
consignee's landlord shall have executed a waiver of landlord's Lien
in form and substance reasonably satisfactory to the Lender and
subordinating such Lien in favor of the Borrower, the Lender and Chase
Manhattan Bank, (f) the Borrower has agreed upon the request of the
Lender to file UCC financing statements against the Borrower in the
jurisdiction where such consigned inventory is located, and (g) prior
filed secured creditors of the Borrower shall have subordinated their
security interest in the consigned inventory in favor of the Lender.
MISCELLANEOUS. It is unused, and it has not, in the Lender's good
faith judgment, been materially reduced in market value by reason of
age, obsolescence, surplus or other factors.
OWNERSHIP. It is owned by the Borrower free of all Liens except the
Permitted Encumbrances, and the Lender has a perfected first security
interest therein.
OTHER FINANCING. No financing statement is on file covering such item
or the products or proceeds thereof except for the Lender's financing
statement and the financing statement of Chase Manhattan Bank.
WIP. It is not work-in-process.
(v) ENVIRONMENTAL LAWS means the Resource Conversation and Recovery Act,
as amended, the Toxic Substance Control Act, as amended, the Comprehensive
Environmental Response, Compensation and Liability Act, as amended, the
Superfund Amendments and Reauthorization Act of 1986, as amended, the Solid
Waste Disposal Act, as amended, the Clean Air Act, as amended, the Clean Water
Act, as amended, and any comparable federal or state statutes, now existing or
later enacted, or any regulation promulgated under any of such federal or state
statutes relating to the protection of the environment.
(w) ERISA means the Employee Retirement Income Security Act of 1974, as
amended.
(x) EVENTS OF DEFAULT is defined in Section 7.1. An Event of Default
"exists" if an Event of Default has occurred and is continuing.
7
<PAGE>
(y) EXTENDED TERMS has the meaning set forth in EXHIBIT F.
(z) FEDERAL FUNDS EFFECTIVE RATE means, for any day, an interest rate per
annum equal to the weighted average of the rates on overnight Federal funds
transactions with members of the Federal Reserve System arranged by Federal
funds brokers on such day, as published for such day (or, if such day is not a
Business Day, for the immediately preceding Business Day) by the Federal Reserve
Bank of Atlanta, or, if such rate is not so published for any day that is a
Business Day, the average of the quotations at approximately 10:00 a.m.
(Birmingham, Alabama time) on such day on such transactions received by the
Lender from three Federal funds brokers of recognized standing selected by the
Lender in its sole discretion.
(aa) FLOATING RATE means a rate per annum equal to (A) from the Closing
Date to and including May 25, 1997, the higher of (1) the Prime Rate in effect
from time to time or (2) the Federal Funds Effective Rate in effect from time to
time, plus .5% (50 basis points) and (B) from May 26, 1997 until the Termination
Date, the higher of (1) the Prime Rate in effect from time to time, plus one
percent (100 basis points) or (2) the Federal Funds Effective Rate in effect
from time to time, plus 1.5% (150 basis points).
(bb) GAAP means generally accepted accounting principles, consistently
applied.
(cc) GOVERNING DOCUMENTS means all organizational and governing documents
applicable to the Borrower, including the Borrower's certificate or articles of
incorporation and bylaws, and all applicable resolutions or other directions of
the directors, shareholders, officers or other relevant persons comprising,
owning, managing or operating the Borrower.
(dd) GOVERNMENTAL AUTHORITY means any national, state, county, municipal or
other government, domestic or foreign, and any agency, authority, department,
commission, bureau, board, court or other instrumentality thereof.
(ee) GOVERNMENTAL REQUIREMENTS means all laws, rules, regulations,
ordinances, judgments, decrees, codes, orders, injunctions, notices and demand
letters of any Governmental Authority.
(ff) GUARANTOR means Metromedia International Group, Inc., a Delaware
corporation.
(gg) HAZARDOUS SUBSTANCES means any and all hazardous or toxic substances,
materials or wastes as defined or listed under the Environmental Laws.
(hh) LIBOR-BASED RATE means a rate per annum equal to (A) from the Closing
Date to and including May 25, 1996 the LIBOR Quote plus 250 basis points and (B)
from May 26, 1996 until the Termination Date, the LIBOR Quote plus 350 basis
points.
8
<PAGE>
(ii) LIBOR-BASED RATE PERIOD means the period of time, selected by the
Borrower under Section 3.1, with respect to which the LIBOR-Based Rate is (or is
proposed to be) applicable to a Segment.
(jj) LIBOR-BASED RATE SEGMENT means a Segment to which the LIBOR-Based Rate
is (or is proposed to be) applicable.
(kk) LIBOR QUOTE means, with respect to any time at which the LIBOR-Based
Rate is to be determined, the rate of interest determined by the Lender at such
time by reference to the Knight-Ridder MoneyCenter reporting service or other
comparable financial information reporting service at the time employed by the
Lender, as the Lender's best estimate of the cost of funds available to the
Lender from the purchase on the London interbank market of funds in the form of
time deposits in Dollars in the approximate amount of the Segment that is to
bear interest at the LIBOR-Based Rate, having a maturity comparable to the
LIBOR-Based Rate Period during which the LIBOR-Based Rate is to be in effect, it
being expressly understood that (1) the Lender may not actually purchase any
such time deposits and obtain such funds and (2) the LIBOR Quote will be an
estimate, and for a variety of reasons, including changing market conditions,
the actual cost of funds to the Lender (if the Lender elects to purchase funds
in the form of time deposits on such date) might vary from the LIBOR Quote.
(ll) LIBOR RESERVE REQUIREMENT means the percentage (expressed as a
decimal) prescribed by the Board of Governors of the Federal Reserve System (or
any successor Governmental Authority), on the date on which the LIBOR-Based Rate
is determined, for determining the reserve requirements of the Lender (including
any marginal, emergency, supplemental, special or other reserves) with respect
to liabilities relating to time deposits purchased in the London interbank
market having a maturity equal to the period during which the LIBOR-Based Rate
will be in effect and in an amount equal to the LIBOR-Based Rate Segment
involved, without any benefit or credit for any proration, exemptions or offsets
under any now or hereafter applicable regulations.
(mm) LIEN means any mortgage, pledge, assignment, charge, encumbrance,
lien, security title, security interest or other preferential arrangement.
(nn) LOAN is defined in Section 2.1.
(oo) MARGIN STOCK is defined in Regulation U of the Federal Reserve Board,
as amended.
(pp) MAXIMUM CREDIT AMOUNT means the lesser of (1) the Borrowing Base
Amount; or (2) the Commitment Amount.
(qq) MIG NOTE means the $23,800,000 Subordinated Promissory Note dated
November 26, 1996, issued by the Borrower to the Guarantor.
9
<PAGE>
(rr) NET OUTSTANDING AMOUNT OF ELIGIBLE ACCOUNTS means the net outstanding
amount of all then Eligible Accounts after eliminating from the aggregate face
amount thereof all payments, adjustments, discounts, credits and allowances
applicable thereto and all amounts due thereon considered uncollectible by
reason of return, rejection, repossession or loss of, or damage to, the
merchandise covered thereby, disputes, financial difficulty of the Account
Debtor or otherwise.
(ss) NOTE is defined in Section 2.1.
(tt) OBLIGATIONS means (1) the payment of all amounts now or hereafter
becoming due and payable under the Credit Documents, including the principal
amount of the Credit, all interest (including interest that, but for the filing
of a petition in bankruptcy, would accrue on any such principal) and all other
fees, charges and costs (including attorneys' fees and disbursements) payable in
connection therewith; (2) the observance and performance by the Borrower of all
of the provisions of the Credit Documents; (3) the payment of all sums advanced
or paid by the Lender in exercising any of its rights, powers or remedies under
the Credit Documents, and all interest (including post-bankruptcy petition
interest, as aforesaid) on such sums provided for herein or therein; (4) the
payment and performance of all other indebtedness, obligations and liabilities
of the Borrower to the Lender (including obligations of performance) of every
kind whatsoever, arising directly between the Borrower and the Lender or
acquired outright, as a participation or as collateral security from another
person by the Lender, direct or indirect, absolute or contingent, due or to
become due, now existing or hereafter incurred, contracted or arising, joint or
several, liquidated or unliquidated, regardless of how they arise or by what
agreement or instrument they may be evidenced or whether they are evidenced by
agreement or instrument, and whether incurred as maker, endorser, surety,
guarantor, general partner, drawer, tort-feasor, account party with respect to a
letter of credit, indemnitor or otherwise; and (5) all renewals, extensions,
modifications and amendments of any of the foregoing, whether or not any
renewal, extension, modification or amendment agreement is executed in
connection therewith.
(uu) OBLIGORS means the Borrower, the Guarantor, the Sponsors, and any
other maker, endorser, surety, guarantor or other person now or hereafter liable
for the payment or performance, in whole or in part, of any of the Obligations.
(vv) PBGC means the Pension Benefit Guaranty Corporation or any entity
succeeding to any or all of its functions under ERISA.
(ww) PENSION PLAN means an "employee pension benefit plan" (as such term is
defined in ERISA) from time to time maintained by the Borrower or a member of
the Controlled Group.
(xx) PERMITTED CONTEST means any appropriate proceeding conducted in good
faith by the Borrower to contest any tax, assessment, charge, Lien or similar
claim, during the pendency of which proceeding the enforcement of such tax,
assessment, charge, Lien or claim is stayed; provided that the Borrower has set
aside on its books or, if required by the Lender, deposited as
10
<PAGE>
cash collateral with the Lender, adequate cash reserves to assure the payment of
any such tax, assessment, charge, Lien or claim.
(yy) PERMITTED ENCUMBRANCES means (a) Liens for taxes, assessments or other
governmental charges or levies not yet delinquent or that are subject to
Permitted Contests; (b) Liens of mechanics, materialmen, landlord, warehousemen,
carriers and similar Liens arising in the future in the ordinary course of
business for sums not yet delinquent or that are subject to Permitted Contests;
(c) Liens incurred in the ordinary course of business in connection with
workers' compensation, unemployment insurance, social security, and similar
items for sums not yet delinquent or that are subject to Permitted Contests; (d)
lessor's Liens arising from operating and capitalized leases entered into in the
ordinary course of business; (e) Liens arising from legal proceedings, so long
as such proceedings are subject to a Permitted Contest, and so long as execution
is stayed on all judgments resulting from any such proceedings; (f) easements,
rights of way, restrictions and other similar encumbrances incurred in the
ordinary course of business and encumbrances consisting of zoning restrictions,
easements, licenses, restrictions on the use of property or minor imperfections
in title thereto that, in the aggregate, are not material in amount and that do
not materially detract from the value of the property subject thereto or
interfere with the ordinary conduct of the Business; (g) Liens securing Debt
incurred for the payment of all or any part of the purchase price of any real
property and fixed assets, and any renewal, extensions or refinancings thereof;
(h) Liens upon the real property of the Borrower located at 535 Macon Road,
McDonough, Georgia that are expressly permitted by the Deed to Secure Debt and
Security Agreement in favor of the Lender relating to such real property; (i)
Liens and security interest existing on the Closing Date and set forth on
SCHEDULE C hereto (which include the Liens of Chase Manhattan Bank); and (j)
Liens in favor of the Lender.
(zz) PERMITTED INVESTMENTS means (1) direct obligations of, or obligations
unconditionally guaranteed by, the United States of America or any agency
thereof maturing in less than one year from the date of purchase;
(2) commercial paper issued by any person organized and doing business under
the laws of the United States of America or any state thereof rated P-1 or
better by Moody's Investors Services, Inc. or A-1 or better by Standard & Poor's
Corporation and maturing in less than one year from the date of purchase; and
(3) certificates of deposit maturing within one year of the date of acquisition
thereof issued by the Lender or any other financial institution acceptable to
the Lender.
(aaa) PERSON (whether or not capitalized) includes natural persons,
sole proprietorships, corporations, trusts, unincorporated organizations,
associations, companies, institutions, entities, joint ventures, partnerships,
limited liability companies and Governmental Authorities.
(bbb) PLAN means, at any time, an employee pension benefit plan which
is covered by Title IV of ERISA or subject to the minimum funding standards
under Section 412 of the Code and is either (a) maintained by the Borrower or
any member of a Controlled Group for employees of the Borrower or any member of
such Controlled Group or (b) maintained pursuant to a collective bargaining
agreement or any other arrangement under which more than one employer makes
contributions and to which the Borrower or any member of a Controlled Group is
then making
11
<PAGE>
or accruing an obligation to make contributions or has within the preceding five
plan years made contributions.
(ccc) PRIME RATE means that rate of interest designated by the Lender
from time to time as its "prime rate," it being expressly understood and agreed
that the "prime rate" is merely an index rate used by the Lender to establish
lending rates and is not necessarily the Lender's most favorable lending rate,
and that changes in the "prime rate" are discretionary with the Lender.
(ddd) PRINCIPAL OFFICE means the principal office of the Lender located
at AmSouth-Sonat Tower, 1900 Fifth Avenue North, Birmingham, Alabama 35203.
(eee) PROPERTY means all property, real and personal, that is now or
hereafter conveyed or assigned to the Lender, or in which the Lender is now or
hereafter granted a Lien, as security for any of the Obligations.
(fff) QUARTERLY PAYMENT DATE is defined in Section 2.3.
(ggg) REQUEST FOR ADVANCES OR INTEREST RATE ELECTION is defined in
Section 2.2.
(hhh) SECURITY AGREEMENT means the General Security Agreement described
on SCHEDULE A.
(iii) SECURITY DOCUMENTS means all Credit Documents that now or
hereafter grant or purport to grant to Lender any guaranty, collateral or other
security for any of the Obligations.
(jjj) SEGMENT means a portion of the Advances (or all thereof) with
respect to which a particular interest rate is (or is proposed to be)
applicable. The aggregate amount of all Advances that bear interest at the
Floating Rate shall be deemed to constitute a single Segment. The aggregate
amount of all Advances that bear interest at the same LIBOR-Based Rate and for
the same LIBOR-Based Rate Period shall be deemed to constitute a single
LIBOR-Based Rate Segment.
(kkk) SOLVENT means, with respect to any person on a particular date,
that as of such date (1) the fair value of the property of such person is
greater than the total amount of liabilities (including contingent liabilities)
of such person, (2) the present fair salable value of the assets of such person
is not less than the amount that will be required to pay the probable liability
of such person on its debts as they become absolute and matured, (3) such person
is not engaged in business or a transaction, and is not about to engage in
business or a transaction, for which such person's property would constitute an
unreasonably small capital, and (4) such person does not intend to, or believe
or reasonably should have believed that it will, incur debts beyond its ability
to repay as they become due.
(lll) SPONSORS means John W. Kluge and Stuart Subotnick.
12
<PAGE>
(mmm) SUBORDINATED DEBT means Debt of the Borrower (including the Debt
evidenced by the MIG Note) that is subordinated to the Obligations on terms
approved by the Lender.
(nnn) SUBSIDIARY means (1) any corporation more than 50% of whose
shares of stock having general voting power under ordinary circumstances to
elect a majority of the board of directors, managers or trustees of such
corporation (irrespective of whether or not at the time stock of any other class
or classes has or might have voting power by reason of the happening of any
contingency), are owned or controlled directly or indirectly by the Borrower, or
(2) any partnership or limited liability company, 50% or more of the partnership
or membership interests in which are owned or controlled, directly or
indirectly, by the Borrower, and includes entities currently or hereafter
falling within the categories described above.
(ooo) TERMINATION DATE means the maturity date of the Loan (which is
initially January 1, 1999), as such date may be extended from time to time
pursuant to Section 2.7 or accelerated pursuant to Section 7.2.
(ppp) THIRTY DAY TERMS has the meaning as set forth in EXHIBIT G.
ARTICLE 2
CREDIT TO BE EXTENDED
UNDER THIS AGREEMENT
SECTION 2.1 LOAN. From the Closing Date to (but not including) the
Termination Date, the Lender agrees, upon the terms and subject to the
conditions of this Agreement, to make a revolving line of credit available to
the Borrower, pursuant to which the Borrower may from time to time borrow from
the Lender and repay and reborrow, such sums as may be needed by the Borrower
for the purposes expressed in this Agreement up to a maximum aggregate principal
amount at any one time outstanding not exceeding the Maximum Credit Amount (the
"Loan"). All advances made by the Lender to the Borrower under this Agreement
("Advances") shall be evidenced by a Note (the "Note") dated the Closing Date,
payable to the order of the Lender, duly executed by the Borrower and in the
maximum principal amount of $55,000,000. The Advances shall bear interest as
provided in Article 3. In no event shall the balance of the Loan be reduced
below $100.
SECTION 2.2 ADVANCES. The Advances made by the Lender pursuant to each
request for Advances shall be in an aggregate amount not less than $1,000,000 or
a greater integral multiple of $100,000. Each request for Advances must be in
writing (which may be by facsimile transmission) and must be received by the
Lender not later than 10:00 a.m., Birmingham, Alabama time, on the day on which
the Advances are to be made, except that, if the Advances are to bear interest
at the LIBOR-Based Rate, the request must be received by the Lender not later
than 10:00 a.m., Birmingham, Alabama time, two Business Days prior to the day on
which
13
<PAGE>
the Advances are to be made. Each request for Advances shall be in the form
attached hereto as SCHEDULE D ("Request for Advances or Interest Rate Election")
and shall specify the aggregate amount of the Advances requested, the day as of
which the Advances are to be made and shall provide the interest rate
information called for in Section 3.2. All the Advances requested in a single
Request for Advances or Interest Rate Election shall be subject to the same
interest rate terms. Not later than 2:00 p.m. Birmingham, Alabama time on the
date specified for the Advances, the Lender shall make available the amount of
the Advances to be made by it on such date to the Borrower by depositing the
proceeds thereof into an account with the Lender or with an Affiliate of the
Lender in the name of the Borrower. The Lender's obligation to make Advances
shall terminate, if not sooner terminated pursuant to the provisions of this
Agreement, on the Termination Date. The Lender shall have no obligation to make
Advances if an Event of Default exists. Each Request for Advances or Interest
Rate Election, whether submitted under this Section 2.2 in connection with
requested Advances or under Section 3.2 in connection with an interest rate
election, shall be signed by an Authorized Representative of the Borrower
designated as authorized to sign and submit Request for Advances or Interest
Rate Election forms in the documents submitted to the Lender pursuant to
Section 5.5. The Borrower may, from time to time, by written notice to the
Lender, terminate the authority of any Authorized Representative to submit
Request for Advances or Interest Rate Election forms, such termination of
authority to become effective upon actual receipt by the Lender of such notice
of termination. The Borrower may from time to time authorize other Authorized
Representatives to sign and submit Request for Advances or Interest Rate
Election forms by delivering to the Lender a certificate of the Secretary of the
Borrower certifying the incumbency and specimen signature of each such
Authorized Representative. The Lender shall be entitled to rely conclusively
upon the authority of any Authorized Representative so designated by the
Borrower.
SECTION 2.3 PAYMENTS. All interest accrued at the Floating Rate shall be
payable in arrears on the first day of each successive January, April, July and
October (each a "Quarterly Payment Date"), commencing on January 1, 1997; and
all interest accrued on each LIBOR-Based Rate Segment shall be payable on the
last day of the applicable LIBOR-Based Rate Period. The principal amount of the
Advances, together with accrued interest thereon, shall be due and payable on
the Termination Date.
SECTION 2.4 PREPAYMENT.
(a) The Borrower may at any time prepay all or any part of the Advances,
without premium or penalty; provided, however, that (1) unless the Borrower pays
the amounts, if any, due under Section 3.6, no LIBOR-Based Rate Segment may be
prepaid during a LIBOR-Based Rate Period if the Lender purchases any such time
deposits and obtains such funds comprising the LIBOR-Based Rate Segment being
prepaid, and (2) any partial prepayment shall be in the amount of not less than
$1,000,000 or a greater integral multiple of $100,000. The Borrower shall pay,
on the date of prepayment, all interest accrued to the date of prepayment on any
amount prepaid in connection with the prepayment in full of the Obligations and
the concurrent termination of this Agreement. The Borrower shall pay all
interest accrued to the date of prepayment on the amount prepaid.
14
<PAGE>
(b) If at any time the principal amount of the Advances is greater than
the Maximum Credit Amount, the Borrower shall immediately make a prepayment
(notwithstanding the provisions of clause (a)(1) of this section, but subject to
the provisions of Section 3.6) on the Advances equal to the difference between
said aggregate principal amount of the Advances and the Maximum Credit Amount.
SECTION 2.5 REDUCTION OR CANCELLATION OF MAXIMUM CREDIT AMOUNT. The
Borrower shall have the right at any time to reduce the unused portion of the
Maximum Credit Amount on each Quarterly Payment Date, provided that: (a) the
Borrower shall give the Lender at least 10 days' prior notice in writing of each
such reduction, (b) the amount of such reduction shall not be less than
$500,000, and (c) no reduction in the Maximum Credit Amount may be reinstated.
The Borrower shall also have the right at any time to terminate this Agreement
by prepayment in full of the Obligations (subject to the provisions of
Section 2.4) with at least 15 days' prior notice in writing of such termination.
SECTION 2.6 FEES.
(a) The Borrower shall pay to the Lender on the Closing Date a commitment
fee equal to $550,000. This fee shall be fully earned and non-refundable as of
the Closing Date.
(b) The Borrower shall pay to the Lender an availability fee (the
"Availability Fee") that begins to accrue on the Closing Date and shall be
computed at the Applicable Rate per annum times the daily average difference
between (1) the Commitment Amount and (2) the sum of the aggregate outstanding
principal amount of the Advances made by the Lender. The Availability Fee shall
be payable in arrears on each Quarterly Payment Date and on the Termination
Date, commencing on January 1, 1997. The Availability Fee shall be computed on
an Actual/360 Basis. The term "Applicable Rate" shall mean from the Closing
Date to and including May 25, 1997, one-half of one percent (.5%) and from May
26, 1997 until the Termination Date, three quarters of one percent (.75%).
(c) The Borrower shall pay to the Lender on May 26, 1997, November 26,
1997, May 26, 1998 and the Termination Date (each an "Administrative Fee Payment
Date") a nonrefundable administrative fee in the amount of $250,000, payable in
arrears on each Administrative Fee Payment Date.
SECTION 2.7 EXTENSION OF TERMINATION DATE. The Borrower and the Lender
may from time to time extend the then-current Termination Date to any subsequent
termination date upon which the Borrower and the Lender may agree by executing a
written extension agreement. Upon the execution of such an extension agreement
by the Borrower and the Lender, the maturity date of the Loan shall be extended
to the agreed-upon termination date, and the agreed-upon termination date shall
become the new "Termination Date" for purposes of this Agreement.
15
<PAGE>
SECTION 2.8 PLACE AND TIME OF PAYMENTS.
(a) All payments by the Borrower to the Lender under this Agreement and
the other Credit Documents shall be made in lawful currency of the United States
and in immediately available funds to the Lender at its Principal Office in
Birmingham, Alabama at the hand delivery address set forth in Section 8.1 or at
such other address within the continental United States as shall be specified by
the Lender by notice to the Borrower. Any payment received by the Lender after
2:00 p.m. (Birmingham, Alabama time) on a Business Day (or at any time on a day
that is not a Business Day) shall be deemed made by the Borrower and received by
the Lender on the following Business Day.
(b) All amounts payable by the Borrower to the Lender under this Agreement
or any of the other Credit Documents for which a payment date is expressly set
forth herein or therein shall be payable on the specified due date without
notice or demand by the Lender. All amounts payable by the Borrower to the
Lender under this Agreement or the other Credit Documents for which no payment
date is expressly set forth herein or therein shall be payable ten days after
written demand by the Lender to the Borrower. The Lender may, at its option,
send written notice or demand to the Borrower of amounts payable on a specified
due date pursuant to this Agreement or the other Credit Documents, but the
failure to send such notice shall not affect or excuse the Borrower's obligation
to make payment of the amounts due on the specified due date.
(c) Payments that are due on a day that is not a Business Day shall be
payable on the next succeeding Business Day, and any interest payable thereon
shall be payable for such extended time at the specified rate.
(d) Except as otherwise required by law, payments received by the Lender
shall be applied first to expenses, fees and charges, then to interest and
finally to principal.
SECTION 2.9 SECURITY. The security for the Obligations shall include the
collateral and other security granted to the Lender under the Security Documents
described in SCHEDULE A. The Security Documents shall be valid and binding as
security for, the aggregate amount of the Obligations outstanding from time to
time, whether or not the full amount of the Credit is actually advanced by the
Lender to the Borrower.
SECTION 2.10 GUARANTY AGREEMENT. Concurrently with the execution of this
Agreement, the Guarantor is executing and delivering to the Lender a Guaranty
Agreement pursuant to which such Guarantor is unconditionally guaranteeing the
payment to the Lender, when and as due and payable, of the Obligations.
SECTION 2.11 MAKE-WHOLE ACCOUNT. Concurrently with the execution of this
Agreement, the Borrower is depositing with the Lender the sum of $1,000,000 in a
restricted account (the "Snapper Make-Whole Account"). Funds in the Snapper
Make-Whole Account may be withdrawn by the Lender from time to time to pay any
and all amounts that are due the Lender from time to time pursuant to the terms
of this Agreement and other credit documents, if the
16
<PAGE>
Borrower has not made such payment within the time provided herein in the other
credit documents (after giving effect to any notice or cure periods). The
Snapper Make-Whole Agreement shall be pledged to the Lender pursuant to the
terms of the Security Agreement. Any withdrawals from the Snapper Make-Whole
Account shall not cure a default under this Agreement unless the default was due
solely to a failure on the part of the Borrower to make a scheduled payment of
principal or interest pursuant to the terms of this Agreement or the Lenders so
agrees in writing.
SECTION 2.12 SUBORDINATION AGREEMENT. Concurrently with the execution of
this Agreement, the Borrower and the Guarantor are executing and delivering to
the Lender a Subordination Agreement pursuant to which the MIG Note is expressly
subordinated to the Obligations pursuant to the terms therein described.
SECTION 2.13 LOCK BOX AGREEMENT.
(a) RECEIPT AND CREDIT FOR COLLECTIONS. Concurrently with the execution
of this Agreement, the Borrower shall enter into a Lock Box Agreement with
the Lender and NationsBank (the "Bank") pursuant to which the Bank will be
granted access to the post office box to which all Account Debtors shall be
instructed to forward payments with respect to all Property. All checks,
drafts, cash, notes, money orders, acceptances and other remittances in
part or full payment with respect to the Property ("Collections") received
through the Lock Box shall be retained by the Bank and processed in
accordance with the Lock Box Agreement. All Collections received directly
by the Borrower shall immediately be sent or delivered by the Borrower to
the post office box that is part of the lock box arrangement. The Bank
shall, without further inquiry and without regard to any instructions from
the Borrower, send all collections by electronic funds transfer to the
Lender at such account or accounts as the Lender shall direct in the Lock
Box Agreement, or otherwise in writing from time to time. Any fees or
expenses charged to the Lender by the Bank or any other bank for transfer
of funds from the Borrower's account shall be charged as accrued, as a
debit to the Obligations.
(b) VERIFICATION OF RECEIVABLES. If an Event of Default exists, the
Lender may confirm and verify all Accounts in any reasonable manner. In
such circumstance, the Borrower shall assist the Lender in confirmation and
verification of the Accounts. If no Event of Default exists, the Lender
and the Borrower shall in good faith coordinate the verification of all
Accounts. The Lender may at any time after an Event of Default exists,
notify or require the Borrower to notify, all of the Borrower's Account
Debtors or any of them to make payment directly to the Lender to the extent
not already provided by the Lock Box. The Lender may enforce collection
of, settle, compromise, extend or renew the indebtedness of any or all of
the Borrower's Account Debtors after an Event of Default exists.
(c) AUTHORITY TO PERFORM FOR BORROWER - LOCK BOX. The Borrower hereby
appoints the Lender as the Borrower's attorney-in-fact in connection solely
with enforcement of the
17
<PAGE>
Lender's rights under the Lock Box Agreement, (i) to endorse the name of
the Borrower on any notes, acceptances, checks, drafts, money orders or
other instruments for the payment of money or any security interest that
may come into the Lender's possession; (ii) after an Event of Default
exists, to sign the Borrower's name on any invoice or bill of lading
relating to any of the Accounts, on drafts against Account Debtors, and
notices to Account Debtors; and (iii) after an Event of Default exists, to
receive, open and dispose of all mail addressed to the Borrower and
received at the lock box established pursuant to subparagraph (a) hereof.
This power, because it is coupled with an interest, is irrevocable during
the term of this Agreement. The Lender is hereby authorized and empowered
to accept the return of goods represented by any of the Accounts, without
notice to or the consent of the Borrower and without discharging or in any
way affecting the Borrower's liability hereunder. Except in case of its
gross negligence or intentional misconduct, neither the Lender nor its
appointee shall be liable for any acts of commission or omission, nor for
any error of judgment or mistake of fact or law.
ARTICLE 3
INTEREST
SECTION 3.1 APPLICABLE INTEREST RATES. The Borrower shall have the option
to elect to have any Segment bear interest at the Floating Rate or the
LIBOR-Based Rate. For any period of time and for any Segment with respect to
which the Borrower does not elect the LIBOR-Based Rate, such Segment shall bear
interest at the Floating Rate. The Borrower's right to elect the LIBOR-Based
Rate shall be subject to the following requirements: (a) each LIBOR-Based Rate
Segment shall be in the amount of $1,000,000 or more and in an integral multiple
of $100,000 thereafter, (b) each LIBOR-Based Rate Segment shall have a maturity
selected by the Borrower of one, two or three months, (c) no more than three
Segments may be outstanding at any time, and (d) no LIBOR-Based Rate Segment may
have a maturity date later than the Termination Date.
SECTION 3.2 PROCEDURE FOR EXERCISING INTEREST RATE OPTIONS. The Borrower
may elect to have a particular interest rate apply to a Segment by notifying the
Lender in writing (which may be by facsimile transmission) not later than 10:00
a.m., Birmingham, Alabama time, on the day on which a requested interest rate is
to become applicable, except that, if the Segment is to bear interest at the
LIBOR-Based Rate, the notice must be received by the Lender not later than 10:00
a.m. Birmingham, Alabama time, two Business Days before the day on which the
requested interest rate is to become applicable. Any notice of interest rate
election hereunder shall be irrevocable and shall be on a Request for Advances
or Interest Rate Election form and shall set forth the following: (a) the
amount of the Segment to which the requested interest rate will apply, (b) the
date on which the selected interest rate will become applicable, (c) whether the
interest rate selected is the Floating Rate or the LIBOR-Based Rate and (d) if
the interest rate selected is the LIBOR-Based Rate, the maturity selected for
the LIBOR-Based Rate Period. On the day that the Lender receives a notice
hereunder requesting that the LIBOR-Based Rate be applicable, the Lender shall
use its best efforts to notify the Borrower by telephone or by facsimile
18
<PAGE>
transmission of the Lender's estimate of the applicable LIBOR-Based Rate as
early on that day or the next Business Day as may be practical in the
circumstances. The Lender shall not be required to provide an estimate of the
LIBOR-Based Rate on any day on which dealings in deposits in Dollars are not
transacted in the London interbank market. If the Borrower does not immediately
accept the LIBOR-Based Rate quoted by the Lender, the Lender may, in view of
changing market conditions, revise the quoted LIBOR-Based Rate at any time. No
LIBOR-Based Rate shall be effective until mutually agreed upon by the Borrower
and the Lender. If the Lender and the Borrower attempt to agree on the
LIBOR-Based Rate but fail so to agree, or if there is any uncertainty as to
whether or not the Lender and the Borrower have agreed upon the LIBOR-Based
Rate, interest shall accrue on the Segment for which the LIBOR-Based Rate has
been selected at the then applicable Floating Rate.
SECTION 3.3 FLOATING RATE. Each Segment subject to the Floating Rate
shall bear interest from the date the Floating Rate becomes applicable thereto
until payment in full, or until the LIBOR-Based Rate is selected by the Borrower
and becomes applicable thereto, on the unpaid principal balance of such Segment
on an Actual/360 Basis. Any change in the Floating Rate caused by a change in
the Prime Rate or in the Federal Funds Effective Rate shall take effect on the
effective date of such change in the Prime Rate designated by the Lender or in
the Federal Funds Effective Rate, without notice to the Borrower and without any
further action by the Lender. If an Event of Default exists, each Segment
subject to the Floating Rate shall bear interest from the date of such Event of
Default until payment in full at a per annum rate (computed on an Actual/360
Basis) equal to the Default Rate. Notwithstanding the foregoing, for the
purpose of enabling the Lender to send periodic billing statements in advance of
each interest payment date reflecting the amount of interest payable on such
interest payment date, at the option of the Lender, the Prime Rate or the
Federal Funds Effective Rate, as applicable, in effect 15 days prior to each
interest payment date shall be deemed to be the Prime Rate or the Federal Funds
Effective Rate, as applicable, as continuing in effect until the date prior to
such interest payment date for purposes of computing the amount of interest
payable on such interest payment date. If the Lender elects to use the Prime
Rate or the Federal Funds Effective Rate, as applicable, 15 days prior to the
interest payment date for billing purposes, and if the Prime Rate or the Federal
Funds Effective Rate, as applicable, changes during such 15-day period, the
difference between the amount of interest that in fact accrues during such
period and the amount of interest actually paid will be added to or subtracted
from, as the case may be, the interest otherwise payable in preparing the
periodic billing statement for the next succeeding interest payment date. In
determining the amount of interest payable at the Termination Date or upon full
prepayment of the Obligations, all changes in the Prime Rate or the Federal
Funds Effective Rate, as applicable, occurring on or prior to the day before the
Termination Date or the date of such full prepayment shall be taken into
account.
SECTION 3.4 LIBOR-BASED RATE. Each LIBOR-Based Rate Segment shall bear
interest from the date the LIBOR-Based Rate becomes applicable thereto until the
end of the applicable LIBOR-Based Rate Period on the unpaid principal balance of
such LIBOR-Based Rate Segment at the LIBOR-Based Rate on an Actual/360 Basis.
If an Event of Default exists, each LIBOR-Based Rate Segment shall bear interest
from the date of such Event of Default until payment in
19
<PAGE>
full at a per annum rate (computed on an Actual/360 Basis) equal to two percent
(2%) in excess of the LIBOR-Based Rate that would otherwise have been
applicable.
SECTION 3.5 TERMINATION OF LIBOR-BASED RATE; INCREASE IN LIBOR-BASED RATE;
REDUCTION OF RETURN.
(a) If at any time the Lender shall reasonably determine (which
determination, if reasonable, shall be final, conclusive and binding upon all
parties) that:
(1) by reason of any changes arising after Closing Date affecting the
London interbank market or affecting the position of the Lender in such
market, adequate and fair means do not exist for ascertaining the
LIBOR-Based Rate by reference to the LIBOR Quote with respect to a
LIBOR-Based Rate Segment; or
(2) the continuation by the Lender of LIBOR-Based Rate Segments at
the LIBOR-Based Rate or the funding thereof in the London interbank market
would be unlawful by reason of any law, governmental rule, regulation,
guidelines or order; or
(3) the continuation by the Lender of LIBOR-Based Rate Segments at
the LIBOR-Based Rate or the funding thereof in the London interbank market
would be impracticable as a result of a contingency occurring after the
Closing Date that materially and adversely affects the London interbank
market;
then, and in any such event, the Lender shall on such date give notice (by
telephone and confirmed in writing) to the Borrower of such determination. The
obligation of the Lender to make or maintain LIBOR-Based Rate Segments so
affected or to permit interest to be computed thereon at the LIBOR-Based Rate,
as the case may be, shall be terminated, and interest shall thereafter be
computed on the affected Segment or Segments at the then applicable Floating
Rate.
(b) It is the intention of the parties hereto that the LIBOR-Based Rate
shall accurately reflect the cost to the Lender of maintaining any LIBOR-Based
Rate Segment during the applicable LIBOR-Based Rate Period assuming the Bank
purchases any such time deposits and obtains such funds comprising any
LIBOR-Based Rate Segment. Accordingly, if by reason of any change after the
date hereof in any applicable Governmental Requirement (or any interpretation
thereof and including the introduction of any new Governmental Requirement),
including any change in the LIBOR Reserve Requirement, the cost to the Lender of
maintaining any LIBOR-Based Rate Segment or funding the same by means of a
London interbank market time deposit, as the case may be, shall increase, the
LIBOR-Based Rate applicable to such LIBOR-Based Rate Segment shall be adjusted
as necessary to reflect such change in cost to the Lender, effective as of the
date on which such change in any applicable Governmental Requirement becomes
effective. Any amounts due under this Section 3.5(b) as a result of a change in
the LIBOR Reserve Requirement shall only be payable by the Borrower to the
extent the Lender incurs actual costs associated with any such change.
20
<PAGE>
(c) If the Lender shall have determined that the adoption after the
Closing Date of any Governmental Requirement regarding capital adequacy, or any
change in any of the foregoing or in the interpretation or administration of any
of the foregoing by any Governmental Authority, central bank or comparable
agency charged with the interpretation or administration thereof, or compliance
by the Lender (or any lending office of the Lender) or the Lender's holding
company with any request or directive regarding capital adequacy (whether or not
having the force of law) of any such Governmental Authority, central bank or
comparable agency, has or would have the effect of reducing the rate of return
on the Lender's capital or on the capital of the Lender's holding company, as a
consequence of the Lender's obligations under this Agreement or the Advances
made by the Lender pursuant hereto to a level below that which the Lender or the
Lender's holding company could have achieved but for such adoption, change or
compliance (taking into consideration the Lender's guidelines with respect to
capital adequacy) by an amount deemed by the Lender to be material, then from
time to time the Borrower shall pay to the Lender such additional amount or
amounts as will compensate the Lender or the Lender's holding company for any
such reduction suffered.
SECTION 3.6 COMPENSATION. The Borrower shall compensate the Lender for
all reasonable losses, expenses and liabilities (including any interest paid by
the Lender to lenders on funds borrowed by the Lender to make or carry any
LIBOR-Based Rate Segment and any loss sustained by the Lender in connection with
the re-employment of such funds), that the Lender may sustain: (a) if for any
reason (other than a default by the Lender) following agreement between the
Borrower and the Lender as to the LIBOR-Based Rate applicable to the LIBOR-Based
Rate Segment the Borrower fails to accept such LIBOR-Based Rate Segment, (b) as
a consequence of any unauthorized action taken or default by the Borrower in the
repayment of any LIBOR-Based Rate Segment when required by the terms of this
Agreement or (c) as a consequence of the prepayment of any LIBOR-Based Rate
Segment pursuant to Section 2.4(b). A certificate as to the amount of any
additional amounts payable pursuant to this section or Section 3.5(c) (setting
forth in reasonable detail the basis for requesting such amounts) submitted by
the Lender to the Borrower shall be conclusive, in the absence of manifest
error. The Borrower shall pay to the Lender the amount shown as due on any such
certificate delivered by the Lender within 30 days after the Borrower's receipt
of the same.
ARTICLE 4
REPRESENTATIONS AND WARRANTIES
The Borrower represents and warrants to the Lender as follows:
SECTION 4.1 FINANCIAL STATEMENTS. The Borrower's audited consolidated
financial statements as at December 31, 1995 and the Borrower's unaudited
consolidated financial statement as at September 30, 1996, copies of which have
been previously submitted to the Lender, have been prepared in conformity with
GAAP and present fairly in all material respects the financial condition of the
Borrower as at such dates and the results of its operations for the periods then
21
<PAGE>
ended, subject (in the case of the September 30, 1996, financial statements) to
year-end audit adjustments and omission of footnotes.
SECTION 4.2 NON-EXISTENCE OF DEFAULTS. As of the Closing Date, it is not
in default with respect to any material amount of its existing Debt. The making
and performance of this Agreement and the Credit Documents, will not
immediately, or with the passage of time, the giving of notice, or both: (a)
violate the provisions of the organizational documents or any other corporate
document of the Borrower; (b) violate any laws; (c) result in a material default
under any contract, agreement, or instrument to which the Borrower is a party or
by which the Borrower or its properties are bound; or (d) result in the creation
or imposition of any Lien upon any of the Property of the Borrower except in
favor of the Lender or Chase Manhattan Bank.
SECTION 4.3 LITIGATION. Set forth on SCHEDULE 4.3 is a list of all
material actions, suits, investigations or proceedings pending or, in the
knowledge of the Borrower, threatened against the Borrower as of the Closing
Date in which there is a reasonable probability of an adverse decision that
would materially and adversely affect the Borrower, the Business, the Property,
or the conditions, financial or otherwise, of the Borrower.
SECTION 4.4 MATERIAL ADVERSE CHANGES. As of the Closing Date, the
Borrower does not know of any material adverse change in the Business, or in the
Borrower's assets, liabilities, properties, or condition, financial or
otherwise, including changes in the Borrower's financial condition from
September 30, 1996, through the Closing Date.
SECTION 4.5 TITLE TO PROPERTY. The Borrower has good and marketable title
to all of the Property, free and clear of any and all Liens, other than the
Permitted Encumbrances.
SECTION 4.6 CORPORATE STATUS. The Borrower is a duly organized Georgia
corporation, in good standing, with perpetual corporate existence. The Borrower
has the corporate power and authority to own its properties and to transact the
Business in which it is engaged and presently proposes to engage. The Borrower
has not done business under any other name, trade name or otherwise, within the
five years immediately preceding the Closing Date except as set forth in
SCHEDULE 4.6.
SECTION 4.7 CORPORATE POWER AND AUTHORITY. The Borrower has the corporate
power to borrow and to execute, deliver and carry out the terms and provisions
of the Credit Documents and is duly qualified or registered to do business in
every jurisdiction where the character of its properties or the nature of its
activities makes such qualification or registration necessary, except to the
extent it would not have a material adverse effect on the Borrower to so qualify
or register. The Borrower has taken or caused to be taken all necessary
corporate action to authorize the execution, delivery and performance of the
Credit Documents and the borrowing thereunder (including the obtaining of any
consent of shareholders required by law or by the Borrower's Articles of
Incorporation or Bylaws).
22
<PAGE>
SECTION 4.8 PLACE OF BUSINESS. As of the Closing Date, the primary place
of business and chief executive office of the Borrower is at 535 Macon Road,
McDonough, GA 30253. The Property is maintained as of the Closing Date solely
at the locations listed in SCHEDULE 4.8, and all assets used in the Business are
in such locations.
SECTION 4.9 PLACE WHERE RECORDS MAINTAINED. As of the Closing Date the
Borrower's records concerning the Property are kept at the chief executive
office of the Borrower referenced above, or will be kept at such other place
that the Borrower informs the Lender of in advance of relocation.
SECTION 4.10 VALIDITY, BINDING NATURE AND ENFORCEABILITY OF THE CREDIT
DOCUMENTS. The Credit Documents executed by the Borrower are the valid and
binding obligations of the Borrower and are enforceable against the Borrower in
accordance with their terms, except as limited by bankruptcy, insolvency, or
other laws of general application relating to the enforcement of creditors'
rights.
SECTION 4.11 TAXES. As of the Closing Date, the Borrower has (a) filed
all federal and all material state and local tax returns and other reports that
it is required by law to file prior to the Closing Date, (b) paid or cause to be
paid all taxes, assessments and other governmental charges that are due and
payable prior to the Closing Date, the failure of which to pay would have a
material adverse effect on the Business, except those subject to a Permitted
Contest, and (c) made adequate provision for the payment of such taxes,
assessments or other charges accruing but not yet payable. The Borrower has no
knowledge of any deficiency or additional assessment in a material amount in
connection with any taxes, assessments or charges.
SECTION 4.12 COMPLIANCE WITH LAWS. As of the Closing Date, the Borrower
has complied in all material respects with all applicable laws, including any
Environmental Laws and any zoning laws, the failure of which to comply with
would have a material adverse effect on the Borrower.
SECTION 4.13 CONSENTS. As of the Closing Date, the Borrower has duly
obtained all material consents, permits, licenses, approvals or authorization
of, or effected the filing, registration or qualification with, any Governmental
Authority that is required to be obtained or effected by the Borrower in
connection with the Business or the execution and delivery of this Agreement and
the other Credit Documents the failure of which to obtain or effect would have a
material adverse effect on the Borrower.
SECTION 4.14 PURPOSE. The proceeds of the Loan shall be used by the
Borrower solely for capital expenditures and the working capital needs of the
Borrower.
SECTION 4.15 CONDITION OF THE BUSINESS. All material assets used in the
conduct of the Business are in good operating condition and repair and are fully
usable in the ordinary course thereof, reasonable wear and tear excepted.
23
<PAGE>
SECTION 4.16 LABOR CONTRACTS. As of the Closing Date, the Borrower is not
a party to or bound by any collective bargaining agreements, nor are there any
petitions to certify a collective bargaining organization or notices of
intention to organize pursuant to the National Labor Relations Act, other than
as described in SCHEDULE 4.16.
SECTION 4.17 ERISA. As of the Closing Date, except as set forth on
SCHEDULE 4.17, the Borrower has no employee benefit plans covered by Title IV of
ERISA and no qualified or nonqualified retirement plans or deferred compensation
plans.
SECTION 4.18 PATENTS AND TRADEMARKS. As of the Closing Date, the Borrower
owns no registered patents, trademarks or service marks, and has no pending
registration applications with respect to patents, trademarks or service marks,
in either case relating to the Business, other than those listed in the attached
SCHEDULE 4.18.
SECTION 4.19 LOCATION OF PROPERTY. SCHEDULE 4.8 describes the locations
where any of the Property is located or stored as of the date hereof.
SECTION 4.20 REAL PROPERTY. As of the Closing Date, the Borrower does not
own or lease any real property, except as set forth on SCHEDULE 4.20 attached
hereto.
SECTION 4.21 CAPITALIZATION. The Borrower has authorized and outstanding
1,000 shares of its capital stock, which are held beneficially and of record as
follows:
SHAREHOLDER NUMBER OF SHARES
----------- ----------------
Guarantor 1,000
There are no outstanding subscriptions, options, rights, warrants, calls,
commitments or agreements of any kind to issue, acquire or transfer any shares
of capital stock of the Borrower or any securities convertible into any shares
of such capital stock.
SECTION 4.22 SUBSIDIARIES. The Borrower has no Subsidiaries.
SECTION 4.23 FEDERAL RESERVE BOARD REGULATIONS. The Borrower does not
intend to use any part of the proceeds of the Credit, and has not incurred any
indebtedness to be reduced, retired or purchased by it out of such proceeds, for
the purpose of purchasing or carrying any Margin Stock, and it does not own and
has no intention of acquiring any such Margin Stock.
SECTION 4.24 INVESTMENT COMPANY ACT. The Borrower is not an "investment
company," or a company "controlled" by an "investment company," as such terms
are defined in the Investment Company Act of 1940, as amended.
24
<PAGE>
ARTICLE 5
CONDITIONS OF LENDING
The obligation of the Lender to lend hereunder is subject to the following
conditions precedent:
SECTION 5.1 REPRESENTATIONS AND WARRANTIES. On and as of the Closing Date
and any later date on which Credit is to be extended hereunder, and on the date
the Borrower presents to the Lender each Request for Advance or Interest Rate
Election form requesting an Advance, the representations and warranties set
forth in Article 4 must be true and correct in all material respects with the
same effect as though they had been made on and as of such date, except to the
extent that they expressly relate to an earlier date.
SECTION 5.2 NO DEFAULT. On and as of the Closing Date hereof and any
later date on which Credit is to be extended hereunder and on the date the
Borrower presents to the Lender each Request for Advance or Interest Rate
Election form requesting an Advance, no Event of Default, nor any event that
upon notice or lapse of time or both would constitute an Event of Default, may
exist. The presentation by the Borrower of each Request for Advance or Interest
Rate Election form requesting an Advance shall constitute representation and
warranty by the Borrower to the Lender that no Event of Default exists.
SECTION 5.3 AUTOMATIC REPRESENTATIONS AND WARRANTIES. The making of any
request for an Advance shall constitute an automatic representation and warranty
by the Borrower that the representations and warranties contained in Article 4
are true and correct in all material respects on and as of the date of such
Advance.
SECTION 5.4 REQUIRED ITEMS. On and as of the Closing Date and on and as
of the date of each Advance and on the date the Borrower presents to the Lender
each Request for Advance or Interest Rate Election form, the Lender must have
received all financial statements (if any), reports and other items required as
of that date under Article 2 and Article 6 of this Agreement.
SECTION 5.5 SUPPORTING DOCUMENTS.
(a) The Lender shall have received on or before the Closing Date:
(i) a copy of resolutions of the Board of Directors of the Borrower,
certified as in full force and effect on the Closing Date by the Secretary
of the Borrower, authorizing the execution, delivery and performance of the
Credit Documents by the Borrower and authorizing designated officers of the
Borrower to execute and deliver the Credit Documents and execute and
deliver to the Lender Request for Advances or Interest Rate Election forms;
25
<PAGE>
(ii) a certificate of the Secretary of the Borrower, dated the Closing
Date, certifying (A) that attached thereto are true, correct and accurate
copies of Certificate of Incorporation and By-laws of the Borrower and
(B) the incumbency and specimen signatures of the designated officers
referred to clause (i) above;
(iii) Opinions of Counsel to the Borrower, the Guarantor and the
Sponsors in form and content acceptable to the Lender and its counsel as to
the execution and delivery by the Borrower, the Guarantor and the Sponsors
of the Credit Documents and other matters related thereto;
(iv) a Pledge Agreement duly executed by the Guarantor granting to the
Lender a first priority perfected security interest in all the outstanding
capital stock of the Borrower, together with all stock powers, stock
certificates, and financing statements related thereto;
(v) other duly executed Security Documents granting to the Lender a
first priority perfected security interest and Lien on all other assets,
real or personal, then or thereafter owned by the Borrower;
(vi) the Subordination Agreement duly executed by the Borrower and the
Guarantor together with a copy of the MIG Note;
(vii) the Make-Whole and Pledge Agreement duly executed by the
Sponsors dated the Closing Date in favor of the Lender;
(viii) the Intercreditor and Subordination Agreement duly executed
by the Lender and The Chase Manhattan Bank dated the Closing Date;
(ix) the deposit of $1,000,000 made by the Borrower into the Snapper
Make-Whole Account;
(x) the Lock Box Agreement duly executed by the Bank, the Lender and
the Borrower;
(xi) a copy of resolutions of the Board of Directors of the Guarantor,
certified as in full force and effect on the Closing Date by the Secretary
of Guarantor, authorizing the execution, delivery and performance by the
Guarantor of the Credit Documents to which it is a party and authorizing
designated officers of the Guarantor to execute and deliver such Credit
Documents on behalf of the Guarantor;
(xii) a certificate of the Secretary of the Guarantor, dated the
Closing Date, certifying (A) that attached thereto are true, correct and
accurate copies of the Certificate of Incorporation and By-laws of the
Guarantor and (B) the incumbency and specimen signatures of the designated
officers referred to in clause (xii) above;
26
<PAGE>
(xiii) the Guaranty Agreement duly executed by the Guarantor in
favor of the Lender;
(xiv) certificates of good standing with respect to the Borrower
and the Guarantor from the appropriate Governmental Authorities in the
jurisdictions under the laws of which each of them is incorporated or
formed; and
(xv) such additional supporting documents as the Lender or its counsel
may reasonably request.
(b) The Lender shall have received on or before the Closing Date the
following additional documents:
(i) a Phase I environmental audit with respect to the real property
described on SCHEDULE 4.20 (the "Real Property") showing that there exist
no material environmental problems with the Real Property;
(ii) evidence satisfactory to the Lender that there has been no
material pending or threatened litigation, bankruptcy or insolvency,
injunction, order or claim pending with respect to the Borrower or any of
them and that no material adverse change has occurred in the financial
condition, business or prospects of the Borrower or any of them since the
date of the financial statements referred to in Section 4.1;
(iii) a title insurance commitment in an amount reasonably
acceptable to the Lender with respect to the Real Property, issued by a
title insurance company approved by the Lender and insuring the Lien of the
Lender, under the deed to secure debt executed and delivered by the
Borrower, and showing no exceptions other than Permitted Encumbrances;
(iv) the subordinations and consents from the landlords where the
Borrower has any Inventory located or consigned whereby each such party
acknowledges the Lender's first-priority security interest in the
Borrower's Inventory and other tangible personal property;
(v) such additional supporting documents as the Agents, the Lenders
or their counsel may reasonably request.
(c) On or before the delivery to the Lender of any Security Document, the
Borrower shall have delivered to the Lender, at the Borrower's expense, such
title insurance commitments, environmental reports, surveys, UCC searches,
financing statements, filing information, opinions of counsel and other
information as shall be requested by the Lender in order to satisfy the Lender
and its counsel as to the validity, legality, effectiveness, perfection,
priority and enforceability of such Security Document. Within 60 days prior to
November 26, 1997, the Borrower shall, at its expense, provide the Lender with
an equipment appraisal, reasonably acceptable to the Lender.
27
<PAGE>
(d) All documents delivered to the Lender under this Section 5.5 shall be
in form and substance reasonably satisfactory to the Lender and its counsel.
ARTICLE 6
COVENANTS
The Borrower covenants and agrees that:
SECTION 6.1 PAYMENT AND PERFORMANCE. The Borrower shall pay and perform
all Obligations in full when and as due under the terms of the Credit Documents.
SECTION 6.2 INSURANCE.
(a) TYPE OF INSURANCE. The Borrower shall at all times cause the Business
and the Property to be insured by reputable insurers of reasonable
financial soundness and having an A. M. Best rating of A or better, with
such policies, against such risks (including products liability) and in
such amounts as are appropriate for reasonably prudent businesses in the
Borrower's industry and of the Borrower's size and financial strength.
(b) REQUIREMENTS AS TO INSURANCE POLICIES. The policies of insurance
which the Borrower is required to carry pursuant to the provisions of
Section 6.2(a) shall comply with the requirements listed below:
(i) Each such policy shall provide that it may not be cancelled or
allowed to lapse at the end of a policy period without at least 30
days' prior written notice to the Lender;
(ii) Each liability and hazard insurance policy shall name the Lender
as an additional insured; and
(iii) Each insurance policy required under Section 6.2(a) shall
contain a standard lender's loss payable clause in favor of the
Lender. Such insurance policies shall also contain lender's loss
payable endorsements satisfactory to the Lender providing, among other
things, that any loss shall be payable in accordance with the terms of
such policy notwithstanding any act of the Borrower which might
otherwise result in forfeiture of such insurance.
(c) COLLECTION OF CLAIMS. The Borrower agrees that it shall promptly
advise the Lender of any insured casualty in excess of $100,000 and, if
such loss represents the destruction of any Property that causes the
Borrowing Base to be exceeded, the Borrower agrees that the Lender may
direct all insurance proceeds therefrom to be paid directly to the Lender,
and hereby appoints the Lender its attorney-in-fact for such purpose.
28
<PAGE>
(d) BLANKET POLICIES. Any insurance required by this Section 6.2 may be
supplied by means of a blanket or umbrella insurance policy.
(e) DELIVERY OF POLICIES OR CERTIFICATE OF INSURANCE. The Borrower shall
deliver to the Lender certificates of insurance issued by insurers to
evidence that the insurance maintained by the Borrower complies with the
requirements of this Section 6.2.
SECTION 6.3 COLLECTION OF RECEIVABLES; SALE OF INVENTORY. The Borrower
shall collect its Accounts and sell its Inventory only in the ordinary course of
business, unless written permission to the contrary is obtained from the Lender.
SECTION 6.4 NOTICE OF LITIGATION AND PROCEEDINGS. The Borrower shall give
prompt notice to the Lender of (a) any litigation or proceeding (including fines
and penalties of any public authority) in which it is a party in which there is
a reasonable probability of an adverse decision that would require it to pay
more than $500,000, or deliver assets the value of which exceeds $500,000,
whether or not the claim is considered to be covered by insurance; (b) any class
action litigation against it, regardless of size; and (c) the institution of any
other suit or proceeding that could reasonably be likely to materially and
adversely affect its operations, financial condition, property or the Business.
SECTION 6.5 PAYMENT OF INDEBTEDNESS TO THIRD PERSONS. The Borrower shall
pay, when due, all Debt due third persons, except when the amount thereof is
subject to a Permitted Contest.
SECTION 6.6 NOTICE OF CHANGE OF BUSINESS LOCATION. The Borrower shall
notify the Lender: (a) 30 days in advance of any change in or discontinuation
of the location of the Property, the Borrower's principal place of business, (b)
30 days in advance of the establishment of any new places of business relating
to the Business, and (c) 2 days in advance of any change in or addition to the
locations where the Borrower's Inventory or records are kept; provided, however,
that Inventory shall be excluded from the Borrowing Base if it is moved to a new
location and the Lender is not satisfied it has a valid perfected security
interest in such Inventory.
SECTION 6.7 PENSION PLANS. The Borrower shall (a) fund all of its defined
benefit or defined contribution pension plans, if any, in accordance with, and
in amounts not less than that required by, the minimum funding standards of
Section 302 of ERISA, as amended, (b) make available for inspection and copying
by the Lender, all audit reports and Forms 5500, filed with the United States
Department of Labor or the Internal Revenue Service with respect to all such
plans promptly after filing, and any other related information as may be
reasonably requested from time to time by the Lender, and (c) promptly advise
the Lender of the occurrence of any reportable event or non-exempt prohibited
transaction (as defined in ERISA) with respect to any such plan.
SECTION 6.8 PAYMENT OF TAXES. The Borrower shall pay or cause to be paid
when and as due, all taxes, assessments and charges or levies imposed upon it or
on any of its property or
29
<PAGE>
that it is required to withhold and pay over to the taxing authority or that it
must pay on its income, the failure of which to pay would have a material
adverse effect on the Borrower, except where subject to a Permitted Contest.
The Borrower shall, however, pay or cause to be paid all such taxes,
assessments, charges or levies immediately whenever foreclosure of any Lien that
attaches on the Property or the Real Property appears imminent.
SECTION 6.9 FURTHER ASSURANCES. The Borrower agrees to, execute such
other and further documents, including confirmatory deeds, deeds to secure debt,
promissory notes, security agreements, financing statements, continuation
statements, certificates of title, and the like as may from time to time in the
reasonable opinion of the Lender be necessary to perfect, confirm, establish,
reestablish, continue, or complete the security interests, collateral
assignments and liens in the Property, and the purposes and intentions of this
Agreement.
SECTION 6.10 ADVANCEMENTS. If the Borrower fails to (i) perform any of
the affirmative covenants contained in Section 6.1, (ii) protect or preserve the
Property or (iii) protect or preserve the status and priority of the Liens and
security interest of the Lender in the Property, the Lender may make advances to
perform those obligations. All sums so advanced shall immediately upon
advancement be subject to the terms and provisions of this Agreement and all of
the Credit Documents. Any provisions in this Agreement to the contrary
notwithstanding, the authorizations contained in this Section 6.10 shall impose
no duty or obligation on the Lender to perform any action or make any
advancement on behalf of the Borrower and are for the sole benefit and
protection of the Lender.
SECTION 6.11 MAINTENANCE OF STATUS. The Borrower shall take all necessary
steps to (i) preserve its existence as a corporation, (ii) preserve the
Borrower's franchises and permits the loss of which would have a material
adverse effect on the Business, and (iii) comply with all present and future
material agreements to which the Borrower's is subject. The Borrower shall not
change the nature of the Business during the term of this Agreement.
SECTION 6.12 FINANCIAL STATEMENTS; REPORTING REQUIREMENTS; CERTIFICATION
AS TO EVENTS OF DEFAULTS. During the term of this Agreement, the Borrower shall
furnish copies of the following to the Lender:
(a) within thirty (30) days of each month, the Borrower's monthly
financial package, consisting of projections of the Borrowing Base for the
next succeeding twelve month period, financial operating results summary,
together with operating summaries for the Borrower for the month and year
to date then ended, subject to year-end audit adjustments, and certified by
the Chief Financial Officer of the Borrower to have been prepared in
accordance with GAAP and to accurately reflect in all material respects the
financial condition of the Borrower;
(b) within 90 days of each fiscal year, annual financial statements for
the Borrower as of the end of such fiscal year, consisting of a
consolidated balance sheet, consolidated statement
30
<PAGE>
of operations, consolidated statements of cash flows and consolidated
statement of stockholder's equity, in comparative form. The statements and
balance sheet shall be consolidated with the financial statements of the
Guarantor and the Guarantor's financial statements shall be audited by an
independent firm of certified public accountants selected by the Guarantor
and reasonably acceptable to the Lender (the Guarantor's present accounting
firm, KPMG Peat Marwick is acceptable and any so-called "Big Six"
accounting firm selected by the Guarantor shall be acceptable to the
Lender), and certified by that firm of certified public accountants to have
been prepared in accordance with GAAP. The certified public accountants
shall render an unqualified opinion as to such statements and balance
sheets; provided, however, if the opinion is qualified, the accountants
shall provide a precise and full explanation of the reasons for any such
qualification together with all papers upon which any such qualification is
based. the Lender shall have the absolute and irrevocable right, from time
to time, to discuss the affairs of the Borrower directly with the
independent certified public accountant after prior notice to the Borrower
and the reasonable opportunity of the Borrower to be present at any such
discussions and a representative of the Guarantor shall have the right to
be present during any such discussions;
(c) within 45 days after the close of each fiscal quarter beginning with
the fiscal quarter ending December 31, 1996, a certificate of the
President, Chief Financial Officer, or Director of Taxes of the Borrower
stating that he has reviewed the provisions of the Credit Documents and
that a review of the activities of the Borrower during such quarter has
been made by or under his supervision with a view to determining whether
the Borrower has observed and performed all of the Borrower's obligations
under the Credit Documents, and that, to the best of his knowledge,
information and belief, the Borrower has observed and performed each and
every undertaking contained in the Credit Documents and is not at the time
in default in the observance or performance of any of the terms and
conditions thereof or, if the Borrower shall be so in default, specifying
all of such defaults and events of which he may have knowledge;
(d) by January 3lst of each fiscal year, an operating plan for such fiscal
year prepared for each month, including projected income statements,
balance sheets, cash flow budgets, and capital expenditure budgets for each
month supported by a narrative describing the assumptions upon which the
plan is based;
(e) within 15 days after the end of each month, financial statements
similar to those referred to in Section 6.12(b) for such month and for the
period beginning on the first day of the fiscal year and beginning on the
last day of such month, unaudited but certified by the Chief Financial
Officer of the Borrower;
(f) on Monday of each week, a completed Borrowing Base Certificate in the
form attached hereto as SCHEDULE E, certified by an Authorized
Representative of the Borrower, together with (i) a detailed aged trial
balance, in form and substance acceptable to the Lender, of all
then-existing Accounts specifying the names, addresses, face value and
dates of invoices for each Account Debtor obligated on an Account so
listed, separated as
31
<PAGE>
to Eligible Accounts and Accounts which are not Eligible Accounts, and,
upon demand, the original copy of all documents (including proof of
shipment and delivery, sales journals, contracts, bills of lading,
warehouse receipts, purchase orders, invoices, customer statements,
repayment histories, completion certificates or other proof of the
satisfactory performance of the services that gave rise to an Account, and
present status reports) evidencing or relating to the Accounts so scheduled
and such other matters and information relating to the then-existing
Accounts as the Lender shall reasonably request and (ii) schedules of
inventory; original orders; invoices; shipping documents; floorplan billing
settlements and receivables; market and inventory listing containing model,
serial number, location and parts inventory by location, the current status
and value of the Inventory and weekly sales reports in form and detail
reasonably satisfactory to the Lender. The statements shall be in the form
and shall contain the information as is prescribed by the Lender. Other
reporting shall be available upon request by the Lender, including
inventory reporting showing the cost (determined on a "first-in, first-out"
basis) and market value thereof;
(g) promptly upon receipt thereof, copies of all final reports and final
management letters (or excerpts of such reports or letters which include
information about the Borrower) submitted to the Guarantor by independent
accountants in connection with any annual or interim audit of the books of
the Guarantor made by such accountants which relate solely to the Borrower;
(h) copies of any and all reports, filings and other documentation
delivered to the Securities and Exchange Commission, if any; and
(i) any other statements, reports and other information as the Lender may
reasonably request concerning the financial condition of the Borrower.
SECTION 6.13 NOTICE OF EXISTENCE OF DEFAULT. The Borrower shall promptly
notify the Lender of: (i) the existence of any known condition or event, which
is or which will be with notice or the passage of time or both an Event of
Default of (ii) the actual or threatened termination, suspension, lapse or
relinquishment of any material license, authorization, permit or other right
granted the Borrower or for the Borrower's benefit and used in the Business by
any Governmental Authority material to the Business.
SECTION 6.14 COMPLIANCE WITH LAWS. The Borrower shall comply in all
material respects with all applicable laws, rules, regulations and orders the
noncompliance with which would have a material adverse effect on the Borrower.
SECTION 6.15 MAINTENANCE OF PROPERTY. The Borrower shall maintain the
Property and every part thereof in good condition and repair. The Borrower
shall not permit the value of the Property to be materially impaired. The
Borrower shall defend the Property against all claims and legal proceedings by
persons other than the Lender and Chase Manhattan Bank. The Borrower shall not
transfer the Property from the premises where now located (other than
32
<PAGE>
Inventory sold in the ordinary course of business, other Property transferred in
the ordinary course of business or in accordance with Section 6.19 of this
Agreement), or permit the Property to become a fixture or accession (unless so
affixed on the Closing Date) to any goods which are not items of Property,
without the prior written approval of the Lender. The Borrower shall not permit
the Property to be used in violation of any applicable law, regulations, or
policy of insurance. As to Property consisting of Instruments and Chattel
Paper, the Borrower shall preserve rights in it against prior parties.
SECTION 6.16 PROPERTY RECORDS AND STATEMENTS. The Borrower shall keep such
accurate and complete books and records pertaining to the Property in such
detail and form as the Lender reasonably requires.
SECTION 6.17 INSPECTION OF PROPERTY. The Lender may examine the Property
at any time, and from time to time. The Lender shall have full access to, and
the right to audit, inspect and make abstracts and copies from the Borrower's
books and records pertaining to the information included in the Borrowing Base
Certificate or the Property, wherever located, at any time during reasonable
business hours, and from time to time. The Borrower shall assist the Lender in
so doing.
SECTION 6.18 CHANGE OF NAME, ETC. The Borrower shall not change its name,
or begin to trade under any assumed names or trade names in connection with the
Business without thirty (30) days' prior written notice to the Lender, other
than the trade name "Blackhawk" and "Lady Garden" of which the Lender is hereby
given notice may be applied to certain products of the Borrower.
SECTION 6.19 SALE OR TRANSFER OF ASSETS. Except as consented to in
writing by the Lender, the Borrower shall not sell, transfer, lease (including
sale-leaseback) or otherwise dispose of all or any material portion of its
assets or merge with any person (whether or not the Borrower shall be the
survivor of such merger); provided that the Borrower may sell or otherwise
dispose of Property having an aggregate book value of not more than $500,000 in
any fiscal year or an aggregate fair market value of not more than $250,000 in
any fiscal year. This provision shall not apply to any sale if the proceeds of
such sale pay the Obligations in full.
SECTION 6.20 ACQUISITION OF STOCK OF THIRD PERSON. The Borrower shall not
enter into any agreement, commitment letter or letter of intent to acquire any
equity interest or stock in another business.
SECTION 6.21 FALSE CERTIFICATES OR DOCUMENTS. The Borrower shall not
furnish the Lender with any certificate or other document delivered pursuant to
this Agreement that contains any untrue statement of material fact or that omits
to state a material fact necessary to make it not misleading in light of the
circumstances under which it was furnished.
SECTION 6.22 TRANSACTIONS WITH AFFILIATES. Without the prior written
consent of the Lender, which shall not be unreasonably withheld, the Borrower
shall not enter into any contracts,
33
<PAGE>
leases, sales or other transactions with any division or Affiliates on terms
less favorable than could be obtained generally by the Borrower from a
nonaffiliate or in the aggregate, would have a material adverse effect on the
Property or on the Business.
SECTION 6.23 DIVIDENDS. The Borrower shall not declare or pay any
dividends or make any distributions upon any of its stock (including dividends
and distributions payable only in shares of its stock) or directly or indirectly
apply any of its assets to the redemption, retirement, purchase or other
acquisition of its stock.
SECTION 6.24 PAYMENTS ON MIG NOTE. The Borrower shall not make any
payments to the Guarantor on the MIG Note, at any time (a) that an Event of
Default exists or would result because of such payment, (b) that there would be
less than $10,000,000 available to the Borrower under the terms of this
Agreement immediately after giving effect to such payment, (c) in a single
payment exceeding $3,000,000, (d) prior to January 1, 1998 and (e) more
frequently than quarterly after January 1, 1998.
SECTION 6.25 LOAN. The Borrower shall not make any loan to any Person,
except for loans in anticipation of reasonable and normally reimbursable
business expenses, trade credit extended in the ordinary course of Business and
loans to employees in an aggregate principal amount not to exceed $300,000 at
any one time outstanding.
SECTION 6.26 USE OF CREDIT PROCEEDS. Not, directly or indirectly use any
part of the proceeds of the Credit (a) for any purpose other than capital
expenditures and general working capital needs or (b) without limiting the
generality of the foregoing, for the purpose of purchasing or carrying any
Margin Stock, or of reducing, retiring or purchasing any indebtedness incurred
for such purpose; or take any other action that would involve a violation of
Section 7 of the Securities Exchange Act of 1934, as amended, or any regulation
issued thereunder, including Regulation U or Regulation X of the Federal Reserve
Board, in connection with the transactions contemplated hereby; provided,
however, that nothing set forth in this Section 6.26 or elsewhere in this
Agreement shall be construed as imposing any duty on the Lender to supervise the
use or application of the Credit proceeds or any liability on the Lender to any
person if the Credit proceeds are not used for the purposes set forth in this
Agreement.
SECTION 6.27 INDEBTEDNESS. The Borrower shall not incur, create, assume
or permit to exist any Debt, other than the Obligations, Subordinated Debt, Debt
existing on the Closing Date and reflected on the Borrower's financial
statements, other Debt to the Lender, capitalized lease obligations in excess of
$3,000,000 and purchase money obligations allowed under Permitted Encumbrances.
SECTION 6.28 GUARANTIES. The Borrower shall not guarantee, endorse,
become surety for or otherwise in any way become or be responsible for the
indebtedness or obligations of any other person, whether by agreement to
purchase the indebtedness, liabilities or obligations of any other person, or
agreement for the furnishing of funds to any other person (directly or
indirectly, through the purchase of goods, supplies or services or by way of
stock purchase, capital
34
<PAGE>
contribution, working capital maintenance agreement, advance or loan) or for the
purpose of paying or discharging the indebtedness or obligations of any other
person, or otherwise, except for the endorsement of negotiable instruments in
the ordinary course of business for collection.
SECTION 6.29 INVESTMENTS, ETC. The Borrower shall not purchase or hold
beneficially any stock, other securities or evidences of indebtedness of or make
any investment or acquire any interest whatsoever in, any other person;
provided, however, that it may invest in Permitted Investments.
SECTION 6.30 SALE OF RECEIVABLES. The Borrower shall not sell, assign or
discount, or grant or permit any Lien (other than Permitted Encumbrances) on any
of its accounts receivable or any promissory note held by it, with or without
recourse, other than the discount of such notes in the ordinary course of
business for collection.
SECTION 6.31 SOLVENCY. The Borrower shall continue to be Solvent.
SECTION 6.32 LEASE OBLIGATIONS. Except for existing leases (and all
renewals, extensions and replacements thereof), the Borrower shall not incur,
create, permit to exist or assume any commitment to make any direct or indirect
payment, whether as rent or otherwise, under any lease, rental or other
arrangement for the use of property of any other person, if immediately
thereafter the aggregate of such payments to be made by it would exceed $500,000
in any consecutive twelve-month period.
SECTION 6.33 FINANCIAL COVENANTS. The Borrower will at all times maintain
as of the last day of each month as set forth below:
(a) a Tangible Net Worth plus Subordinated Debt in the combined amount of
not less than the amount set forth below;
(b) an EBITDA of not less than the amount set forth below;
(a) (b)
Tangible Net Worth Minimum
Date plus Subordinated Debt Date EBITDA
- ---- ---------------------- ---- --------
12 Months Ended
12/31/96 33,500 12/31/96 (10,000)
3 Months Ended
3/31/97 32,500 3/31/97 3,750
6 Months Ended
6/30/97 32,500 6/30/97 13,000
9 Months Ended
9/30/97 32,500 9/30/97 14,000
35
<PAGE>
12 Months Ended
12/31/97 32,500 12/31/97 14,000
Rolling
12 Months Ended
3/31/98 37,500 3/31/98 20,000
Rolling
12 Months Ended
6/30/98 40,000 6/30/98 25,000
Rolling
12 Months Ended
9/30/98 42,500 9/30/98 27,500
For purposes of this Section 6.33: (i) "Tangible Net Worth" means the book
value of the Borrower's assets less liabilities, excluding from such assets all
Intangibles; (ii) "INTANGIBLES" means and includes general intangibles (as that
term is defined in the Uniform Commercial Code); accounts receivable and
advances due from officers, directors, employees, stockholders and affiliates;
non-trade accounts receivable and other unidentified accounts receivable;
leasehold improvements net of depreciation; licenses; good will; prepaid
expenses; escrow deposits; covenants not to compete; the excess of cost over
book value of acquired assets; franchise fees; organizational costs; finance
reserves held for recourse obligations; capitalized research and development
costs; and such other similar items as the Lender may from time to time
determine in the Lender's reasonable discretion; (iii) "EBITDA" shall mean, for
any period of determination, the consolidated net income of the Borrower before
provision for income taxes, Interest Expense, depreciation and amortization
(including implicit interest expense on capitalized leases), all as determined
in accordance with GAAP, excluding therefrom (to the extent included): (a)
non-operating gains (including extraordinary or nonrecurring gains, gains from
discontinuance of operations and gains arising from the sale of assets other
than Inventory) during the applicable period; (b) net earnings of any business
entity in which the Borrower has an ownership interest unless such net earnings
shall have actually been received by the Borrower in the form of cash
distributions; (c) the earnings of any Person to which any assets of the
Borrower shall have been sold, transferred or disposed of, or into which the
Borrower shall have merged, or been a party to any consolidation or other form
of reorganization, prior to the date of such transaction; (d) any gain arising
from the acquisition of any securities of the Borrower; (e) non-operating losses
arising from the sale of capital assets during such period; and (f)
extraordinary charges of up to an aggregate, in each of 1996 and 1997 only, of
$7,000,000 relating to the effect of Inventory repurchased from distributors on
gross margin. The foregoing terms will be determined in accordance with GAAP,
and, if applicable, on a consolidated basis; (iv) "INTEREST EXPENSE" shall mean
interest payable on Debt during the period in question.
SECTION 6.34 ERISA COMPLIANCE. Neither the Borrower nor any member of the
Controlled Group nor any Plan of any of them will:
36
<PAGE>
(a) engage in any "prohibited transaction" (as such term is defined in
Section 406 or Section 2003 (a) of ERISA) which is not subject to a legal
exemption;
(b) incur any "accumulated funding deficiency" (as such term is defined in
Section 302 of ERISA) whether or not waived;
(c) terminate any Pension Plan in a manner which could result in the
imposition of a Lien on any property of the Borrower or any member of the
Controlled Group pursuant to Section 4068 of ERISA; or
(d) violate state or federal securities laws applicable to any Plan.
SECTION 6.35 FISCAL YEAR. The Borrower shall not change its fiscal
year-end without sixty days prior written notice to the Lender.
ARTICLE 7
EVENTS OF DEFAULT
SECTION 7.1 EVENTS OF DEFAULT. The occurrence of any of the following
events shall constitute an event of default (an "Event of Default") under this
Agreement (whatever the reason for such event and whether or not it shall be
voluntary or involuntary or be effected by operation of law or pursuant to any
Governmental Requirement):
(a) any representation or warranty made in this Agreement or in any of the
other Credit Documents shall prove to be false or misleading in any material
respect as of the time made; or
(b) any certificate, financial statement or other instrument furnished
pursuant to this Agreement or any of the other Credit Documents, shall prove to
be false or misleading in any material respect as of the time furnished; or
(c) default shall be made in the payment when due of any of the
Obligations, and such default shall continue unremedied for five (5) days; or
(d) default shall be made in the due observance or performance of any
covenant, condition or agreement on the part of the Borrower to be observed or
performed pursuant to the terms of Sections 6.19, 6.20, 6.21, 6.23, 6.24, 6.25,
6.27, 6.28, 6.29, 6.30, 6.31, 6.32, 6.33, 6.34 and 6.35 hereof; or
(e) default shall be made in the due observance or performance of any
covenant, condition or agreement on the part of the Borrower to be observed or
performed pursuant to the terms of this Agreement (other than any covenant,
condition or agreement, default in the observance or performance of which is
elsewhere in this Section 7.1 specifically dealt with) and
37
<PAGE>
such default shall continue unremedied until the first to occur of (1) the date
that is thirty (30) days after written notice by the Lender to the Borrower or
(2) the date that is thirty (30) days after the Borrower first obtains knowledge
thereof; or
(f) any default or event of default, as therein defined, shall occur under
any of the other Credit Documents (after giving effect to any applicable notice,
grace or cure period specified therein); or
(g) default shall be made with respect to any Debt (other than the
Obligations) of any Obligor in a principal amount in excess of $2,000,000, if
the effect of such default is to accelerate the maturity of such Debt or to
permit the holder thereof to cause such Debt to become due prior to its stated
maturity, or any such Debt shall not be paid when due (after giving effect to
any applicable notice, grace or cure periods); or
(h) any Obligor shall (1) apply for or consent to the appointment of a
receiver, trustee, liquidator or other custodian of such Obligor or any of such
Obligor's properties or assets, (2) fail or admit in writing such Obligor's
inability to pay such Obligor's debts generally as they become due, (3) make a
general assignment for the benefit of creditors, (4) suffer or permit an order
for relief to be entered against such Obligor in any proceeding under the
federal Bankruptcy Code, or (5) file a voluntary petition in bankruptcy, or a
petition or an answer seeking an arrangement with creditors or to take advantage
of any bankruptcy, reorganization, insolvency, readjustment of debt, dissolution
or liquidation law or statute, or an answer admitting the material allegations
of a petition filed against such Obligor in any proceeding under any such law or
statute, or if corporate action shall be taken by any Obligor for the purpose of
effecting any of the foregoing; or
(i) a petition shall be filed, without the application, approval or
consent of any Obligor in any court of competent jurisdiction, seeking
bankruptcy, reorganization, rearrangement, dissolution or liquidation of such
Obligor or of all or a substantial part of the properties or assets of such
Obligor, or seeking any other relief under any law or statute of the type
referred to in Section 7.1(h)(5) against such Obligor, or the appointment of a
receiver, trustee, liquidator or other custodian of such Obligor or of all or a
substantial part of the properties or assets of such Obligor, and such petition
shall not have been stayed or dismissed within 60 days after the filing thereof;
or
(j) any Obligor shall be dissolved or liquidated, if an entity, or cease
to be Solvent or suspend business; or
(k) a Change in Control shall occur; for purposes hereof, a "Change in
Control" shall mean (1) a change of ownership of the Borrower that results in
the Guarantor not owning at least 80% of all the outstanding stock of the
Borrower, (2) a change of ownership of the Guarantor that results in (A) the
Sponsors not having beneficial ownership or common voting power of at least 15%
of the common voting power of the Guarantor, (B) any "person" (as such term is
defined in 13(d) and 14(d) of the Securities and Exchange Act of 1934) having
more common voting power
38
<PAGE>
than the Sponsors or (C) any person other than the Sponsors for any reason
obtaining the right to appoint a majority of the board of directors of the
Guarantor; or
(l) an Estate Default shall occur; for purposes hereof an "Estate Default"
shall mean (1) a failure by the estate Sponsor of either within ninety (90) days
of the death of either Sponsor, or a failure by a conservator, committee or
guardian (a "conservator") for the assets of either Sponsor within ninety (90)
days of the appointment of any such conservator, (A) to duly allow and assume,
or otherwise confirm, a creditor's claim filed against the estate or the
conservator in accordance with applicable law relating to the obligations of
such Sponsor under the Make-Whole and Pledge Agreement (which, in the case of
the death of either Sponsor, shall, if required by applicable law, be evidenced
by a creditor's claim filed against the estate in accordance with applicable
law) and (B) to agree for the benefit of the Lender to maintain (unless the
Lender is furnished with cash collateral), a letter of credit or other
collateral acceptable to the Lender in an amount equal to the estate's maximum
exposure under the Make-Whole and Pledge Agreement (assuming an Event of Default
thereunder and an acceleration of the Obligations hereunder at a time when the
Loan was fully drawn) the net worth of the estate (disregarding the separate
status of the Borrower) of at least $1,000,000,000 and not to make any
beneficial distribution from the estate that would cause its net worth to be
less than such amount and (C) to provide a legal opinion (in form and substance,
and from counsel, reasonably satisfactory to the Lender) regarding such
allowance and assumption or confirmation and such agreement or (2) any
rejection, or attempt at rejection, by the estate of either Sponsor or a
conservator for either Sponsor's assets of his obligations under the Make-Whole
and Pledge Agreement or the taking of any action or the filing of any motion by
such estate or conservator that could reasonably be expected to materially
adversely affect or impede the enforceability of such obligation; or
(m) the Borrower or any member of the Controlled Group shall fail to pay
when due an amount or amounts aggregating in excess of $2,000,000 which it shall
have become liable to pay to the PBGC or to a Plan under Section 515 of ERISA
or Title IV of ERISA; or notice of intent to terminate a Plan or Plans (other
than a multi-employer plan, as defined in Section 4001(3) of ERISA), having
aggregate benefit commitments or vested liabilities in excess of assets by an
amount in excess of $2,000,000 shall be filed under Title IV of ERISA by the
Borrower, any member of the Controlled Group, any plan administrator or any
combination of the foregoing, or the PBGC shall institute proceedings under
Title IV of ERISA to terminate any such Plan or Plans and such default, if
capable of cure, continues for thirty (30) calendar days after notice of such
default to the Borrower from the Lender; or
(n) any writ of execution, attachment or garnishment shall be issued
against the assets of any Obligor, the fair market value of which assets are in
excess of $2,000,000, and such writ of execution, attachment or garnishment
shall not be dismissed, discharged, bonded off or quashed within 90 days of
issuance; or
(o) any final judgment for the payment of money in the amount of $250,000
or more shall be rendered against the Borrower or any such judgment in the
amount of $1,000,000 or more shall be rendered against the Guarantor or either
of the Sponsors and in either case such judgment
39
<PAGE>
shall remain undischarged for a period of 30 days during which execution shall
not be effectively stayed; or
(p) any guarantor of any of the Obligations shall default in the due
observance or performance of any covenant, condition or agreement on such
guarantor's part to be observed or performed under such guarantor's guaranty
agreement (after giving effect to any applicable notice, grace or cure period
specified therein) or shall terminate or attempt to terminate such guarantor's
guaranty agreement.
SECTION 7.2 LENDER'S REMEDIES ON DEFAULT. If an Event of Default exists,
or any event exists that upon notice or lapse of time or both would constitute
an Event of Default, the Lender shall have no obligation to extend any further
Credit hereunder. If an Event of Default exists under Section 7.1(h) or 7.1(i),
all of the Obligations shall automatically become immediately due and payable.
If any other Event of Default exists, the Lender may, by written notice to the
Borrower, declare any or all of the Obligations to be immediately due and
payable, whereupon they shall become immediately due and payable. Any such
acceleration (whether automatic or upon notice) shall be effective without
presentment, demand, protest or other action of any kind, all of which are
hereby expressly waived, anything contained herein or in any of the other Credit
Documents to the contrary notwithstanding. If an Event of Default exists, the
Lender may exercise any of its rights and remedies on default under the Credit
Documents or applicable law, including the right to make withdrawals from the
Make-Whole Accounts (as defined in the Make-Whole and Pledge Agreement).
ARTICLE 8
MISCELLANEOUS
SECTION 8.1 NOTICES.
(a) Any request, demand, authorization, direction, notice, consent, waiver
or other document provided or permitted by this Agreement or the other Credit
Documents to be made upon, given or furnished to, or filed with, the Borrower or
the Lender must (except as otherwise provided in this Agreement or the other
Credit Documents) be in writing and be delivered by one of the following means:
(1) by personal delivery at the hand delivery address specified below, (2) by
first-class, registered or certified mail, postage prepaid and addressed as
specified below, or (3) if facsimile transmission facilities for such party are
identified below or pursuant to a separate notice from such party, sent by
facsimile transmission to the number specified below or in such notice.
(b) The hand delivery address, mailing address and (if applicable)
facsimile transmission number for receipt of notice or other documents by such
parties are as follows:
40
<PAGE>
BORROWER
By hand Snapper, Inc.
or mail: 535 Macon Road
McDonough, Georgia 30253
Attention: Robin Knight/Paul Kiel
By facsimile: (770) 914-4271
Attention: Robin Knight/Paul Kiel
With a copy to the c/o One Meadowlands Plaza
Guarantor and the East Rutherford, New Jersey 07076
Sponsors: Attention: Arnold L. Wadler, Esq.
By facsimile: (201) 531-2803
Attention: Arnold L. Wadler, Esq.
And to: Paul, Weiss, Rifkind, Wharton & Garrison
1285 Avenue of the Americas
New York, New York 10019
Attention: James M. Dubin, Esq.
By facsimile: (212) 757-3990
Attention: James M. Dubin, Esq.
LENDER:
By hand: AmSouth Bank of Alabama
7th Floor, AmSouth-Sonat Tower
1900 5th Avenue North
Birmingham, Alabama 35203
Attention: Samuel M. Tortorici
By mail: AmSouth Bank of Alabama
P.O. Box 11007
Birmingham, Alabama 35288
Attention: Samuel M. Tortorici
By facsimile: (205) 801-0157
Attention: Samuel M. Tortorici
41
<PAGE>
With a copy to: J. Kris Lowry
Maynard, Cooper & Gale, P.C.
1901 Sixth Avenue North
2400 AmSouth/Harbert Plaza
Birmingham, Alabama 35203-2602
By facsimile: (205) 254-1999
Any of such parties may change the address or facsimile transmission notice for
receiving any such notice or other document by giving notice of the change to
the other parties named in this Section 8.1.
(c) Any such notice or other document shall be deemed delivered when
actually received by the party to whom directed (or, if such party is not a
natural person, to an officer, director, partner, member or other legal
representative of the party) at the address or number specified pursuant to this
Section 8.1, or, if sent by mail, three Business Days after such notice or
document is deposited in the United States mail, addressed as provided above.
(d) Five Business Days' written notice to the Borrower as provided above
shall constitute reasonable notification to the Borrower when notification is
required by law; provided, however, that nothing contained in the foregoing
shall be construed as requiring five Business Days' notice if, under applicable
law and the circumstances then existing, a shorter period of time would
constitute reasonable notice.
SECTION 8.2 EXPENSES. The Borrower shall promptly on demand pay all costs
and expenses, including the fees and disbursements of counsel to the Lender,
reasonably incurred by the Lender in connection with (a) the extension of the
Credit and the administration or collection of the Obligations, (b) the
negotiation, preparation and review of the Credit Documents (whether or not the
transactions contemplated by this Agreement shall be consummated), (c) the
enforcement of any of the Credit Documents, (d) the custody and preservation of
the Property, (e) the protection or perfection of the Lender's rights and
interests under the Security Documents in the Property, (f) the filing or
recording of the Security Documents or any related financing, continuation or
termination statements, or similar documents (including any stamp, documentary,
mortgage, recording and similar taxes and fees), (g) the exercise by or on
behalf of the Lender of any of its rights, powers or remedies under the Credit
Documents, (h) the compliance by the Lender with any Governmental Requirements
with respect to any of the Credit Documents, any of the Property or any of the
Obligations, and (i) the successful prosecution or defense of any action or
proceeding by or against the Lender, the Borrower, any Obligor, or any one or
more of them, concerning any matter related to this Agreement or any of the
other Credit Documents, any of the Property or any of the Obligations. All such
amounts shall bear interest from the date demand is made at the Default Rate and
shall be included in the Obligations secured by the Security Documents. The
Borrower's obligations under this Section 8.2 shall survive the payment in full
of the Obligations and the termination of this Agreement.
42
<PAGE>
SECTION 8.3 INDEPENDENT OBLIGATIONS. The Borrower agrees that each of the
obligations of the Borrower to the Lender under this Agreement may be enforced
against the Borrower without the necessity of joining any other Obligor, any
other holders of Liens in any Property or any other person, as a party.
SECTION 8.4 SUCCESSORS AND ASSIGNS. Whenever in this Agreement any party
hereto is referred to, such reference shall be deemed to include the successors
and assigns of such party, except that neither the Borrower nor the Lender may
assign or transfer this Agreement without the prior written consent of the other
party; and all covenants and agreements of the Borrower contained in this
Agreement shall bind the Borrower's successors and assigns and shall inure to
the benefit of the successors and assigns of the Lender.
SECTION 8.5 GOVERNING LAW. This Agreement and the other Credit Documents
shall be construed in accordance with and governed by Title 9 of the U.S. Code
and the internal laws of the State of Alabama (without regard to conflict of law
principles) except as required by mandatory provisions of law and except to the
extent that the validity and perfection of the Liens on the Property are
governed by the laws of any jurisdiction other than the State of Alabama.
SECTION 8.6 DATE OF AGREEMENT. The date of this Agreement is intended as
a date for the convenient identification of this Agreement and is not intended
to indicate that this Agreement was executed and delivered on that date.
SECTION 8.7 SEPARABILITY CLAUSE. If any provision of the Credit Documents
shall be invalid, illegal or unenforceable, the validity, legality and
enforceability of the remaining provisions shall not in any way be affected or
impaired thereby.
SECTION 8.8 COUNTERPARTS. This Agreement may be executed in any number of
counterparts, each of which so executed shall be deemed an original, but all
such counterparts shall together constitute but one and the same agreement.
SECTION 8.9 NO ORAL AGREEMENTS. This Agreement is the final expression of
the agreement between the parties hereto, and this Agreement may not be
contradicted by evidence of any prior oral agreement between such parties. All
previous oral agreements between the parties hereto have been incorporated into
this Agreement and the other Credit Documents, and there is no unwritten oral
agreement between the parties hereto in existence.
SECTION 8.10 WAIVER AND ELECTION. The exercise by the Lender of any
option given under this Agreement shall not constitute a waiver of the right to
exercise any other option. No failure or delay on the part of the Lender in
exercising any right, power or remedy under this Agreement shall operate as a
waiver thereof, nor shall any single or partial exercise of any such right,
power or remedy preclude any further exercise thereof or the exercise of any
other right, power or remedy. No modification, termination or waiver of any
provisions of the Credit Documents, nor consent to any departure by the Borrower
therefrom, shall be effective unless in writing and signed by an authorized
representative of the Lender, and then such waiver or consent
43
<PAGE>
shall be effective only in the specific instance and for the specific purpose
for which given. No notice to or demand on the Borrower in any case shall
entitle the Borrower to any other or further notice or demand in similar or
other circumstances. NO SUCH WRITTEN AMENDMENT, MODIFICATION OR SUPPLEMENT THAT
WOULD (A) INCREASE THE PRINCIPAL AMOUNT OF OR RATE OF INTEREST ON THE
OBLIGATIONS, (B) INCREASE THE RATE OF ANY FEE PAYABLE UNDER SECTION 2.6(B) OR
(C) OF THIS AGREEMENT, (C) EXCEPT AS MAY BE OTHERWISE SPECIFICALLY PROVIDED IN
THIS AGREEMENT OR ANY OTHER CREDIT DOCUMENT, RELEASE ALL OR SUBSTANTIALLY ALL OF
THE PROPERTY, OR (D) WAIVE AN EVENT OF DEFAULT UNDER ANY CREDIT DOCUMENT SHALL
BE EFFECTIVE BETWEEN THE PARTIES THERETO UNLESS CONSENTED TO IN WRITING BY THE
GUARANTOR AND THE SPONSORS.
SECTION 8.11 NO OBLIGATIONS OF LENDER; INDEMNIFICATION. The Lender does
not by virtue of this Agreement or any of the transactions contemplated by the
Credit Documents assume any duties, liabilities or obligations with respect to
any property now or hereafter granted to it as collateral for any of the
Obligations unless expressly assumed by the Lender under a separate agreement in
writing, and the Credit Documents shall not be deemed to confer on the Lender
any duties or obligations that would make the Lender directly or derivatively
liable for any person's negligent, reckless or wilful conduct. The Borrower
agrees to indemnify and hold the Lender harmless against and with respect to any
damage, claim, action, loss, cost, expense, liability, penalty or interest
(including attorney's fees) and all costs and expenses of all actions, suits,
proceedings, demands, assessments, claims and judgments directly or indirectly
resulting from, occurring in connection with, or arising out of: (a) any
inaccurate representation made by the Borrower or any Obligor in this Agreement
or any other Credit Document; and (b) any breach of any of the warranties or
obligations of the Borrower or any Obligor under this Agreement or any other
Credit Document. The provisions of this Section 8.11 shall survive the payment
of the Obligations in full and the termination of this Agreement and the other
Credit Documents, and the satisfaction, release (in whole or in part) and
foreclosure of the Security Documents.
SECTION 8.12 SET-OFF. While any Event of Default exists, the Lender is
authorized at any time and from time to time, without notice to the Borrower
(any such notice being expressly waived by the Borrower), to set off and apply
any and all deposits (general or special, time or demand, provisional or final)
at any time held and other indebtedness at any time owing by the Lender to or
for the credit or the account of the Borrower against any and all of the
Obligations, irrespective of whether or not the Lender shall have made any
demand under this Agreement and although such Obligations may be unmatured. The
rights of the Lender under this Section 8.12 are in addition to all other rights
and remedies (including other rights of set-off or pursuant to any banker's
lien) that the Lender may have.
SECTION 8.13 PARTICIPATION. The Borrower understands that the Lender may,
with the Borrower's consent, from time to time enter into a participation
agreement or agreements with one or more participants pursuant to which each
such participant shall be given a participation in the Credit and that any such
participant may from time to time similarly grant to one or more
44
<PAGE>
subparticipants subparticipations in the Credit. The Borrower agrees that any
participant or subparticipant may exercise any and all rights of banker's lien
or set-off with respect to the Borrower, as fully as if such participant or
subparticipant had made a loan directly to the Borrower in the amount of the
participation or subparticipation given to such participant or subparticipant in
the Credit. For the purposes of this Section 8.13 only, the Borrower shall be
deemed to be directly obligated to each participant or subparticipant in the
amount of its participating interest in the amount of the Credit and any other
Obligations. Nothing contained in this Section 8.13 shall affect the Lender's
right of set-off (under Section 8.12 or applicable law) with respect to the
entire amount of the Obligations, notwithstanding any such participation or
subparticipation. The Lender may divulge to any participant or subparticipant
all information, reports, financial statements, certificates and documents
obtained by it from the Borrower or any other person under any provision of this
Agreement or otherwise.
SECTION 8.14 SUBMISSION TO JURISDICTION. The Borrower irrevocably
(a) acknowledges that this Agreement will be accepted by the Lender and
performed by the Borrower in the State of Alabama;(b) submits to the
jurisdiction of each state or federal court sitting in Jefferson County, Alabama
(collectively, the "Courts") over any suit, action or proceeding arising out of
or relating to this Agreement (to enforce the arbitration provisions hereof or,
if the arbitration provisions are found to be unenforceable, to determine any
issues arising out of or relating to this Agreement) or any of the other Credit
Documents (individually, an "Agreement Action");(c) waives, to the fullest
extent permitted by law, any objection or defense that the Borrower may now or
hereafter have based on improper venue, lack of personal jurisdiction,
inconvenience of forum or any similar matter in any Agreement Action brought in
any of the Courts;(d) agrees that final judgment in any Agreement Action brought
in any of the Courts shall be conclusive and binding upon the Borrower and may
be enforced in any other court to the jurisdiction of which the Borrower is
subject, by a suit upon such judgment; (e) consents to the service of process on
the Borrower in any Agreement Action by the mailing of a copy thereof by
registered or certified mail, postage prepaid, to the Borrower at the Borrower's
address designated in or pursuant to Section 8.1;(f) agrees that service in
accordance with Section 8.14(e) shall in every respect be effective and binding
on the Borrower to the same extent as though served on the Borrower in person by
a person duly authorized to serve such process; and (g) AGREES THAT THE
PROVISIONS OF THIS SECTION, EVEN IF FOUND NOT TO BE STRICTLY ENFORCEABLE BY ANY
COURT, SHALL CONSTITUTE "FAIR WARNING" TO THE BORROWER THAT THE EXECUTION OF
THIS AGREEMENT MAY SUBJECT THE BORROWER TO THE JURISDICTION OF EACH STATE OR
FEDERAL COURT SITTING IN JEFFERSON COUNTY, ALABAMA WITH RESPECT TO ANY AGREEMENT
ACTIONS, AND THAT IT IS FORESEEABLE BY THE BORROWER THAT THE BORROWER MAY BE
SUBJECTED TO THE JURISDICTION OF SUCH COURTS AND MAY BE SUED IN THE STATE OF
ALABAMA IN ANY AGREEMENT ACTIONS. Nothing in this Section 8.14 shall limit or
restrict the Lender's right to serve process or bring Agreement Actions in
manners and in courts otherwise than as herein provided.
45
<PAGE>
SECTION 8.15 USURY LAWS. Any provision of this Agreement or any of the
other Credit Documents to the contrary notwithstanding, the Borrower and the
Lender agree that they do not intend for the interest or other consideration
provided for in this Agreement and the other Credit Documents to be greater than
the maximum amount permitted by applicable law. Regardless of any provision in
this Agreement or any of the other Credit Documents, the Lender shall not be
entitled to receive, collect or apply, as interest on the Obligations, any
amount in excess of the maximum rate of interest permitted to be charged under
applicable law until such time, if any, as that interest, together with all
other interest then payable, falls within the then applicable maximum lawful
rate of interest. If the Lender shall receive, collect or apply any amount in
excess of the then maximum rate of interest, the amount that would be excessive
interest shall be applied first to the reduction of the principal amount of the
Obligations then outstanding in the inverse order of maturity, and second, if
such principal amount is paid in full, any excess shall forthwith be returned to
the Borrower. In determining whether the interest paid or payable under any
specific contingency exceeds the highest lawful rate, the Borrower and the
Lender shall, to the maximum extent permitted under applicable law,
(a) characterize any nonprincipal payment as an expense, fee or premium rather
than as interest, (b) exclude voluntary prepayments and the effects thereof,
(c) consider all the Obligations as one general obligation of the Borrower, and
(d) "spread" the total amount of the interest throughout the entire term of the
Note so that the interest rate is uniform throughout the entire term of the
Note.
SECTION 8.16 ARBITRATION; DISPUTE RESOLUTION; PRESERVATION OF FORECLOSURE
REMEDIES
(a) The Borrower represents to the Lender that its business and affairs
constitute substantial interstate commerce and that it contemplates using the
proceeds of the Note in substantial interstate commerce. Except as otherwise
specifically set forth below, any action, dispute, claim, counterclaim or
controversy ("Dispute" or "Disputes"), between or among the Lender, the Borrower
or any other Obligor, including any claim based on or arising from an alleged
tort, shall be resolved by arbitration as set forth below. As used herein,
Disputes shall include all actions, disputes, claims, counterclaims or
controversies arising in connection with the Note, any extension of or
commitment to extend Credit by the Lender, any collection of any indebtedness
owed to the Lender, any security or collateral given to the Lender, any action
taken (or any omission to take any action) in connection with any of the
foregoing, any past, present and future agreement between or among the Lender,
the Borrower or any other Obligor (including the Note and any Credit Document),
and any past, present or future transactions between or among the Lender, the
Borrower or any other Obligor. Without limiting the generality of the
foregoing, Disputes shall include actions commonly referred to as lender
liability actions.
(b) All Disputes shall be resolved by binding arbitration in accordance
with Title 9 of the U.S. Code and the Commercial Arbitration Rules of the
American Arbitration Association (the "AAA"). Defenses based on statutes of
limitation, estoppel, waiver, laches and similar doctrines, that would otherwise
be applicable to an action brought by a party, shall be applicable in any such
arbitration proceeding, and the commencement of an arbitration proceeding with
respect to this Agreement shall be deemed the commencement of an action for such
purposes.
46
<PAGE>
(c) Notwithstanding the foregoing, the Borrower and each other Obligor
agrees that the Lender shall have the option, but not the obligation, to submit
to and pursue in a court of law any claim against the Borrower or any other
Obligor for a debt due. The Borrower and each other Obligor agrees that, if the
Lender pursues such a claim in a court of law,(1) failure of the Lender to
assert any additional claim in such proceeding shall not be deemed a waiver of,
or estoppel to pursue, such claim as a claim or counterclaim in arbitration as
set forth above, and (2) the institution or maintenance of a judicial action
hereunder shall not constitute a waiver of the right of any party to submit any
other action, dispute, claim or controversy as described above, even though
arising out of the same transaction or occurrence, to binding arbitration as set
forth herein. If the Borrower asserts a claim against the Lender in arbitration
or otherwise during the pendency of a claim brought by the Lender in a court of
law, the court action shall be stayed and the parties shall submit to
arbitration all claims.
(d) No provision of, nor the exercise of any rights under this Section,
shall limit the right of any party (1) to foreclose against any real or personal
property collateral by exercise of a power of sale under any Credit Document, or
by exercise of any rights of foreclosure or of sale under applicable law,(2) to
exercise self-help remedies such as set-off, or (3) to obtain provisional or
ancillary remedies such as injunctive relief, attachment or the appointment of a
receiver from a court having jurisdiction before, during or after the pendency
of any arbitration or referral. The institution and maintenance of an action
for judicial relief or pursuit of provisional or ancillary remedies or exercise
of self-help remedies shall not constitute a waiver of the right of any party,
including the plaintiff in such an action, to submit the Dispute to arbitration
or, in the case of actions on a debt, to judicial resolution.
(e) Whenever an arbitration is required hereunder, the arbitrator shall be
selected in accordance with the Commercial Arbitration Rules of the AAA. The
AAA shall designate a panel of 10 potential arbitrators knowledgeable in the
subject matter of the Dispute. Each of the Lender and the Obligor shall
designate, within 30 days of the receipt of the list of potential arbitrators,
one of the potential arbitrators to serve, and the two arbitrators so designated
shall select a third arbitrator from the eight remaining potential arbitrators.
The panel of three arbitrators shall determine the resolution of the Dispute.
47
<PAGE>
IN WITNESS WHEREOF, the Borrower and the Lender have caused this Agreement
to be dated November 26, 1996 and to be duly executed and delivered.
SNAPPER, INC.
By
---------------------------------------
Its
----------------------------------
AMSOUTH BANK OF ALABAMA
By
---------------------------------------
Its Senior Vice President
<PAGE>
LIST OF SCHEDULES
Schedule
A Credit Documents
B Eligible Adjusted Equipment Value
C Permitted Encumbrances
D Request for Advances or Interest Rate Election
E Borrowing Base Certificate
F Extended Terms
G Thirty Day Terms
4.3 Litigation
4.6 Trade Names
4.8 Locations of Personal Property
4.16 Labor Contracts
4.17 ERISA
4.18 Patents, Trademarks and Copyrights
4.20 Real Property
<PAGE>
SCHEDULE A
CREDIT DOCUMENTS
The "CREDIT DOCUMENTS" referred to in this Agreement include the following:
(a) Credit Agreement dated November 26, 1996 executed by the Borrower and
the Lender.
(b) Promissory Note dated November 26, 1996 in the principal amount of
Fifty-five Million and No/100 Dollars ($55,000,000.00) executed by the Borrower
in favor of the Lender (the "Note"), which evidences the loan made by the Lender
to the Borrower and has a final maturity date of January 1, 1999.
(c) Environmental Indemnity Agreement dated November 26, 1996 executed by
the Borrower and Metromedia International Group, Inc. in favor of the Lender.
(d) Security Agreement (General) dated November 26, 1996 executed by the
Borrower in favor of the Lender.
(e) Guaranty Agreement dated November 26, 1996 executed by Metromedia
International Group, Inc. in favor of the Lender.
(f) Pledge Agreement dated November 26, 1996 executed by Metromedia
International Group, Inc. in favor of the Lender.
(g) Make-Whole and Pledge Agreement dated November 26, 1996 executed by
John W. Kluge and Stuart Subotnick in favor of the Lender.
(h) Deed to Secure Debt dated November 26, 1996 executed by the Borrower
in favor of the Lender.
A-1
<PAGE>
SCHEDULE B
ELIGIBLE ADJUSTED EQUIPMENT VALUE
APPLICABLE PERIOD EQUIPMENT VALUE
12/96 $8,158,000
1/97 8,158,000
2/97 7,991,000
3/97 7,825,000
4/97 7,658,000
5/97 7,492,000
6/97 7,325,000
7/97 7,159,000
8/97 6,992,000
9/97 6,826,000
10/97 6,659,000
11/97 6,493,000
12/97 until the Values to be based upon a
Termination Date new equipment appraisal to be
provided by the Borrower to the
Lender after the Lender
applying the assumed
depreciation percentage of 2%
B-1
<PAGE>
SCHEDULE C
PERMITTED ENCUMBRANCES
JURISDICTION STATE UCC SECURED PARTY COLLATERAL
- -------------------------------------------------------------------------------
Henry County Clerk
of Superior Court GA UCC-193-845 AT&T Systems Specific equipment
- -------------------------------------------------------------------------------
Henry County Clerk GA UCC-193-790 Wrenn Handling Specific equipment
of Superior Court under lease
- -------------------------------------------------------------------------------
Henry County Clerk GA UCC-194-106 AT&T Systems Specific equipment
of Superior Court under lease
- -------------------------------------------------------------------------------
Henry County Clerk GA UCC-194-1095 GE Capital Specific equipment
of Superior Court under lease
- -------------------------------------------------------------------------------
Henry County Clerk GA UCC-1075-95-468 StorageTek Specific equipment
of Superior Court Distributed under lease
- -------------------------------------------------------------------------------
Henry County Clerk GA UCC-1075-95-683 StorageTek Specific equipment
of Superior Court Distributed under lease
- -------------------------------------------------------------------------------
Henry County Clerk GA UCC-1075-96-565 AT&T Systems Specific equipment
of Superior Court Leasing under lease
- -------------------------------------------------------------------------------
Henry County Clerk GA UCC-1075-96-1248 Leasetec Specific equipment
of Superior Court Corporation under lease
- -------------------------------------------------------------------------------
C-1
<PAGE>
SCHEDULE D
REQUEST FOR ADVANCES OR INTEREST RATE ELECTION
Under the Credit Agreement dated November 26, 1996 (the "Credit Agreement")
entered into by SNAPPER, INC., a Georgia corporation, (the "Borrower"), and
AMSOUTH BANK OF ALABAMA, an Alabama banking corporation:
REQUEST FOR ADVANCES
Pursuant to Section 2.2 of the Credit Agreement, the Borrower hereby
requests Advances as follows:
(a) Aggregate amount of Advances -
$_______________.
(b) Date as of which the Advances are to be made -
_________________, 199__.
(c) The following interest rate information is provided with
respect to the Segment represented by the Advances:
(i) the interest rate shall be [the Floating Rate] [the
LIBOR-Based Rate] (circle one).
(ii) If the LIBOR-Based Rate is selected, the maturity
selected for the LIBOR-Based Rate Period is [one month] [two
months] [three months] (circle one, if applicable).
INTEREST RATE ELECTION
Pursuant to Section 3.2 of the Credit Agreement, the Borrower makes the
following interest rate election with respect to the Segment in the principal
amount of $______________ that matures on ____________________.
(a) The amount of the Segment to which the requested interest
rate will apply - $__________.
(b) The date on which the selected interest rate will become
applicable - _______________.
D-1
<PAGE>
(c) The interest rate selected is [the Floating Rate] [the
LIBOR-Based Rate] (circle one).
(d) If the LIBOR-Based Rate is selected, the maturity selected
for the LIBOR-Based Rate Period is [one month] [two months]
[three months] (circle one, if applicable).
In accordance with Section 5.1 of the Credit Agreement, the presentation by
the Borrower of this Request for Advances or Interest Rate Election constitutes
a representation and warranty by the Borrower to the Lender that (a) no material
adverse change in the financial condition of the Borrower in the financial
statements referred to in Section 4.1 of the Credit Agreement, has occurred
since the date of such financial statements, and (b) no Event of Default
exists.
Dated ________________, 199__.
SNAPPER, INC.
By:
-----------------------------
Its
D-2
<PAGE>
SCHEDULE E
BORROWING BASE CERTIFICATE
To: AmSouth Bank of Alabama
Date: _______________, 19____
Snapper, Inc. (the "Borrower") hereby furnishes the following information
to you pursuant to the Credit Agreement (the "Credit Agreement") between you and
the Borrower dated November 26, 1996. Capitalized terms used in this
certificate and not otherwise defined herein have the meanings defined for them
in the Credit Agreement.
I. ACCOUNTS RECEIVABLE
A. Dealer Accounts
(1) Home Depot ------------
(2) Dealers utilizing floor plan financing ------------
(3) Dealers utilizing Extended Terms ------------
(4) Dealers utilizing Thirty Day Terms ------------
(5) Dealers/Distributors outside U.S. with letter
of credit serving Inventory shipped ------------
B. Sum of (1) through (5) ------------
C. Less adjustments per definition of Net Outstanding
Amount of Eligible Accounts ------------
D. Line (B) minus (C) ------------
E. Line (D) times 80% ------------
F. Distributor A/R Sublimit ------------
G. Distributor Accounts ------------
H. Less adjustments per definition of Net Outstanding
Amount of Eligible Accounts ------------
I. Line (G) minus (H) ------------------
J. Line (I) times 76.3% ------------------
K. Line (J) times 60% ------------
L. Lesser of Line (F) and (K) ------------
M. $10,000,000 ------------
N. Dealer Accounts utilizing Extended Terms over 90 days
but not 60 days past due(1) ------------
O. Less adjustments per definition of Net Outstanding
Amount of Eligible Accounts ------------
P. Line (N) minus (O) ------------
Q. Line (P) times 65.8% ------------
- -----------------------
(1) With respect to the Accounts arising from sales to dealers of
Inventory consisting of snow products, which Inventory has not been sold by the
dealer or financed by the dealer by means of floor planning arrangement, the
Borrower shall be permitted to extend the due date with respect to such Account
for March 10 of any year to December 10 of such year.
E-1
<PAGE>
R. Line (Q) times 55% ------------
S. Lesser of Line (M) and (R) ------------
T. TOTAL OF LINES (E), (L) and (S) ------------
II. INVENTORY
A. 45,000,000 ------------
B. Finished Goods Inventory ------------
C. Line (B) times 60% ------------
D. $5,000,000 ------------
E. Engines ------------
F. Line (E) times 50% ------------
G. Lesser of Line (D) and (F) ------------
H. $5,000,000 ------------
I. Parts and accessories (other than engines) ------------
J. Line (H) times 35% ------------
K. Lesser of Line (H) and (J) ------------
L. Sum of Lines (C), (G) and (K) ------------
M. Less Inventory that is not Eligible Inventory or
that should be excluded per Section 6.6 of the
Credit Agreement ------------
N. Line (L) minus (M) ------------
O. Lesser of Lines (A) and (N) -----------------
III. EQUIPMENT
A. Eligible Adjusted Equipment Value ------------
B. Line (A) times 75% ------------
IV. MAXIMUM CREDIT ACCOUNT
A. Borrowing Base Amount sum of Lines (I.T.,
II.O. and III.B.) ------------
B. Commitment Amount ------------
C. Lesser of Lines (A) and (B) ------------
D. Outstanding Advances ------------
E. Line (C) minus (D) (Maximum Availability) ------------
The Borrower certifies to you as follows:
(a) The representations and warranties contained in the Credit Agreement
are true and correct on and as of the date of this certificate, except as
follows:
E-2
<PAGE>
(b) The representations and warranties contained in Section 3.2 of the
Security Agreement are true and correct with respect to all Accounts included in
the Net Outstanding Amount of Eligible Accounts on line 3 of this certificate
except as follows:
(c) The representations and warranties contained in Section 3.3 of the
Security Agreement are true and correct with respect to all Inventory included
in the Eligible Inventory on line 7 of this certificate except as follows:
(d) No Event of Default, nor any event that would constitute an Event of
Default with the passage of time or the giving of notice, or both, exists under
the Credit Agreement or the other Credit Documents, except as follows:
(e) The information contained in this certificate is true and correct to
the best of the Borrower's knowledge.
This certificate is furnished to you for the purpose of obtaining Advances
from you under the Credit Agreement or otherwise complying with the provisions
of the Credit Agreement.
SNAPPER, INC.
By:
------------------------
Its
--------------------
E-3
<PAGE>
SCHEDULE F
EXTENDED TERMS
EXTENDED TERMS - OPEN ACCOUNT ONLY
DEALERS:
RESIDENTIAL LAWN & GARDEN: For stocking order shipments during the
months of September to March - Payment due
June 30.
During the months of April to August -
Payment due 90 days from invoice date
COMMERCIAL: All shipments due for payment in 10 months
from invoice date (available in certified
commercial territories to certified
commercial dealers only)
SNOW: For shipments June through December - Payment
due March 30.
All other months - due in 90 days from
invoice date (optional redating to next
December 10 if no snow)
PARTS AND ACCESSORIES: All stocking orders due June 30 or 90 days
from invoice date whichever longer.
DOMESTIC DISTRIBUTORS:
Extended terms available ONLY for Parts and Accessories (Due 1/3 April, 1/3
May, 1/3 June) and Special Prior Model Year Clear-outs (Due May 10)
F-1
<PAGE>
SCHEDULE G
THIRTY DAY TERMS
For all Accounts with dealers and distributors that are not subject to
Extended Terms or floor plan financing, Invoices due 30 days from Invoice
Date.
G-1
[EXECUTION COPY]
AMENDMENT NO. 1 TO LICENSE AGREEMENT
This Amendment No. 1 to License Agreement (this "Amendment") is made as
of June 13, 1996 by and between Metromedia Company, a Delaware general
partnership, and Metromedia International Group, Inc., a Delaware corporation.
W I T N E S S E T H :
WHEREAS, Metromedia Company (hereinafter "Licensor") and Metromedia
International Group, Inc. (hereinafter, "Licensee") are parties to that certain
License Agreement dated as of November 1, 1995 (the "License Agreement")
pursuant to which Licensor granted to Licensee a license to use the Licensor's
tradename and trademark "Metromedia" in accordance with the terms and conditions
of the License Agreement; and
WHEREAS, Licensor and Licensee are also parties to that certain
Management Agreement dated as of November 1, 1995 (the "Management Agreement")
whereby Licensor and Licensee have agreed that Licensor shall provide management
services to Licensee; and
WHEREAS, both Licensor and Licensee have agreed to amend the License
Agreement to provide that the License Agreement shall be coterminous with the
Management Agreement;
NOW THEREFORE, in consideration of the mutual premises and covenants
made herein and other valuable consideration, the receipt and sufficiency of
which are hereby acknowledged, Licensor and Licensee agree as follows:
1. Capitalized Terms.
All capitalized terms used but not defined herein shall have the
meanings ascribed thereto in the License Agreement.
2. Termination.
2.1 The first sentence of Paragraph 9 of the License Agreement is hereby
deleted in its entirety and replaced with the following:
"Licensor may terminate this Agreement upon one month's prior written
notice to Licensee in the event that, and at any time after, (i) the
expiration or termination of the Management Agreement, or (ii) upon a
Change of Control (as hereinafter defined) of Licensee; or (iii) if
any of the stock or all or substantially all of the assets of any of
the subsidiaries of the Licensee are sold or transferred."
<PAGE>
2.2 Subsection 9(c) of the Licensee Agreement is hereby deleted in its
entirety and replaced with the following:
"(c) upon the occurrence of a reorganization, merger, or consolidation
where following consummation thereof, Licensor and its affiliates hold
less than 10% of the combined voting power of all classes of
Licensee's stock;
3. Miscellaneous.
3.1 Except as specifically provided herein, nothing contained in this
Amendment shall be deemed to modify in any respect the terms, provisions or
conditions of the License Agreement, and such terms, provisions and
conditions shall remain in full force and effect.
3.2 This Amendment shall be binding upon and inure to the benefit of
Licensor, Licensee, and their respective permitted successors and assigns.
IN WITNESS WHEREOF, Licensor and Licensee have executed this Amendment as
of the day and year first above written.
LICENSOR:
Metromedia Company
By:___________________________________
Robert A. Maresca
Senior Vice President and Treasurer
LICENSEE:
Metromedia International Group, Inc.
By:___________________________________
Arnold L. Wadler
Senior Vice President, Secretary
and General Counsel
AMENDMENT NO. 1 TO MANAGEMENT AGREEMENT
This Amendment No. 1 to Management Agreement, dated as of January 1, 1997
(this "Amendment"), amends that certain Management Agreement by and between
Metromedia International Group, Inc., a Delaware corporation, ("MIG") and
Metromedia Company, a Delaware general partnership ("Metromedia") (the
"Management Agreement").
W I T N E S S E T H:
WHEREAS, MIG and Metromedia are parties to a Management Agreement dated as
of November 1, 1995 wherein Metromedia agreed to provide certain managerial
services to MIG and MIG agreed to pay Metromedia a fee for such services;
WHEREAS, on December 11, 1996 the Board of Directors of MIG voted in favor
of increasing the fee payable to Metromedia for such services;
NOW, THEREFORE, in consideration of the mutual covenants and agreements
herein contained, the receipt and sufficiency of which are hereby acknowledged,
the parties hereto agree as follows:
1. Capitalized Terms
1.1 All capitalized terms used herein and not otherwise defined shall have
the meanings assigned thereto in the Management Agreement.
2. Management Agreement
2.1 Subparagraph 1.4.1 is hereby deleted in its entirety and replaced with
the following:
"1.4.1 In order to compensate Metromedia for its services
hereunder and for certain overhead and other costs incurred by it for
which MIG is not directly responsible pursuant to Section 1.3 hereof,
MIG will pay to Metromedia a management fee (the "Management Fee") at
the annual rate of $3,250,000.00. MIG will pay the Management Fee to
Metromedia in twelve equal monthly installments of $270,833.33 each no
later than 15 days after the end of each of its twelve monthly
accounting periods. The Management Fee may be adjusted to the extent
necessary to compensate Metromedia for services rendered or costs
incurred not originally contemplated hereunder."
<PAGE>
3. No Other Change
3.1 Except for the amendments provided for herein, the Management
Agreement shall remain unchanged in all respects and shall remain in
full force and effect.
4. General
4.1 This Amendment shall be binding upon and inure to the benefit of the
parties hereto and their respective successors and assigns, contains
the entire agreement of the parties with respect to the specific
subject matter hereof, may be executed in counterparts, each of which
will be an original and all of which together will constitute the same
instrument and will be governed by New York law except for the body of
law pertaining to conflict of laws.
IN WITNESS WHEREOF, the parties have executed this Amendment as of the date
first above written.
METROMEDIA INTERNATIONAL GROUP, INC.
By:______________________________________
Stuart Subotnick
President and Chief Executive Officer
METROMEDIA COMPANY
By:______________________________________
Arnold L. Wadler
Senior Vice President
AMENDED AND RESTATED
AGREEMENT AND PLAN OF MERGER
AMENDED AND RESTATED AGREEMENT AND PLAN OF MERGER, dated as of May 17, 1996
(as amended, supplemented or otherwise modified from time to time, this
"Agreement"), between METROMEDIA INTERNATIONAL GROUP, INC., a Delaware
corporation, ("Metromedia"), MPCA MERGER CORP., a Delaware corporation and a
wholly-owned subsidiary of Metromedia ("MPCA Mergerco"), and Bradley Krevoy and
Steven Stabler (collectively, the "Stockholders") and MOTION PICTURE CORPORATION
OF AMERICA, a Delaware corporation (the "Company").
WHEREAS, the Stockholders are the beneficial and record owners of 545,916
issued and outstanding shares (the "Shares") of common stock, $.01 par value per
share, of the Company ("Company Common Stock");
WHEREAS, upon the terms and subject to the conditions of this Agreement,
the Company has agreed that at the Effective Time (as hereinafter defined), MPCA
Mergerco will merge with and into the Company (the "Merger") and, among other
things, the Stockholders will receive shares of Metromedia in the manner
provided in Section 2;
WHEREAS, Metromedia, MPCA Mergerco and the Company wish to make certain
representations, warranties and agreements in connection with the Merger and
also prescribe various conditions to the Merger.
Capitalized terms used herein and not otherwise defined shall have the
meanings assigned thereto in Section 12 hereof.
NOW, THEREFORE, in consideration of the premises and other good and
valuable consideration, the receipt and adequacy of which are hereby
acknowledged, the parties hereto hereby agree as follows:
ARTICLE 1
THE MERGER
Section 1.1 The Merger. Upon the terms and subject to the conditions set
forth in
<PAGE>
this Agreement, and in accordance with the Delaware General Corporation Law (the
"DGCL"), MPCA Mergerco shall be merged with and into the Company at the
Effective Time. Upon and after the Effective Time, the separate corporate
existence of MPCA Mergerco shall cease and the Company shall be the surviving
corporation in the Merger (the "Surviving Corporation"). In accordance with the
DGCL, all of the rights, privileges, powers, immunities, purposes and franchises
of MPCA Mergerco and the Company shall vest in the Surviving Corporation and all
of the debts, liabilities, obligations and duties of MPCA Mergerco and the
Company shall become the debts, liabilities, obligations and duties of the
Surviving Corporation.
Section 1.2 Closing. The closing of the Merger (the "Closing") will take
place at the offices of Metromedia Company at 10:00 a.m. on a Business Day (as
hereinafter defined) mutually agreed to by Metromedia, the Company and the
Stockholders prior to the Termination Date (as hereinafter defined) following
the satisfaction or waiver by the party entitled to the benefit of such
condition of each of the conditions set forth in Articles 7 and 8 or at such
other place, time and date as Metromedia, the Company and the Stockholders may
agree. The time and date upon which the Closing occurs is referred to herein as
the "Closing Date".
Section 1.3 Effective Time. On the Closing Date (or on such other date as
Metromedia, the Company and the Stockholders may agree), MPCA Mergerco and the
Company shall cause a Certificate of Merger (the "Certificate of Merger") to be
executed and filed with the Secretary of State of the State of Delaware in
accordance with the relevant provisions of the DGCL and shall make all other
filings or recordings required under the DGCL. The Merger shall become effective
at such time as the Certificate of Merger is duly filed with the Secretary of
State of the State of Delaware, or at such later time as Metromedia, the Company
and the Stockholders agree to specify in the Certificate of Merger (the
"Effective Time").
Section 1.4 Name, Certificate of Incorporation and By-laws. The Certificate
of Incorporation (as defined in Section 104 of the DGCL) of the Company as in
effect at the Effective Time shall be the Certificate of Incorporation of the
Surviving Corporation from
2
<PAGE>
and after the Effective Time until thereafter changed or amended as provided
therein or by applicable law except that the Certificate of Incorporation of the
Surviving Corporation shall be amended at the Effective Time to decrease the
number of authorized shares to 1000. The By-laws of the Company at the Effective
Time shall be the By-laws of the Surviving Corporation until thereafter changed
or amended as provided therein or by applicable law.
Section 1.5 Officers and Directors.
(a) The by-laws of the Surviving Corporation shall be amended to
provide that each of the directors of MPCA Mergerco and the Company at the
Effective Time shall be the directors of the Surviving Corporation and shall
hold office until their respective successors are duly elected or appointed and
qualified or until their earlier death, resignation or removal in accordance
with the Certificate of Incorporation and By-laws of the Surviving Corporation.
(b) The officers set forth on Schedule 1.5 hereto shall be the
officers of the Surviving Corporation and they shall hold office until their
respective successors are duly elected or appointed and qualified or until their
earlier death, resignation or removal in accordance with the Certificate of
Incorporation and By-laws of the Surviving Corporation.
ARTICLE 2
EFFECT OF THE MERGER ON THE CAPITAL STOCK AND OPTIONS;
EXCHANGE OF CERTIFICATES
Section 2.1 Effect on Capital Stock of the Company. At the Effective Time,
by virtue of the Merger and without any action on the part of the holder
thereof:
(a) Conversion of Shares of Company Common Stock. Each issued and
outstanding share of Company Common Stock (the "Company Common Stock") shall,
subject to compliance with Section 2.2, be converted into the right to receive
the Initial Shares, the Adjustment Shares (as defined herein) and, to the extent
the Closing Date Boot Limit exceeds the Existing Note Amount (as such terms are
defined in Section 2.3), the additional consideration set forth in Section 2.3
to the extent of such excess. At the Effective Time, all such shares of Company
Common Stock shall no longer be outstanding
3
<PAGE>
and shall automatically be cancelled and retired and shall cease to exist, and
the Stockholders, who collectively hold certificates representing all such
shares of Company Common Stock shall cease to have any rights with respect
thereto, except the right to receive for each share of Company Common Stock
outstanding at the Effective Time (a) the Initial Shares (as defined herein) to
be issued in consideration therefor upon surrender of such certificates in
accordance with Section 2.2, without interest, plus (b) the Adjustment Shares
(as defined herein), if any, to be issued on the Adjustment Date (as defined
herein), without interest. The term "Initial Shares" shall mean a number of
fully paid and non-assessable shares of Common Stock , par value $1.00 per
share, of Metromedia (the "Metromedia Common Stock") equal to a fraction
(rounded to the fourth decimal point), (i) the numerator of which is 1,433,636
and (ii) the denominator of which is the number of shares of Company Common
Stock outstanding at the Effective Time ("Company Outstanding Shares"). The term
"Adjustment Shares" shall mean (A) if the Average Closing Price (as defined
herein) is less than $16.50, a number of fully paid an non-assessable shares of
Metromedia Common Stock equal to (i) a fraction (rounded to the fourth decimal
point), (a) the numerator of which is (I) 23,655,000 less (II) the product of
(x) 1,433,636 and (y) the Average Closing Price, and (b) the denominator of
which is the Average Closing Price, divided by (ii) the number of Company
Outstanding Shares (rounding the quotient of (i) and (ii) to the fourth decimal
point); provided, however, that in no event shall the Adjustment Shares exceed
(i) 458,764 divided by (ii) the number of Company Outstanding Shares, or (B) if
the Average Closing Price is greater than or equal to $16.50, zero. The term
"Average Closing Price" shall have the meaning ascribed to such term in that
certain Agreement and Plan of Merger (the "Goldwyn Merger Agreement") dated as
of January 31, 1996 by and among Metromedia, SGC Merger Corp. and The Samuel
Goldwyn Company; provided, however, if the transactions contemplated by the
Goldwyn Merger Agreement are not consummated on or before September 30, 1996,
the term "Average Closing Price" shall mean the average of the last sale prices
for the Metromedia Common Stock as reported by the American Stock Exchange for
the last 20 consecutive trading days ending on September 30, 1996. The term
"Adjustment Date" shall
4
<PAGE>
mean five business days following the earlier of (i) the consummation of the
transactions contemplated by the Goldwyn Merger Agreement and (ii) September 30,
1996.
(c) Treasury Shares. Each share of Company Common Stock held in
treasury by the Company immediately prior to the Effective Time shall, by virtue
of the Merger, be cancelled and retired and cease to exist, without any
conversion thereof.
(d) Mergerco Common Stock. Each then issued outstanding share of
Common Stock, par value $.01 per share ("Mergerco Common Stock") of MPCA Merger
Co. shall be converted into one fully paid and non-assessable share of Common
Stock, $.01 par value per share of the Surviving Corporation.
Section 2.2 Exchange of Certificates.
(a) Exchange Procedures. At the Closing, the Stockholders shall
deliver to Metromedia all of the issued and outstanding shares of stock of
Company Common Stock, including the Restricted Stock, and Metromedia shall
deliver to the Stockholders the Initial Shares. The Adjustment Shares shall be
delivered to the Stockholders on the Adjustment Date. The notes and/or other
shares of Metromedia Common Stock issuable to the Stockholders pursuant to
Section 2.3 on account of the Company Common Stock and the existing indebtedness
of the Company to the Stockholders shall be delivered as set forth in Section
2.3.
(b) Rule 144 Legend. The shares delivered to the Stockholders in
accordance with Section 2.2(a) and, if applicable, Section 2.3, shall contain a
restrictive legend pursuant to Rule 144 under the Securities Act of 1933, as
amended.
Section 2.3 Stockholder Loans; Additional Consideration.
(a) For purposes of this Section 2.3, the following terms shall have
the following meanings:
(i) "Tax Fair Market Value Per Share" of Metromedia Common Stock
on a certain date shall mean the lesser of (A) the closing price of Metromedia
Common Stock as reported by the American Stock Exchange for such date or (B) the
average of the high and the low price of Metromedia Common Stock as reported by
the American Stock Exchange for such date.
5
<PAGE>
(ii) "Existing Note Amount" shall mean the aggregate principal
amount of the existing indebtedness of the Company to the Stockholders
determined at the close of business on the date immediately preceding the date
during which the Effective Time occurs, but not to exceed $5,000,000.
(iii) "Closing Date Boot Limit" shall mean 25% of the Tax Fair
Market Value Per Share at the Effective Time multiplied by the number of Initial
Shares.
(iv) "Test Principal Amount" of a note described in this Section
2.3 shall be the amount assigned to it in such Section 2.3. The actual principal
amount of such a note shall be determined pursuant to Section 2.3(g) below.
(v) "Maximum Additional Note Amount" shall mean the excess, if
any, of $5,000,000 over the aggregate principal amount of notes issued pursuant
to Sections 2.3(c)(i) or 2.3(d)(ii) below.
(vi) "Stock Amount" shall mean the excess, if any, of the Maximum
Additional Note Amount over the Test Principal Amount of the notes issued
pursuant to Section 2.3(e) below.
(b) If the Closing Date Boot Limit equals or exceeds $5,000,000, then
at the Closing:
(i) Metromedia shall issue to each of the Stockholders a note
dated as of the Effective Date with principal amount equal to, and in
replacement for, the existing indebtedness of the Company to such Stockholder,
(ii) Metromedia shall issue to the Stockholders, between them in
proportion to the number of shares of Company Common Stock, shares which such
Stockholders deliver pursuant to Section 2.2(a), notes dated as of the Effective
Date with aggregate Test Principal Amounts equal to the difference between
$5,000,000 and the aggregate principal amounts of the notes issued pursuant to
Section 2.3(b)(i) above, and
(iii) Section 2.3(e) shall not apply.
(c) If the Closing Date Boot Limit is less than $5,000,000 but greater
than or equal to the Existing Note Amount, then:
(i) Metromedia shall issue to each of the Stockholders a note
6
<PAGE>
dated as of the Effective Date with principal amount equal to, and in
replacement for, the existing indebtedness of the Company to such Stockholder,
and
(ii) The provisions of Section 2.3(e) shall apply.
(d) If the Closing Date Boot Limit is less than the Existing Note
Amount, then:
(i) The Stockholders shall contribute to the capital of the
Company as of the Effective Time an amount of the Company's existing
indebtedness to the Stockholders equal to the excess of the Existing Note Amount
over the Closing Date Boot Limit, between the Stockholders in proportion to
their amounts of the Company's indebtedness to the Stockholders, to reduce the
amount of the Company's indebtedness outstanding to the Stockholders at that
time to the Closing Date Boot Limit,
(ii) Metromedia shall issue to each of the Stockholders a note
dated as of the Effective Date with principal amount equal to, and in
replacement for, the then reduced indebtedness of the Company to such
Stockholder and
(iii) The provisions of Section 2.3(e) shall apply.
(e) If the Closing Date Boot Limit is less than $5,000,000, then this
Section 2.3(e) applies and on the Adjustment Date, Metromedia shall issue to the
Stockholders, between them in proportion to the number of shares of Company
Common Stock which such Stockholders deliver pursuant to Section 2.2(a), notes
dated as of the Adjustment Date with aggregate Test Principal Amounts equal to
the Maximum Additional Note Amount, but not to exceed the lesser of the amounts
D and E in the equations below:
D = [.25 x TFMV2 x (N1 + N2)] - FN
E = [.25 x [ (TFMV1 x N1) + (TFMV2 x N2))] - FN
where
TFMV1 = the Tax Fair Market Value per share at Effective Time
TFMV2 = the Tax Fair Market Value per share on the Adjustment Date
N1 = the aggregate number of Initial Shares
N2 = the aggregate number of Adjustment Shares
FN = the principal amount of notes issued pursuant to Sections 2.3(c)(i) or
2.3(d)(ii).
7
<PAGE>
(f) If the Closing Date Boot Limit is less than $5,000,000 so that
Section 2.3(e) applies but the Test Principal Amount of the notes issued
pursuant to such Section 2.3(e) is less than the Maximum Additional Note Amount,
then Metromedia shall, on the Adjustment Date, issue to the Stockholders,
between them in proportion to the number of shares of Company Common Stock which
such Stockholders deliver pursuant to Section 2.2(a), a number of shares of
Metromedia Common Stock equal to N3 in the equation:
N3 = Stock Amount/Average Closing Price,
then rounded down to the next lowest whole number of shares of Metromedia Common
Stock , provided, however, that the number of shares issued pursuant to this
Section 2.3(f) shall not exceed 974,872
(g) Any notes issued by Metromedia pursuant to Section 2.3 shall bear
interest at the applicable federal rate as defined in Section 1274 of the
Internal Revenue Code of 1986, as amended and shall be due 10 days after the
Adjustment Date. Any notes issued pursuant to Sections 2.3(b)(ii) and 2.3(e)
shall have an actual principal amount computed as follows: the Test Principal
Amount of each note shall be reduced by $500, and such reduced amount shall be
rounded down to the nearest even multiple of $1000.
(h) The notes and/or shares of Metromedia Common Stock issued pursuant
to this Section 2.3, to the extent equal to or less than the Existing Note
Amount shall be in satisfaction of the existing indebtedness of the Company to
the Stockholders.
ARTICLE 3
REPRESENTATIONS AND WARRANTIES OF THE COMPANY
3. The Company represents and warrants to Metromedia as follows:
3.1 Due Incorporation and Authority. The Company is a corporation duly
organized, validly existing and in good standing under the laws of the State of
Delaware and has all requisite corporate power and lawful authority to own,
lease and operate its Properties and to carry on its business as is presently
being conducted.
3.2 Subsidiaries and Other Affiliates. Schedule 3.2 sets forth the
name
8
<PAGE>
and jurisdiction of organization of each corporation or other entity
(collectively, "Subsidiaries") in which the Company directly or indirectly owns
or has the power to vote shares of any capital stock or other ownership
interests having voting power to elect a majority of the directors of such
corporation, or other Persons performing similar functions for such entity, as
the case may be. Except for the Subsidiaries and except as set forth on Schedule
3.2, the Company does not directly or indirectly own any ownership interest in
any other Person. Each of the Subsidiaries is a corporation duly organized,
validly existing and in good standing under the laws of its jurisdiction of
organization and has the corporate power and lawful authority to own, lease and
operate its Properties and to carry on its business as is presently being
conducted.
3.3 Qualification. The Company and each of the Subsidiaries is duly
qualified or otherwise authorized as a foreign corporation to transact business
and is in good standing in each jurisdiction set forth on Schedule 3.3, which
are the only jurisdictions in which such qualification or authorization is
required by law, except in those jurisdictions in which failure to be so
qualified or authorized would not, in the aggregate have a material adverse
effect on the Properties, business, operation or financial condition of the
Company and the Subsidiaries taken as a whole (a "Material Adverse Effect").
3.4 Outstanding Capital Stock. The Company is authorized to issue
545,916 shares of Company Common Stock, of which 545,916 shares are issued, and
are outstanding and no shares are held by the Company as treasury stock. All of
the outstanding shares of Common Stock are owned by the Stockholders in the
respective amounts set forth on Exhibit A. The authorized and issued shares of
capital stock of each Subsidiary are set forth on Schedule 3.4. All issued and
outstanding capital stock of each Subsidiary is owned by the Company, free and
clear of any lien, pledge, mortgage, security interest, claim, lease, charge,
option, right of first refusal, easement, servitude, transfer restriction under
any shareholder or similar agreement, encumbrance or any other restriction or
limitation whatsoever (collectively, "Liens"), except as created by this
Agreement and except for limitations on transfers imposed by Federal and state
securities or "blue sky" laws. All of the outstanding shares of capital stock of
the Company and the Subsidiaries are
9
<PAGE>
duly authorized and validly issued, fully paid and nonassessable. No other class
of capital stock or other ownership interests of the Company or any of the
Subsidiaries is authorized or outstanding.
3.5 Options or Other Rights. Except as set forth on Schedule 3.5,
there is no outstanding right, subscription, warrant, call, unsatisfied
preemptive right, option or other agreement of any kind to purchase or otherwise
to receive from the Company, any of the Subsidiaries or any Stockholder any of
the outstanding, authorized but unissued, unauthorized or treasury shares of the
capital stock or any other security of the Company or any of the Subsidiaries,
and there is no outstanding security or instrument of any kind convertible into,
exercisable for, or exchangeable for any such capital stock.
3.6 Charter Documents and Corporate Records. The Company has
heretofore caused to be delivered to Metromedia true and complete copies of the
Certificates of Incorporation and By-laws, or comparable instruments, of the
Company and each of the Subsidiaries as in effect on the date hereof and has
made available for inspection the true and complete minute books of the Company
and each of the Subsidiaries through the date hereof.
3.7 Financial Statements. The combined balance sheets of the Company
and its Affiliates as of December 31, 1993, December 31, 1994, and December 31,
1995 and the related combined statements of income, and retained earnings and
partners' capital and cash flows for the years then ended, including the
footnotes thereto, certified by KPMG Peat Marwick, independent certified public
accountants, which have been delivered to Metromedia, fairly present in all
material respects the combined financial position of the Company and its
Affiliates as at such dates and the combined results of operations of the
Company and its Affiliates for such respective periods, in each case in
accordance with generally accepted accounting principles consistently applied
for the periods covered thereby. The foregoing combined financial statements of
the Company and its Affiliates as of December 31, 1995, and for the year then
ended are sometimes herein called the "Audited Financials". The unaudited
combined balance sheet of the Company and its Affiliates as of March 31, 1996
and the related combined statement of income which have
10
<PAGE>
been delivered to Metromedia, fairly present in all material respects the
combined financial position of the Company and its Affiliates as at such date
and the results of operations of the Company for the three months then ended, in
each case in conformity with generally accepted accounting principles applied on
a basis consistent with that of the Audited Financials (subject to the normal
year-end adjustments described in Schedule 3.7) and with all interim financial
statements of the Company heretofore delivered to Metromedia. The foregoing
unaudited combined financial statements of the Company and its Affiliates as of
March 31, 1996 and for the three months then ended are sometimes herein called
the "Interim Financials," the combined balance sheet included in the Interim
Financials is sometimes herein called the "Balance Sheet" and March 31, 1996 is
sometimes herein called the "Balance Sheet Date." Except as set forth on
Schedule 3.7, all of the assets reflected on the Balance Sheet are owned by the
Company or one of its Affiliates.
3.8 No Material Adverse Change. Except as set forth on Schedule 3.8,
since the Balance Sheet Date, there has been no material adverse change in the
Properties, business, prospects, results of operations or financial condition of
the Company and the Subsidiaries taken as a whole (a "Material Adverse Effect")
other then changes in prospects resulting from changes in general economic,
political, legal or other like conditions and in the motion picture industry
generally. Neither the Company nor any of the Subsidiaries Knows (as defined in
Section 12.1(ii)) of any fact, event, circumstance or change which is reasonably
likely to have a Material Adverse Effect and neither the Company nor any of its
Subsidiaries knows of any fact, event, circumstance or change which is
reasonably likely to result in any damage, destruction or loss of value with
respect to the Properties of the Company or any of the Subsidiaries not covered
by insurance which has had a Material Adverse Effect.
3.9. Tax Matters.
(i) Schedule 3.9(a) identifies all partnerships and corporations
which were predecessors or were Affiliates of the Company and the Subsidiaries.
(ii) Schedule 3.9(a)(ii) identifies which corporations, included
among the Company, the Subsidiaries, and their respective predecessors or
Affiliates were
11
<PAGE>
intended to be taxed as "S Corporations" pursuant to Sections 1362 et. seq. of
the Internal Revenue Code of 1986, as amended (Code") and comparable provisions
of state and local tax laws applicable to such corporations (the "S
Corporations"). The S Corporations timely filed elections to be taxed as "S
Corporations" pursuant to Sections 1362 et. seq. of the Code and comparable
provisions of state and local tax laws applicable to the S Corporations. The
Company has provided Metromedia with copies of any such elections. The S
Corporations' elections did not terminate under Sections 1362(d)(2) or (3) of
the Code or comparable provisions of state and local tax laws applicable to the
S Corporations, and such elections remained in full force and effect and were
not voluntarily revoked, until such S Corporations were liquidated, merged with
and into the Company or became one of the Subsidiaries.
(iii) All federal, state, county, local, foreign and other taxes
(including, without limitation, income, profits, premium, estimated, excise,
sales, use, occupancy, gross receipts, franchise, ad valorem, severance, capital
levy, production, transfer, withholding, employment, unemployment compensation,
payroll related, property, import duties and other governmental charges and
assessments), whether or not measured in whole or in part by net income, and
including deficiencies, interest, additions to tax or interest, and penalties
with respect thereto, (hereinafter "Taxes" or, individually, a "Tax") required
to be paid on or before the date hereof (after giving effect to any applicable
extensions) by or with respect to the Company, the Subsidiaries and their
respective predecessors or Affiliates (or any of them), have been, or will be,
timely paid when due (including extensions), except with respect to Taxes for
which the failure to pay would not have a Material Adverse Effect with respect
to the Company and the Subsidiaries taken as a whole.
(iv) All material declarations, reports, information returns,
statements and returns for Taxes (hereinafter "Tax Returns" or, individually, a
"Tax Return") required to be filed by or with respect to the Company, the
Subsidiaries or their respective predecessors or Affiliates (or any of them) on
or before the date hereof have been timely filed. No penalties or other charges
in a material amount are or will become due with
12
<PAGE>
respect to the late filing of any Tax Return of the Company, the Subsidiaries or
their respective predecessors or Affiliates or the payment of any Tax of the
Company, the Subsidiaries or their respective predecessors or Affiliates,
required to be filed or paid on or before the date hereof.
(v) With respect to all Tax Returns filed by or with respect to
the Company and any of the Subsidiaries or their respective predecessors or
Affiliates, (A) Schedule 3.9(b) sets forth the periods for which the statute of
limitations for the assessment of federal Taxes have expired; (B) except as set
forth in Schedule 3.9(b), neither the Company nor the Subsidiaries has been
notified that, nor to the Knowledge of the Stockholders is, there an audit in
progress and no extension of time has been executed with respect to any date on
which any Tax Return was or is to be filed and no waiver or agreement has been
executed for the assessment or payment of any Tax; and (C) except as set forth
in Schedule 3.9(b), there is no material unassessed deficiency of Taxes proposed
or threatened against the Company or any of the Subsidiaries or any of their
respective predecessors or Affiliates.
(vi) Except as set forth in Schedule 3.9(c), none of the Company
or any of the Subsidiaries or any of their respective predecessors or Affiliates
has been or is a party to any tax sharing agreement or similar arrangement.
3.10 Compliance with Laws. Neither the Company nor any of the
Subsidiaries is in violation of any applicable order, judgment, injunction,
award, decree or writ (collectively, "Orders"), or any applicable law, statute,
code, ordinance, regulation or other requirement (collectively, "Laws"), of any
government or political subdivision thereof, whether federal, state, local or
foreign, or any agency or instrumentality of any such government or political
subdivision, any court or arbitrator (collectively, "Governmental Bodies") the
enforcement of which would have a Material Adverse Effect on the condition of
the Company and the Subsidiaries taken as a whole, and except as set forth on
Schedule 3.10, neither the Company nor any of the Subsidiaries has received
notice that any such violation is being or may be alleged. The Company and the
Subsidiaries have not made any illegal payment to officers or employees of any
Governmental Body, or made any payment
13
<PAGE>
to customers for the sharing of fees or to customers or suppliers for rebating
of charges, or engaged in any other reciprocal practice, or made any illegal
payment or given any other illegal consideration to purchasing agents or other
representatives of customers in respect of sales made or to be made by the
Company or any of the Subsidiaries.
3.11 Permits. The Company and the Subsidiaries have all licenses,
permits, orders or approvals of, and have made all required registrations with,
any Governmental Body that are material to the current conduct of the business
of, or the current use of any of the Properties of, the Company or any of the
Subsidiaries (collectively, "Permits"). All Permits are listed on Schedule 3.11
and are in full force and effect; no material violations are or have been
recorded in respect of any Permit; and no proceeding is pending or, to the
Knowledge of the Company, any of the Subsidiaries or any of the Stockholders,
threatened to revoke or limit any Permit. No action by the Stockholders, the
Company or Metromedia is required in order that all Permits will remain in full
force and effect following the consummation of the transactions provided for
herein.
3.12 No Breach. The execution, delivery and performance of this
Agreement by the Stockholders and the consummation of the transactions
contemplated hereby, including but not limited to, the conversion of shares
pursuant to Section 2.1 hereof (the "Contemplated Transactions") will not (i)
violate any provision of the Articles of Incorporation or By-laws of the Company
or any of the Subsidiaries; (ii) require the Stockholders, the Company or any of
the Subsidiaries to obtain any consent, approval or action of, or make any
filing with or give any notice to, any Governmental Body or any other Person,
except (a) filings under the Hart-Scott-Rodino Antitrust Improvements Act of
1976, as amended, and the rules and regulations promulgated thereunder (the "HSR
Act") and (b) as set forth on Schedule 3.12 (b) (the "Required Consents"); (iii)
if the Required Consents are obtained, violate, conflict with or result in the
breach of any of the terms of, result in a material modification of the effect
of, otherwise cause the termination of or give any other contracting party the
right to terminate, or constitute (or with notice or lapse of time or both
constitute) a default under, any material contract, agreement, indenture, note,
bond, loan, instrument, lease, conditional sale contract, mortgage, license,
franchise,
14
<PAGE>
commitment or other binding arrangement (collectively, the "Contracts") to which
the Company or any of the Subsidiaries is a party or by or to which any of them
or any of their Properties may be bound or subject, or result in the creation of
any Lien upon the material Properties of the Company or any of the Subsidiaries
pursuant to the terms of any such Contract; (iv) if the Required Consents are
obtained, violate any Order of any Governmental Body against, or binding upon,
the Company or any of the Subsidiaries or upon their respective securities,
Properties or business; (v) if the Required Consents are obtained, violate any
Law of any Governmental Body; or (vi) if the Required Consents are obtained,
violate or result in the revocation or suspension of any Permit.
3.13 Claims and Proceedings. There are no outstanding Orders of any
Governmental Body against or involving the Company or any of the Subsidiaries.
Except as set forth on Schedule 3.13, there are no actions, suits, claims or
legal, administrative or arbitral proceedings, public investigations or to the
Knowledge of the Company, any private investigations (collectively, "Claims")
(whether or not the defense thereof or liabilities in respect thereof are
covered by insurance) pending, or to the Knowledge of the Company or any of the
Subsidiaries, threatened, against or involving the Company or any of the
Subsidiaries or any of their Properties as set forth on Schedule 3.13, to the
Knowledge of the Company, any of the Subsidiaries or any of the Stockholders,
there is no fact, event or circumstance that may give rise to any Claim. All
notices required to have been given to any insurance company listed as insuring
against any material Claim set forth on Schedule 3.13 have been timely and duly
given and, except as set forth on Schedule 3.13, no insurance company has
asserted, orally or in writing, that such Claim is not covered by the applicable
policy relating to such Claim. Except as set forth on Schedule 3.13, no claims
pending or threatened against or involving the Company or any of its
Subsidiaries have been settled, adjudicated or otherwise disposed of since
December 31, 1995.
3.14 Contracts. (a) Schedule 3.14 sets forth all of the following
Contracts to which the Company or any of the Subsidiaries is a party or by or to
which any of them or any of their Properties may be bound or subject: (i)
Contracts with any current or former officer, director, shareholder, employee,
consultant, agent or other representative
15
<PAGE>
or with an entity in which any of the foregoing is a controlling Person; (ii)
Contracts with any labor union or association representing any employee or
former employee; (iii) Contracts for the sale of any Properties other than in
the ordinary course of business or for the grant to any Person of any option or
preferential rights to purchase any material Properties; (iv) partnership or
joint venture agreements; (v) Contracts under which the Company or any of the
Subsidiaries agrees to indemnify any party or to share tax liability of any
party; (vi) material Contracts which cannot be cancelled without liability,
premium or penalty only on 90 days' or more notice; (vii) Contracts containing
covenants of the Company or any of the Subsidiaries not to compete in any line
of business or with any Person in any geographical area or covenants of any
other Person not to compete with the Company or any of the Subsidiaries in any
line of business or in any geographical area; (viii) Contracts relating to the
acquisition by the Company or any of the Subsidiaries of any operating business
or the capital stock of any other Person; (ix) Contracts relating to the
borrowing of money; (x) Contracts containing obligations or liabilities of any
kind to holders of the capital stock of the Company as such (including, without
limitation, an obligation to register any of such securities under any federal
or state securities laws); (xi) Contracts pursuant to which the Company or any
of the Subsidiaries may hold or use any interest owned or claimed by the Company
or any of the Subsidiaries in or to any material Property; (xii) management
Contracts and other similar agreements with any Person; (xiii) any other
Contracts pursuant to the terms of which there is either a current or future
obligation or right of the Company or any of the Subsidiaries to make payments
in excess of $50,000 or receive payments in excess of $100,000; (xiv) Contracts
with respect to the development, financing or production of motion picture,
video, television or interactive productions; (xv) Distribution Contracts; (xvi)
material Contracts relating to the acquisition of Product, including Contracts
relating to the acquisition of licensing and distribution rights with respect to
such Product; (xvii) Contracts with motion picture studios; (xviii) Contracts
relating to television sales and distribution of Product; (xix) Contracts
entitling the Company or its Subsidiaries or any Affiliate, including the
Stockholders, to Contingent Compensation; and (xx) material Contracts relating
to any other Product.
16
<PAGE>
(b) There have been delivered to Metromedia true and complete copies
of all of the Contracts set forth on Schedule 3.14 or on any other Schedule. All
of the Contracts are valid and binding upon the Company or one of the
Subsidiaries, as the case may be, in accordance with their terms subject as to
enforcement, as to applicable bankruptcy, insolvency, reorganization, moratorium
or other similar laws affecting the enforcement of creditors' rights generally
and to general principles of equity. Neither the Company nor any of the
Subsidiaries is in default in any material respect under any of such Contracts,
nor does any condition exist that with notice or lapse of time or both would
constitute such a material default thereunder. To the Knowledge of the Company,
any of the Subsidiaries or any of the Stockholders, no other party to any such
Contract is in default thereunder in any material respect nor does any condition
exist that with notice or lapse of time or both would constitute such a material
default thereunder.
3.15 Real Estate.
3.15.1 Ownership of Premises. The Company and its Subsidiaries do
not own any real property or any buildings, structures and other improvements
located on any real property (collectively, "Owned Real Property").
3.15.2 Leased Properties. Except for short-term space leases
entered into by the Company or a Subsidiary in connection with producing a
specific Product, Schedule 3.15.2 is a true, correct and complete schedule of
all leases, subleases, licenses and other agreements (collectively, the "Real
Property Leases") under which the Company or any Subsidiary uses or occupies or
has the right to use or occupy, now or in the future, any real property (the
land, buildings and other improvements covered by the Real Property Leases being
herein called the "Leased Real Property"), which Schedule 3.15 sets forth the
date of and parties to each Real Property Lease, the date of and parties to each
amendment, modification and supplement thereto, the term and renewal terms
(whether or not exercised) thereof and a brief description of the Leased Real
Property covered thereby. The Company has heretofore delivered to Metromedia
true, correct and complete copies of all Real Property Leases (including all
modifications, amendments and supplements). Each Real Property Lease is a legal,
valid, binding and enforceable obligation of the Company
17
<PAGE>
and is in full force and effect, subject as to enforcement, as to applicable
bankruptcy, insolvency, reorganization, moratorium or other similar laws
affecting the enforcement of creditors' rights generally and to general
principles of equity. All rent and other sums and charges payable by the Company
or a Subsidiary as tenant under any Real Property Lease are current, no notice
of default or termination under any Real Property Lease is outstanding, no
termination event or condition or uncured material default on the part of the
Company or the applicable Subsidiary, or to the Knowledge of the Company or the
applicable Subsidiary on the part of the landlord, exists under any Real
Property Lease, and no event has occurred and no condition exists which, with
the giving of notice or the lapse of time or both, would constitute such a
default or termination event or condition on the part of the Company or the
applicable Subsidiary or, to the Knowledge of the Company or the applicable
Subsidiary on the part of the landlord. Except as set forth on Schedule 3.15.2,
to the Knowledge of the Company or the applicable Subsidiary, none of the Leased
Real Property and the Real Property Leases contravenes any zoning ordinance or
other administrative regulation or violates any restrictive covenant, easement
or other agreement to which the lessee under any such Real Property Lease is
bound, the effect of which in any material respect would interfere with or
prevent the continued use of the Leased Real Property for the purposes for which
it is now being used by the Company or the applicable Subsidiary.
3.15.3 Entire Premises. All of the land, buildings, structures
and other improvements used by the Company and the Subsidiaries in the conduct
of their business are included in the Leased Real Property except for land,
building, structures and other improvements subject to short term space leases
entered into by the Company or a Subsidiary in connection with producing a
particular item of Product.
3.16 Intellectual Property. Schedule 3.16 sets forth a list of the
Company's registered patents, registered trademarks, registered service marks,
registered trade names, registered copyrights and franchises, all applications
for any of the foregoing and all permits, grants and licenses or other rights
running to the Company and any of its Subsidiaries relating to any of the
foregoing that are material to the business of the
18
<PAGE>
Company and its Subsidiaries. Except as set forth on Schedule 3.16, (i) the
Company or one of the Subsidiaries own, or are licensed or otherwise have the
right, to use all registered patents, registered trademarks, registered service
marks, registered trade names, registered copyrights and franchises set forth on
Schedule 3.16, and (ii) the Company's rights in the property set forth on such
list are free and clear of any Lien or other encumbrances and the Company and
the Subsidiaries have not received written notice of any adversely-held patent,
invention, trademark, service mark or trade name of any other person, or notice
of any charge or claim of any person relating to such intellectual property or
any process or confidential information of the Company and its Subsidiaries and
to the Company's Knowledge there is no basis for any such charge or claim, and
(iii) the Company, the Subsidiaries and their respective predecessors, if any,
have not conducted business at any time during the period beginning five years
prior to the date hereof under any corporate or partnership, trade or fictitious
names other than as set forth on Schedule 3.16.
3.17 Ownership of Product; Copyrights and Other Rights. The Products
listed on Schedule 3.17 comprise all of the material Products in which the
Company or any of the Subsidiaries has any right, title, or interest in or to
(either directly or through a joint venture or partnership). As to each item
listed on Schedule 3.17 hereto, the party holding such interests, if not the
Company or a Subsidiary, to the Knowledge of the Company, has duly recorded its
interests in the United States Copyright Office. All such recordation is listed
on Schedule 3.17. To the Knowledge of the Company, none of the Company's or any
Subsidiaries' right, title or interest in any Product and component parts
thereof violates or infringes upon in any material respect any copyright, right
of privacy, trademark, patent, trade name, performing right or any literary,
dramatic, musical, artistic, personal, private, contract or copyright or any
other right of any Person or contain any libelous or slanderous material. There
is no claim, suit, action or proceeding pending, or to the Knowledge of the
Company or any of the Subsidiaries, threatened against the Company or any of the
Subsidiaries that involves a claim of infringement of any copyright with respect
to any Product listed on Schedule 3.17 and neither the Company nor any of the
Subsidiaries has any Knowledge of any existing infringement by any other Person
of any
19
<PAGE>
copyright held by the Company or the Subsidiaries with respect to any Product.
3.18 Title to Properties. Except as set forth elsewhere in this
Agreement or the Schedules hereto, the Company and the Subsidiaries own outright
and have good and marketable title to all of their Properties, including,
without limitation, all of the assets reflected on the Balance Sheet or
currently used in the operation of their businesses (other than the Leased Real
Property) in each case free and clear of any material Lien.
3.19 Liabilities. Except as set forth on Schedule 3.19, as at March
31, 1996, the Company and the Subsidiaries did not have any material direct or
indirect indebtedness, liability, claim, loss, damage, deficiency, obligation or
responsibility, known or unknown, fixed or unfixed, choate or inchoate,
liquidated or unliquidated, secured or unsecured, accrued, absolute, contingent
or otherwise, whether or not of a kind required by generally accepted accounting
principles to be set forth on a financial statement or in the notes thereto
("Liabilities") that were not fully and adequately reflected or reserved against
on the Balance Sheet dated March 31, 1996 or described on any Schedule or in the
notes to the Audited Financials. Except as set forth on Schedule 3.19 or
described on any Schedule to this Agreement, (x) the Company and the
Subsidiaries have not, except in the ordinary course of business, incurred any
material Liabilities since the Balance Sheet Date and (y) neither the Company
nor any of the Subsidiaries has any Knowledge of any circumstance, condition,
event or arrangement that may hereafter give rise to any Liabilities of the
Company or any of the Subsidiaries or any successor to their businesses except
in the ordinary course of business.
3.20 Employee Benefit Plans.
Except as set forth on Schedule 3.20, there are no employee
benefit plans or arrangements of any type (whether or not described in section
3(3) of the Employee Retirement Income Security Act of 1974, as amended and the
regulations thereunder ("ERISA"), and including, without limitation, plans or
arrangements providing for deferred compensation, bonuses, stock options, fringe
benefits, cafeteria plan deferrals, flexible arrangements or other similar plans
or arrangements), under which the Company or any of its Subsidiaries has or in
the future could have, directly or indirectly, any liability with
20
<PAGE>
respect to any current or former employee of the Company, any Subsidiary or any
Commonly Controlled Entity (within the meaning of section 414(b), (c), (m), (n)
or (o) of the Code) ("Benefit Plans").
3.21 Employee Relations. Except with respect to Projects where members
of the Screen Actors Guild, the Directors Guild of America, the Writers Guild of
America or other union representation for "below the line" personnel are engaged
by the Company or a Subsidiary, no union organizing efforts have been conducted
within the last five years or are now being conducted. For purposes of this
section 3.21, "below the line personnel" shall mean all persons (other than
authors, screenwriters, producers, directors and actors) engaged by the Company
or its Subsidiaries in connection with the production of a film. Neither the
Company nor any of the Subsidiaries has at any time during the last five years
had, nor, to the Knowledge of the Company nor any of the Subsidiaries, is there
now threatened, a strike, picket, work stoppage, work slowdown or other labor
trouble.
3.22 Insurance. Schedule 3.22 sets forth a list (specifying the
insurer, describing each pending claim thereunder of more than $50,000 and
setting forth the aggregate amounts paid out under each such policy through the
date hereof and the aggregate limit, if any, of the insurer's liability
thereunder) of all policies or binders of fire, liability, product liability,
workmen's compensation, vehicular and other insurance held by or on behalf of
the Company or any of the Subsidiaries. Such policies and binders are valid and
binding in accordance with their terms, are in full force and effect. Neither
the Company nor any of the Subsidiaries is in default with respect to any
provision contained in any such policy or binder or has failed to give any
notice or present any claim under any such policy or binder in due and timely
fashion. There are no outstanding unpaid claims under any such policy or binder,
and neither the Company nor any of the Subsidiaries has received any notice of
cancellation or non-renewal of any such policy or binder. Neither the Company
nor any of the Subsidiaries has received any notice from any of its insurance
carriers that any insurance premiums will or may be materially increased in the
future or that any insurance coverage listed on Schedule 3.22 will or may not be
available in the future on terms or subject to conditions which would make
renewal thereof onerous.
21
<PAGE>
3.23 Officers, Directors and Key Employees. Schedule 3.23 sets forth
(i) the name and the scheduled 1996 total compensation of each officer and
director of the Company and the Subsidiaries, (ii) the name and scheduled total
compensation of each other employee, consultant, agent or other representative
of the Company or any of the Subsidiaries whose current or committed annual rate
of compensation (including bonuses and commissions) exceeds $150,000, (iii) all
wage and salary increases, bonuses and increases and any other direct or
indirect compensation received by such Persons since December 31, 1995, (iv) any
payments or commitments to pay any severance or termination pay to any such
Persons, and (v) any accrual for, or any commitment or agreement by the Company
or any of the Subsidiaries to pay, such increases, bonuses or pay. None of such
Persons has indicated that he or she will cancel or otherwise terminate such
Person's relationship with the Company or any of the Subsidiaries.
3.24 Operations of the Company. Except as set forth on Schedule 3.24
or on any other Schedule, since the Balance Sheet Date neither the Company nor
any of the Subsidiaries has:
(i) declared or paid any dividends or declared or made any other
distributions of any kind to its shareholders, or made any direct or indirect
redemption, retirement, purchase or other acquisition of any shares of its
capital stock;
(ii) except for short-term bank borrowings in the ordinary course
of business and except for borrowings with respect to the Project Beverly Hills
Ninja, incurred any indebtedness for borrowed money;
(iii) reduced its cash or short-term investments or their
equivalent, other than to meet cash needs arising in the ordinary course of
business, consistent with past practices and to pay year end employee bonuses
which are set forth on Schedule 3.23;
(iv) waived any material right under any contract or other
agreement of the type required to be set forth on any Schedule;
(v) made any material change in its accounting methods or
practices or made any material change in depreciation or amortization policies
or rates
22
<PAGE>
adopted by it;
(vi) materially changed any of its business policies, including,
without limitation, advertising, investment, marketing, pricing, purchasing,
production, personnel, sales, returns, budget or product acquisition policies,
except as specifically set forth in the Company's Confidential Information
Memorandum (dated March 1995), a copy of which was previously delivered to
Metromedia;
(vii) made any loan or advance to any of its shareholders,
officers, directors, employees, consultants, agents or other representatives
(other than travel advances made in the ordinary course of business for business
travel and entertainment expenses), or made any other loan or advance otherwise
than in the ordinary course of business;
(viii) except for the acquisition or disposition of inventory, or
equipment or other Properties in the ordinary course of business, sold,
abandoned or made any other disposition of any of its Properties or made any
acquisition of all or any part of the Properties, capital stock or business of
any other person;
(ix) paid, directly or indirectly, any of its material
Liabilities before the same became due in accordance with its terms or otherwise
than in the ordinary course of business;
(x) terminated or failed to renew, or received any written threat
(that was not subsequently withdrawn) to terminate or fail to renew, any
contract or other agreement that is or was material to the business of the
Company and the Subsidiaries taken as a whole;
(xi) except with respect to certain transactions among the
Company and its Subsidiaries as set forth on Schedule 3.24, amended its Articles
of Incorporation or By-laws (or comparable instruments) or merged with or into
or consolidated with any other Person, subdivided or in any way reclassified any
shares of its capital stock or changed or agreed to change in any manner the
rights of its outstanding capital stock or the character of its business; or
(xii) except for the Company's "first look" deal with Paramount
Pictures Corporation, the most recent copy of which and all material
correspondence
23
<PAGE>
relating thereto has been provided to Metromedia, engaged in any other material
transaction.
3.25 Potential Conflicts of Interest. No executive officer or director
of the Company or any of the Subsidiaries, no Stockholder, no relative or spouse
(or relative of such spouse) of any such officer, director or Stockholder and no
entity controlled by one or more of the foregoing:
(i) owns, directly or indirectly, any interest in (excepting less
than 5% stock holdings for investment purposes in securities of publicly held
and traded companies), or is an officer, director, employee or consultant of,
any Person which is, or is engaged in business as, a competitor, lessor, lessee,
supplier, distributor, sales agent or customer of the Company or any of the
Subsidiaries except as set forth on Schedule 3.25(a);
(ii) except as set forth on Schedule 3.25(b), owns, directly or
indirectly, in whole or in part, any Property that the Company or any of the
Subsidiaries uses in the conduct of its business; or
(iii) except as set forth on Schedule 3.25(c), has any cause of
action or other claim whatsoever against, or owes any amount to, the Company or
any of the Subsidiaries, except for claims in the ordinary course of business
such as for accrued vacation pay, accrued benefits under employee benefit plans,
and similar matters and agreements existing on the date hereof.
3.26 Premerger Notification. The Company (or its ultimate parent
entity) will promptly file notification and report forms with respect to the
Contemplated Transactions in compliance with the HSR Act. Metromedia will bear
the costs of any filing fees required to be paid pursuant to the HSR Act as a
result of Metromedia being deemed an "acquiring person" under the HSR Act in
connection with the transactions contemplated in Section 1 hereof. In the event
Metromedia is not deemed an "acquiring person" under the HSR Act in connection
with the transactions contemplated by Section 1 hereof, the person deemed the
"acquiring person" shall bear the sole responsibility for any filing fee under
the HSR Act in connection with such transactions.
3.27 Projections. The projections relating to operations of the
Company and the Subsidiaries through the fiscal year ending 2003 (the
"Projections"), heretofore
24
<PAGE>
delivered by the Company to Metromedia, have been prepared in good faith on a
reasonable basis. The assumptions on which the Projections are based are stated
in Schedule 3.27 and are consistent with past practices of the Company and the
Subsidiaries and with historical conditions applicable to the business of the
Company and the Subsidiaries. Nothing has come to the attention of the Company
or any of the Subsidiaries to indicate that the Projections or the assumptions
upon which they are based are not reasonable.
3.28 Full Disclosure. All documents, Contracts, instruments,
certificates, notices, consents, affidavits, letters, telegrams, telexes,
statements, schedules (including Schedules to this Agreement), exhibits
(including Exhibits to this Agreement), the Confidential Information Memorandum
dated March 1995 (the "Confidential Memorandum"), the Projections through the
year ending 2003, and any other papers whatsoever (collectively, "Documents")
delivered by or on behalf of the Stockholders, the Company or the Subsidiaries
in connection with this Agreement and the Contemplated Transactions are
authentic if original or true and correct copies of the originals. With the
exception of the Confidential Memorandum, no representation or warranty of the
Company or the Stockholders contained in this Agreement or in any of the
Schedules, and no Document furnished by or on behalf of the Stockholders, the
Company or the Subsidiaries to Metromedia pursuant to this Agreement or in
connection with the Contemplated Transactions, contains an untrue statement of a
material fact or omits to state a material fact required to be stated therein or
necessary to make the statements made, in the context in which made, not
materially false or misleading. Except as otherwise set forth in this Agreement,
there is no material fact that the Stockholders have not disclosed to Metromedia
in writing that materially adversely affects or, so far as any of the
Stockholders can now foresee, will have a Material Adverse Effect on the Company
or any of the Subsidiaries or the ability of the Stockholders to perform this
Agreement.
3.29 Environment Protection. Except as disclosed on Schedule 3.29:
(i) neither the Company nor any of its Subsidiaries is or has been in
violation in any material respect of any applicable Safety and Environmental Law
(as hereinafter defined);
25
<PAGE>
(ii) the Company and its Subsidiaries have all material Permits
required pursuant to Safety and Environmental Laws, such Permits are in full
force and effect, no action or proceeding to revoke, limit or modify any of such
Permits is pending, and the Company and each of its Subsidiaries is in
compliance in all material respects with all terms and conditions thereof;
(iii) neither the Company nor any of its Subsidiaries has received any
Environmental Claim (as hereinafter defined);
For purposes of this Agreement, the following terms have the following
meanings:
(i) "Environmental Claims" means any notification, whether direct or
indirect, formal or informal, written or oral, pursuant to Safety and
Environmental Laws or principles of common law relating to pollution, protection
of the environment or health and safety, that any of the current or past
operations of the Company or any of its Subsidiaries, or any by-product thereof,
or any of the property currently or formerly owned, leased or operated by the
Company or any of its Subsidiaries, or the operations or property of any
predecessor of the Company or any of its Subsidiaries is or may be implicated in
or subject to any proceeding, action, investigation, claim, lawsuit, order,
agreement or evaluation by any Governmental Body or any other person.
(ii) "Safety and Environmental Laws" means all federal, state and
local laws and order relating to pollution, protection of the environment,
public or worker health and safety, or the emission, discharge, release or
threatened release of pollutants, contaminants or industrial, toxic or hazardous
substances or wastes into the environment or otherwise relating to the
manufacture, processing, distribution, use, treatment, storage, disposal,
transport or handling of pollutants, contaminants or industrial, toxic or
hazardous substances or wastes, including, without limitation, the Comprehensive
Environmental Response, Compensation and Liability Act, 42 U.S.C. section 9601
et seq., the Resource Conservation and Recovery Act, 42 U.S.C. section 6901 et
seq., the Toxic Substances Control Act, 15 U.S.C. section 2601 et seq., the
Federal Water Pollution Control Act, 33 U.S.C. section 1251 et seq., the Clean
Air Act, 42 U.S.C. section 7401 et seq., the Federal
26
<PAGE>
Insecticide, Fungicide and Rodenticide Act, 7 U.S.C. section 121 et seq., the
Occupational Safety and Health Act, 29 U.S.C. section 651 et seq., the Asbestos
Hazard Emergency Response Act, 15 U.S.C. section 2601 et seq., the Safe Drinking
Water Act, 42 U.S.C. section 300 et seq., the Oil Pollution Act of 1990 and
analogous state acts.
ARTICLE 4
REPRESENTATIONS AND WARRANTIES OF EACH STOCKHOLDER
4. Each Stockholder, severally and not jointly, represents and warrants to
Metromedia as follows:
4.1 Title to the Shares. As of the Closing Date, such Stockholder
shall own beneficially and of record, free and clear of any Lien, or shall own
of record and have full power and authority to convey free and clear of any
Lien, the Shares set forth opposite such Stockholder's name on Exhibit A, and,
upon delivery of and payment for such Shares as herein provided, such
Stockholder will convey to Metromedia good and valid title thereto, free and
clear of any Lien.
4.2 Authority to Execute and Perform Agreement. Such Stockholder has
the full legal right and power and all authority and approvals required to
execute and deliver this Agreement and to perform fully such Stockholder's
obligations hereunder. This Agreement has been duly executed and delivered by
such Stockholder and (assuming the due authorization, execution and delivery
hereof by MPCA Mergerco, the Company and Metromedia) is a valid and binding
obligation of such Stockholder enforceable in accordance with its terms except
as the same may be limited by (insolvency qualification). Except as set forth on
Schedule 4.2, the execution and delivery by such Stockholder of this Agreement,
the consummation of the Contemplated Transactions and the performance by such
Stockholder of this Agreement in accordance with its terms will not (i) require
the approval or consent of any Governmental Body or the approval or consent of
any other Person; (ii) conflict with or result in any breach or violation of any
of the terms and conditions of, or constitute (or with notice or lapse of time
or both constitute) a default under, any Law or Order of any Governmental Body
applicable to such Stockholder or to
27
<PAGE>
the Shares held by such Stockholder, or any Contract to which such Stockholder
is a party or by or to which such Stockholder is or the Shares held by such
Stockholder are bound or subject; or (iii) result in the creation of any Lien on
the Shares held by such Stockholder.
4.3 Company's Representations and Warranties. To the Knowledge of the
Stockholders, the Company's representations and warranties set forth in Section
3 are true, correct and complete in all material respects.
ARTICLE 5
REPRESENTATIONS AND WARRANTIES
OF MPCA MERGERCO AND METROMEDIA
5. Metromedia and MPCA Mergerco represent and warrant to the Stockholders
and the Company as follows:
5.1 Due Incorporation and Authority. Each of the MPCA Mergerco and
Metromedia is a corporation duly organized, validly existing and in good
standing under the laws of the State of Delaware, and each has all requisite
corporate power and authority to own, lease and operate their respective
Properties and to carry on its business as now being and as heretofore
conducted.
5.2 Authority to Execute and Perform Agreement. Each of MPCA Mergerco
and Metromedia has the full legal right and power and all authority and
approvals required to execute and deliver this Agreement and to perform fully
their respective obligations hereunder. This Agreement has been duly executed
and delivered by each of MPCA Mergerco and Metromedia and (assuming the due
authorization, execution and delivery hereof by the Stockholders and the
Company) is a valid and binding obligation of each of MPCA Mergerco and
Metromedia enforceable in accordance with its terms.
5.3 No Violations. Except as set forth on Schedule 5.3, the execution
and delivery by MPCA Mergerco and Metromedia of this Agreement, the consummation
of the Contemplated Transactions and the performance by MPCA Mergerco and
Metromedia of this Agreement, in accordance with its terms will not (i) require
the consent, approval, action of, or making any filing with or giving notice to
any Governmental Body or any other
28
<PAGE>
Person; (ii) conflict with or result in any breach or violation of any of the
terms and conditions of, or constitute (or with notice or lapse of time or both
constitute) a default under, the Certificate of Incorporation or By-laws of MPCA
Mergerco or Metromedia, any Law or Order of any Governmental Body applicable to
MPCA Mergerco or Metromedia, or any Contract to which MPCA Mergerco or
Metromedia is a party or by or to which MPCA Mergerco or Metromedia or any of
their Properties is bound or subject; or (iii) result in the creation of any
material Lien on any of the Properties of MPCA Mergerco, Metromedia or the
Surviving Corporation.
5.4 Investment Company Act. Metromedia either (i) is not an
"investment company", or to Metromedia's Knowledge a company "controlled" by, or
to Metromedia's Knowledge an "affiliated company" with respect to an "investment
company" required to register under the Investment Company Act of 1940, as
amended (the "Investment Company Act") or (ii) satisfied all conditions for an
exemption from the Investment Company Act, and accordingly, none of its
subsidiaries is required to be registered under the Investment Company Act.
5.5 Premerger Notification. Metromedia (or its ultimate Parent) will
promptly file notification and report forms with respect to the Contemplated
Transactions in compliance with the HSR Act.
5.6 Business of MPCA Mergerco. MPCA Mergerco has not incurred,
directly or indirectly through any subsidiary or otherwise, any liabilities or
obligations, except those incurred in connection with its incorporation or with
the negotiation and the execution, delivery and performance of this Agreement
and the transactions contemplated hereby. MPCA Mergerco has not engaged,
directly or indirectly through any subsidiaries or otherwise, in any business or
activities of any type or kind whatsoever, or entered into any agreement or
arrangements with any Person, and is not subject to or bound by any obligation
or understanding which is not contemplated by this Agreement.
5.7 Capitalization. The authorized capital stock of MPCA Mergerco
consists of 1000 shares of common stock, $.01 par value per share, all of which
are validly issued and outstanding, fully paid and nonassessable, and owned,
beneficially and of record,
29
<PAGE>
by Metromedia, free and clear of all Liens. As of the date of this Agreement,
there are no outstanding options, warrants, preemptive or other rights,
contracts, commitments, or agreements by which MPCA Mergerco is or may become
obligated to issue any additional shares of its capital stock or securities
convertible into any such shares.
5.8 Reports and Financial Statements. Metromedia has previously
furnished or otherwise made available to the Company true and complete copies of
all reports on Forms 10-K, 10-Q and 8-K filed by Metromedia and Metromedia has
filed all reports on Forms 10-K, 10-Q and 8-K required to be filed by Metromedia
with the Securities and Exchange Commission since November 1, 1995. As of their
respective dates, such reports did not contain any untrue statement of material
fact or omit to state a material fact required to be stated therein or necessary
to make the statements therein, in light of the circumstances under which they
were made, not misleading
5.9 Status of Metromedia Common Stock to be Issued. Assuming without
investigation that the shares of Company Common Stock at the Effective Time will
be validly authorized, validly issued, fully paid, and non-assessable, the
shares of Metromedia Common Stock to be issued in the Merger will, at the
Effective Time, be validly authorized and, when the Merger has become effective
and the shares of Metromedia Common Stock have been duly delivered pursuant to
the terms of this Agreement, such shares of Metromedia Common Stock will be
validly issued, fully paid and non-assessable.
ARTICLE 6
COVENANTS AND AGREEMENTS
6.1 Conduct of Business. From the date hereof through the Closing
Date, the Stockholders, jointly and severally, agree that they (i) shall cause
the Company and the Subsidiaries to conduct their businesses in the ordinary
course and, without the prior written consent of Metromedia, not to undertake
any of the actions specified in Section 3.24 unless otherwise disclosed in any
Schedule referred to in Section 3.24 or in connection with an item disclosed in
any such Schedule; and further not to (a)
30
<PAGE>
authorize for issuance, issue, grant, sell, pledge, dispose of or propose to
issue, grant, sell, pledge or dispose of any shares of, or any options,
warrants, commitments, subscriptions or rights of any kind to acquire any shares
of, the capital stock of the Company or any securities convertible into or
exchangeable for shares of stock of any class of the Company or any of its
Subsidiaries; (b) split, combine, subdivide or reclassify any shares of its
capital stock or issue or authorize the issuance of any other securities in
respect of, in lieu of or in substitution for shares of its capital stock or
declare, pay or set aside any dividend or other distribution (whether in cash,
stock or property or any combination thereof) in respect of its capital stock,
or redeem, purchase or otherwise acquire or offer to acquire any shares of its
own capital stock or any of its Subsidiaries or any other securities thereof or
any right, warrants or options to acquire any such shares or other securities;
(c) (1) except for debt (including obligations in respect of capital leases) not
in excess of $50,000 and except for the existing line of credit listed on
Schedule 6.1, create, incur or assume any short-term debt, long-term debt or
obligations in respect of capital leases; (2) assume, guarantee, endorse or
otherwise become liable or responsible (whether directly, indirectly,
contingently or otherwise) for the obligations of any other person except
wholly-owned subsidiaries of the Company, in the ordinary course of business
consistent with past practice; (3) make any capital expenditures or make any
loans, advances or capital contributions to, or investments in, any other Person
(other than customary travel or business or entertainment advances to employees,
representatives, consultants, directors or advisors or subsidiaries made in the
ordinary course of business consistent with past practice and/or in connection
with the consummation of the transactions contemplated by this Agreement and
listed on Schedule 6.1), currently committed, budgeted capital expenditures and
additional capital expenditures not in excess of $50,000; or (4) incur any
material liability or obligation (absolute, accrued, contingent or otherwise)
other than in the ordinary course of business and consistent with past practice;
(d) except in the ordinary course of business consistent with past practice or
as may be required by local law, sell, transfer, mortgage, or otherwise dispose
of, or encumber, or agree to sell, transfer, mortgage or otherwise dispose of or
encumber, any material assets or properties, real, personal or mixed; (e)
increase in any manner the compensation of any of
31
<PAGE>
its officers; (f) enter into severance, termination or retention agreements, and
terminating any employment agreements, with its officers and key employees; (g)
(except in the ordinary course of business consistent with past practice) enter
into any agreement relating to the production, financing, acquisition,
development or license of motion pictures or television programming; (h) incur
any obligation in excess of $50,000 in connection with any item of Product to be
produced by the Company or its Subsidiaries; execute any Contract obligating the
Company or its Subsidiaries to pay a minimum guarantee of more than $50,000 for
any item of Product, incur acquisition costs of more than $100,000 for any item
of Product; (i) enter into any "first look" or output Contract with any Person;
and (ii) shall use reasonable commercial efforts to cause the Company and the
Subsidiaries to conduct their businesses in such a manner so that the
representations and warranties contained in Article 3 shall continue to be true
and correct on and as of the Closing Date as if made on and as of the Closing
Date. From the date hereof through the Closing Date, each Stockholder, severally
and not jointly, agrees to conduct such Stockholder's affairs in such a manner
so that the representations and warranties of such Stockholder contained in
Article 4 shall continue to be true and correct on and as of the Closing Date as
if made on and as of the Closing Date. The Stockholders shall give Metromedia
prompt notice of any event, condition or circumstance occurring from the date
hereof through the Closing Date that would constitute, to their Knowledge, a
violation or breach of any representation or warranty, whether made as of the
date hereof or as of the Closing Date, or that would constitute a violation or
breach of any covenant of any Stockholder contained in this Agreement.
6.2 Performance of Obligations; Copyright. From the date hereof
through the Closing Date, the Company and the Subsidiaries agree (i) to duly
observe and perform all material terms and conditions of all material agreements
with respect to the production, development and/or exploitation of each item of
Product and diligently protect and enforce the rights of the Company or any of
the Subsidiaries under all such agreements in a manner consistent with prudent
business practice; provided, however, that to the extent the Company does not
have adequate resources to comply with the foregoing, it shall
32
<PAGE>
promptly inform Metromedia and Metromedia shall, in it sole discretion, decide
whether to pursue the same (if sufficient resources are not available, then
failure to comply shall not be deemed a breach of this covenant) and (ii) in
connection with each item of Product with respect to which the Company or any of
the Subsidiaries is or becomes the copyright proprietor thereof or to the extent
such interest is obtained by the Company or any of the Subsidiaries, or the
Company or any of the Subsidiaries otherwise acquires a copyrightable interest
in, take any and all actions reasonably necessary to register the copyright for
such item of Product in the name of the Company or any of the Subsidiaries in
conformity with the laws of the United States; provided, however, that to the
extent the Company does not have adequate resources to comply with the
foregoing, it shall promptly inform Metromedia and Metromedia shall, in it sole
discretion, decide whether to pursue the same (if sufficient resources are not
available, then failure to comply shall not be deemed a breach of this
covenant).
With respect to subsections (i) and (ii) of this Section 6.2 if
sufficient resources are not available to the Company and Metromedia does not
expend its resources in connection with the Company's rights under any
Production Services Agreement or under any item of Product after notification
thereof by Metromedia, such failure shall not be deemed a breach of this
covenant by either of the Company or Metromedia.
6.3 Corporate Examinations and Investigations. Prior to the Closing
Date, the Stockholders agree that Metromedia shall be entitled, through its
employees and representatives, including, without limitation, any counsel, tax
advisors and accountants, to conduct its due diligence investigation (the "Due
Diligence Investigation") and to make such investigation of the Properties,
businesses and operations of the Company and the Subsidiaries, and such
examination of the books, records and financial condition of the Company and the
Subsidiaries, as it wishes. Any such investigation and examination shall be
conducted at reasonable times and under reasonable circumstances, and the
Stockholders shall, and shall cause the Company and the Subsidiaries to,
cooperate fully therein. No investigation by Metromedia shall diminish or
obviate any of the representations, warranties, covenants or agreements of the
Stockholders contained in this Agreement except
33
<PAGE>
as otherwise specifically set forth herein. In order that Metromedia may have
full opportunity to make such physical, business, accounting and legal review,
examination or investigation as it may wish of the affairs of the Company and
the Subsidiaries, the Stockholders shall make available and shall cause the
Company and the Subsidiaries to make available to the representatives of
Metromedia during such period all such information and copies of such documents
concerning the affairs of the Company and the Subsidiaries as such
representatives may reasonably request, shall permit the representatives of
Metromedia access to the Properties of the Company and the Subsidiaries and all
parts thereof and shall cause their officers, employees, consultants, agents,
accountants and attorneys to cooperate fully with such representatives in
connection with such review and examination. If this Agreement terminates, (i)
Metromedia shall keep confidential and shall not use in any manner any
information or documents obtained from the Company or the Subsidiaries
concerning their Properties, businesses and operations, unless readily
ascertainable from public or published information, or trade sources, or already
known or subsequently developed by Metromedia independently of any investigation
of the Company or the Subsidiaries or through sources which, to the Knowledge of
Metromedia are not subject to an obligation of confidentiality otherwise
required by law to be disclosed provided, however, that if required by law to be
disclosed, Metromedia shall give the Company and the Stockholders written notice
of such disclosure and a reasonable opportunity to obtain a protective order,
and (ii) any documents obtained from the Company or the Subsidiaries and all
copies thereof shall be returned.
6.4 Publicity. Except as may be required by the rules and regulations
of the SEC or the American Stock Exchange, the parties agree that no publicity
release or announcement concerning this Agreement or the Contemplated
Transactions shall be made without advance approval thereof by the other party
hereto.
6.5 Expenses. The parties to this Agreement shall, except as otherwise
specifically provided herein, bear their respective expenses incurred in
connection with the preparation, execution and performance of this Agreement and
the Contemplated Transactions, including, without limitation, all fees and
expenses of agents, representatives,
34
<PAGE>
counsel and accountants.
6.6 Indemnification of Brokerage. The Stockholders, jointly and
severally, represent and warrant to Metromedia that there are no brokerage
commissions, finder's fees or similar fees or commissions payable to any Person
(a "Broker") in connection with this Agreement or based on any agreement,
arrangement or understanding with the Company, any of the Subsidiaries or any of
the Stockholders, or any action taken by the Company, any of the Subsidiaries or
any of the Stockholders relating thereto. The Stockholders agree, jointly and
severally, to indemnify and save Metromedia harmless from any claim or demand
for commission or other compensation by any Broker claiming to have been
employed by or on behalf of the Company, any of the Subsidiaries or any of the
Stockholders, and to bear the cost of legal expenses incurred in defending
against any such claim. Metromedia represents and warrants to the Stockholders
that no Broker has acted on behalf of Metromedia in connection with this
Agreement or the Contemplated Transactions, and that there are no brokerage
commissions, finders' fees or similar fees or commissions payable in connection
therewith based on any agreement, arrangement or understanding with Metromedia,
or any action taken by Metromedia. Metromedia agrees to indemnify and save the
Stockholders harmless from any claim or demand for commission or other
compensation by any Broker claiming to have been employed by or on behalf of
Metromedia, and to bear the cost of legal expenses incurred in defending against
any such claim.
6.7 Related Parties. The Stockholders shall, simultaneously with the
Closing, pay or cause to be paid to the Company or one of the Subsidiaries, as
the case may be, all amounts owed to the Company or such Subsidiary and
reflected on the Balance Sheet or borrowed from or owed to the Company or such
Subsidiary since the Balance Sheet Date by any of the Stockholders or any
Affiliate of any of the Stockholders. At and as of the Closing, upon delivery of
the consideration pursuant to Section 2.3, there will be no further obligation
of the Company to the Stockholders with respect to the Existing Note Amount. The
Company shall remain liable to the Stockholders for compensation, reimbursement
of expenses, and obligations under contracts, all listed on Schedule 6.7.
35
<PAGE>
6.8 Further Assurances. Each of the parties shall execute such
Documents and take such further actions as may be reasonably required or
desirable to carry out the provisions hereof and the Contemplated Transactions.
Each such party shall use its best commercially reasonable efforts to fulfill or
obtain the fulfillment of the conditions to the Closing set forth in Articles 7
and 8.
6.9 D&O Insurance. Metromedia agrees to maintain insurance relating to
directors' and officers' liability and cause the Surviving Corporation to act in
accordance with the indemnification provisions of the Surviving Corporation's
by-laws and certificate of incorporation.
6.10 Employee Benefits; Employment Contracts; Indemnification.
(a) Following the Effective Time, the Surviving Corporation will
provide generally to officers and employees of the Company employee benefits,
which in the aggregate, are no less favorable than those provided by Orion
Pictures Corporation, a wholly-owned subsidiary of Metromedia. However, the
Surviving Corporation shall have the right to amend, modify, or terminate any
employee benefit plan, program, or arrangement after the Effective Time, in
accordance with the terms and conditions of such plans, programs or
arrangements.
(b) The Surviving Corporation will honor all Company employment
agreements listed on Schedule 6.10 in accordance with the terms and conditions
of such agreement.
6.11 Capital Stock Changes. If, prior to the Effective Time,
Metromedia shall effect any stock dividend, stock split, or reverse stock split
of Metromedia Common Stock, then the shares of Metromedia Common Stock, to be
delivered under this Agreement shall be appropriately and equitably adjusted to
the kind and amount of shares of stock and other securities and property to
which the holders of such shares of Metromedia Common Stock would have been
entitled to receive had such stock or such other security been issued and
outstanding as of the record date for determining stockholders entitled to
participate in such corporate event.
6.12 Company Trademarks. Upon expiration or earlier termination of
36
<PAGE>
the Employment Agreements referred to in Section 7.7 (if expired or terminated
separately, upon the expiration or termination of the latter Employment
Agreement), the Surviving Corporation agrees to assign to the Stockholders,
jointly, all of the Surviving Corporation's right, title and interest in and to
the trade name and the trademark MOTION PICTURE CORPORATION OF AMERICA and the
design of the mark as reproduced on Exhibit A hereto (collectively, the Mark),
provided, however, that Metromedia and its Affiliates shall have the
irrevocable, perpetual, royalty-free right to continue to use the Mark
throughout the universe on any Company Product (as such term is defined in the
Employment Agreements) existing prior to the expiration or earlier termination
of the Employment Agreements. The parties agree to execute any and all
instruments necessary to effectuate the assignment referred to herein. The
Surviving Corporation agrees that from the Effective Time until the assignment
to the Stockholders as set forth above, it will not assign, transfer, dispose
of, or license the Mark or any part thereof to any Person except that the Mark
may be transferred to and used by Affiliates on a non-exclusive basis with the
approval of the Stockholders which shall not be unreasonably withheld or
delayed.
6.13 Restricted Stock Plan. Metromedia will adopt a Restricted Stock
Plan in the form of Exhibit B hereto and grant the Awards (as defined therein)
on the Adjustment Date. Metromedia will use reasonable efforts to register the
Common Stock underlying the Awards on a Form S-8.
ARTICLE 7
CONDITIONS PRECEDENT TO THE OBLIGATION
METROMEDIA TO CLOSE
7. The obligations of Metromedia to enter into and complete the
Closing are subject, at the option of Metromedia acting in accordance with the
provisions of Section 11 with respect to termination of this Agreement, to the
fulfillment on or prior to the Closing Date of the following conditions, any one
or more of which may be waived by it:
7.1 Representations and Covenants. The representations and warranties
37
<PAGE>
of the Company and the Stockholders contained in this Agreement shall be true
and correct in all material respects on and as of the Closing Date with the same
force and effect as though made on and as of the Closing Date. The Company and
each of the Stockholders shall have performed and complied in all material
respects with all covenants and agreements required by this Agreement to be
performed or complied with by the Company or such Stockholder, as the case may
be, on or prior to the Closing Date. The Company and each Stockholder shall have
delivered to Metromedia a certificate, dated the date of the Closing and signed
by the Company or such Stockholder, to the foregoing effect.
7.2 Consents and Approvals. All Required Consents shall have been
obtained and be in full force and effect, and Metromedia shall have been
furnished with evidence reasonably satisfactory to it of the granting of such
approvals, authorizations and consents.
7.3 Opinion of Counsel to the Stockholders. Metromedia shall have
received the opinion of Loeb & Loeb, LLP, counsel to the Company and the
Stockholders, dated the date of the Closing, addressed to Metromedia, in the
form of Exhibit C.
7.4 Intentionally Omitted.
7.5 FIRPTA Affidavit. Metromedia shall have received an affidavit of
each Stockholder sworn to under penalty of perjury, setting forth such Majority
Stockholder's name, address and Federal tax identification number and stating
that Stockholder is not a "foreign person" within the meaning of Section 1445 of
the Internal Revenue Code of 1986 (the "Code").
7.6 HSR Act Filing. Any Person required in connection with the
Contemplated Transactions to file a notification and report form in compliance
with the HSR Act shall have filed such form and the applicable waiting period
with respect to each such form (including any extension thereof by reason of a
request for additional information) shall have expired or been terminated.
7.7 Employment Agreements. Each Stockholder shall have entered into an
Employment Agreement in the form attached to that certain letter dated as of the
date hereof from the Surviving Corporation to the Stockholders.
38
<PAGE>
7.8 No Claims. There shall be no outstanding Order of any Governmental
Body against or involving the Company or any of the Subsidiaries and there are
no claims pending, or to the Knowledge of the Company, any of the Subsidiaries
or any of the Stockholders, threatened against or involving the Company or any
of the Subsidiaries or any of their Properties which individually or in the
aggregate could have a Material Adverse Effect or an adverse effect on the
Contemplated Transactions.
7.9 Board Approval. The Board of Directors of Metromedia shall have
approved this Agreement and the Contemplated Transactions.
7.10 Due Diligence. Metromedia shall have completed its legal,
financial and accounting review of the Company and the subsidiaries and shall be
satisfied with the results of such review.
7.11 No Dissenters' Rights. No holder of any Shares of Company Common
Stock shall have objected to the Merger in writing and demanded the value of
their shares pursuant to Section 262 of the Delaware General Corporation Law.
7.12 Paramount Pictures. The Agreement dated as of November 1, 1995
between Paramount Pictures Corporation and the Company shall be executed in a
form approved by Metromedia.
ARTICLE 8
CONDITIONS PRECEDENT TO THE OBLIGATION
OF THE STOCKHOLDERS TO CLOSE
The obligation of the Stockholders to enter into and complete the Closing
is subject, at the option of the Stockholders acting in accordance with the
provisions of Section 11 with respect to termination of this Agreement, to the
fulfillment on or prior to the Closing Date of the following conditions, any one
or more of which may be waived by them:
8.1 Representations and Covenants. The representations and warranties
of Metromedia contained in this Agreement shall be true on and as of the Closing
Date with
39
<PAGE>
the same force and effect as though made on and as of the Closing Date.
Metromedia shall have performed and complied with all covenants and agreements
required by this Agreement to be performed or complied with by it on or prior to
the Closing Date. Metromedia shall have delivered to the Stockholders a
certificate, dated the date of the Closing and signed by an officer of
Metromedia, to the foregoing effect.
8.2 Consents and Approvals. All Required Consents shall have been
obtained and be in full force and effect and the Company and the Stockholders
shall have been furnished with evidence reasonably satisfactory to each of them
of the granting of such approvals, authorizations and consents.
8.3 Opinion of Counsel to Metromedia. The Stockholders shall have
received the opinion of Arnold L. Wadler, General Counsel to Metromedia, dated
the date of the Closing, addressed to the Stockholders, in the form of Exhibit
F.
8.4 HSR Act Filing. Any Person required in connection with the
Contemplated Transactions to file a notification and report form in compliance
with the HSR Act shall have filed such form and the applicable waiting period
with respect to each such form (including any extension thereof by reason of a
request for additional information) shall have expired or been terminated.
8.5 Employment Agreements. The Surviving Corporation shall have
entered into employment agreements with each of the Stockholders in the form
attached to that certain letter dated as of the date hereof from the Surviving
Corporation to the Stockholders.
8.6 No Claims. There shall be no outstanding Order of any governmental
body against or involving Metromedia and there shall be no claims pending or to
the Knowledge of Metromedia, threatened against or involving Metromedia which
could have an adverse effect on the Contemplated Transactions.
8.7 Board Approval. The Board of Directors of the Company shall have
approved this Agreement and the Contemplated Transactions.
8.8 Due Diligence. The Company and the Stockholders shall have
completed their review of Metromedia and shall be satisfied with the results of
such review.
40
<PAGE>
8.9 The parties shall enter into a Registration Rights Agreement in
the form of Exhibit G hereto.
8.10 No Dissenters' Rights. No holder of any Shares of Company Common
Stock shall have objected to the Merger in writing and demanded the value of
their shares pursuant to Section 262 of the Delaware General Corporation Law.
ARTICLE 9
SURVIVAL OF REPRESENTATIONS AND WARRANTIES
OF THE STOCKHOLDERS AFTER CLOSING
Notwithstanding any right of Metromedia fully to investigate the affairs of
the Company and the Subsidiaries and notwithstanding any Knowledge of facts
determined or determinable by Metromedia pursuant to such investigation or right
of investigation, Metromedia has the right to rely fully upon the
representations, warranties, covenants and agreements of the Stockholders
contained in this Agreement or in any Documents delivered pursuant to this
Agreement. All such representations, warranties, covenants and agreements shall
survive the execution and delivery of this Agreement and the Closing hereunder.
Except for all representations and warranties in Article 4, all representations
and warranties of the Stockholders contained in this Agreement shall terminate
and expire (i) on the date 3 years after the Closing Date, with respect to any
General Claim (as defined below) based upon, arising out of or otherwise in
respect of any fact, circumstance, action or proceeding of which Metromedia
shall not have given notice on or prior to such date to the Stockholders, and
(ii) with respect to any Tax Claim ), on the later of (a) the date upon which
the liability to which any such Tax Claim may relate is barred by all applicable
statutes of limitation or (b) the date upon which any claim for refund or credit
related to such Tax Claim is barred by all applicable statutes of limitations.
As used in this Agreement, the following terms have the following meanings:
(x) "General Claim" means any claim based upon, arising out of or
otherwise in respect of any inaccuracy in or any breach of any representation or
warranty, of
41
<PAGE>
any Stockholder contained in this Agreement or in any Documents delivered
pursuant to this Agreement.
(y) "Tax Claim" shall mean any claim based upon, arising out of
or otherwise in respect of any inaccuracy or any breach of any representation or
warranty contained in Section 3.9.
ARTICLE 10
GENERAL INDEMNIFICATION
10.1 Obligation of the Stockholders to Indemnify.
(a) Subject to the limitations contained in Article 9 and this Article 10,
the Stockholders jointly and severally agree to indemnify, defend and hold
harmless Metromedia (and their respective directors, officers, employees,
Affiliates, parents, partners, shareholders, successors and assigns) from and
against all losses, liabilities, damages, deficiencies, demands, claims,
actions, judgments or causes of action, assessments, costs or expenses
(including, without limitation, interest, penalties and reasonable attorneys'
fees and disbursements) ("Losses") based upon, arising out of or otherwise in
respect of any inaccuracy in or any breach of any representation, warranty,
covenant or agreement of the Company or the Stockholders contained in this
Agreement with the exception of Article 4.
(ii) Each Stockholder agrees to indemnify, defend and hold
harmless Metromedia (and its respective directors, employees, officers,
Affiliates, parents, partners, shareholders, successors and assigns) from and
against all Losses based upon, arising out of or otherwise in respect of any
inaccuracy in or any breach of any representation, warranty, covenant or
agreement of such Stockholder contained in this Agreement.
10.2 Obligation of Metromedia to Indemnify. Metromedia agrees to
indemnify, defend and hold harmless the Stockholders from and against all Losses
based upon, arising out of or otherwise in respect of any inaccuracy in or any
breach of any
42
<PAGE>
representation, warranty, covenant or agreement of Metromedia contained in this
Agreement.
10.3 Notice and Opportunity to Defend.
10.3.1 Notice of Asserted Liability.
Promptly after receipt by any party hereto (the "Indemnitee") of notice of any
demand, claim or circumstances which, with the lapse of time, would or might
give rise to a claim or the commencement (or threatened commencement) of any
action, proceeding or investigation (an "Asserted Liability") that may result in
a Loss, the Indemnitee shall give notice thereof (the "Claims Notice") to any
other party (or parties) obligated to provide indemnification pursuant to
Section 10.1 or 10.2 (the "Indemnifying Party"). The Claims Notice shall
describe the Asserted Liability in reasonable detail, and shall indicate the
amount (estimated, if necessary and to the extent feasible) of the Loss that has
been or may be suffered by the Indemnitee.
10.3.2 Opportunity to Defend. Except as otherwise set forth in
Section 10.3.3, the Indemnifying Party may elect to compromise or defend, at its
own expense and by its own counsel, any Asserted Liability. If the Indemnifying
Party elects to compromise or defend such Asserted Liability, it shall within 20
days (or sooner, if the nature of the Asserted Liability so requires) notify the
Indemnitee of its intent to do so, and the Indemnitee shall cooperate, at the
expense of the Indemnifying Party, in the compromise of, or defense against,
such Asserted Liability. If the Indemnifying Party elects not to compromise or
defend the Asserted Liability, fails to notify the Indemnitee of its election as
herein provided or contests its obligation to indemnify under this Agreement,
the Indemnitee may pay, compromise or defend such Asserted Liability.
Notwithstanding the foregoing, neither the Indemnifying Party nor the Indemnitee
may settle or compromise any claim over the objection of the other; provided,
however, that consent to settlement or compromise shall not be unreasonably
withheld or delayed. In any event, the Indemnitee and the Indemnifying Party may
participate, at their own expense, in the defense of such Asserted Liability.
Notwithstanding the foregoing, any Indemnitee shall be entitled to employ
separate counsel from the Indemnifying Party if the interests of such Indemnitee
43
<PAGE>
may be prejudiced without such separate counsel (including, without limitation,
if one or more legal defenses may be inconsistent or in conflict with the legal
defenses available to the Indemnifying Party) and the Indemnifying Party shall
entirely and solely bear the reasonable fees and expenses of such separate
counsel. If the Indemnifying Party chooses to defend any claim, the Indemnitee
shall make available to the Indemnifying Party any books, records or other
documents within its control that are necessary or appropriate for such defense.
10.3.3 Opportunity to Defend Tax Deficiencies. In the event a
claim (a "Tax Deficiency") (including a revenue agent's report or notice of
proposed adjustment) shall be made by the Internal Revenue Service or its state,
local or foreign counterpart, which, if successful, would result in an
obligation on the part of the Stockholders to indemnify Metromedia for Taxes,
Metromedia shall give prompt written notice thereof to Stockholders. If, within
thirty days after the giving of such notice, the Stockholders notify Metromedia
in writing that they wish to question a Tax Deficiency in administrative
proceedings before the Internal Revenue Service or its state, local or foreign
counterpart, then, subject to the following provisions, Metromedia shall afford
to the Stockholders an opportunity in good faith (and subject to the
satisfaction of Metromedia's reasonable requirements) to participate in such
administrative proceeding as to such Tax Deficiency, provided, however, that in
the case of a Tax Deficiency which will, as a result of any adjustment of tax
basis of assets of the Company and the Subsidiaries or their respective
predecessors or Affiliates or the adjustment, restatement or recharacterization
of amounts deducted by the Company and the Subsidiaries or their respective
predecessors or Affiliates, require the Company and the Subsidiaries to
recognize additional taxable income for any Tax Period following the Effective
Time, Metromedia shall not be obligated to afford the Stockholders an
opportunity to participate in such administrative proceeding as to such Tax
Deficiency unless and until the Stockholders shall have delivered to Metromedia
a current opinion of counsel reasonably acceptable to Metromedia to the effect
that Stockholders' position with respect to the Tax Deficiency is more likely
than not to prevail. Metromedia shall not be obligated to take a protest with
respect to a Tax Deficiency to the
44
<PAGE>
appellate levels within the Internal Revenue Service or its state, local or
foreign counterpart, or to commence litigation in the Tax Court or any other
court unless and until the Stockholders shall have (a) delivered to Metromedia a
current opinion of counsel reasonably acceptable to Metromedia to the effect
that the Stockholders' position with respect to the Tax Deficiency is more
likely than not to prevail, and (b) delivered to Metromedia a certified check
drawn to Metromedia in the amount of the Tax Deficiency where payment of the Tax
Deficiency is required to commence appellate proceedings or litigation. If the
Stockholders fail to satisfy the requirements of the preceding sentences,
Metromedia may settle the Tax Deficiency covered by the notice for an amount
that does not exceed the amount of Taxes set forth in the original notice to the
Stockholders. If Metromedia desires to settle any Tax Deficiency, it shall give
the Stockholders thirty days' prior written notice of such intention setting
forth the terms of such settlement. Metromedia shall be entitled to settle any
Tax Deficiency covered by such notice after the expiration of said thirty day
period unless in the case of a Tax Deficiency which will, as a result of any
adjustment of Tax basis of assets of the Company and the Subsidiaries or their
respective predecessors or Affiliates or the adjustment, restatement or
recharacterization of amounts deducted by the Company and the Subsidiaries or
their respective predecessors or Affiliates, require the Company and the
Subsidiaries to recognize additional taxable income for any Tax period following
the Effective Time the Stockholders deliver to Metromedia a current opinion of
counsel reasonably acceptable to Metromedia to the effect that the Stockholders'
position with respect to the Tax Deficiency is more likely than not to prevail.
If the Stockholders shall deliver such an opinion, the Stockholders shall be
entitled to settle such Tax Deficiency without the written consent of Metromedia
unless entering into such a settlement, would, in the reasonable judgment of
Metromedia, have an adverse effect on the business of the Company or the
Subsidiaries.
10.4 Limitation on Claims. In case any event shall occur which would
otherwise entitle Metromedia to assert a claim for indemnification hereunder, no
Loss shall be deemed to have been sustained by such party to the extent of (a)
any tax savings realized by such party with respect thereto in the year in which
the indemnification would otherwise
45
<PAGE>
be made in connection with the claim or (b) any proceeds received by such party
from any insurance policies with respect thereto.
10.5 Maximum Exposure. Notwithstanding anything to the contrary in
Section 10.1(a), (a) Metromedia shall be entitled to indemnification hereunder
only when, and only with respect to amounts by which, the aggregate of all
Losses sustained by it exceeds $500,000 and (b) the aggregate amount of all
Losses subject to indemnification hereunder by the Stockholders shall not exceed
$27,500,000.
10.6 Actual Knowledge. An Indemnifying Party shall not be liable under
this Article X for a Loss resulting from any event relating to a breach of any
representation, warranty, covenant or agreement if the Indemnifying Party can
establish that the Indemnitee had Knowledge on or before the Closing Date of
such event.
10.7 Option to Pay Indemnity Obligations in Stock. In the event that
any payment of the indemnity obligations of the Stockholders set forth in
Section 10.1 is required to be made, the Stockholders may satisfy such payment,
in whole or in part, by delivering to Metromedia shares of Metromedia Common
Stock acquired by them pursuant to the merger pursuant to this Agreement, which
shares, for such purpose, shall be valued at the closing price of Metromedia
Common Stock, as reported in The Wall Street Journal, on the date such liability
is finally determined. The Stockholders may satisfy the indemnification
obligations set forth in Section 10.1 by cash, stock, or a combination thereof.
ARTICLE 11
TERMINATION OF AGREEMENT
11.1 Termination. This Agreement may be terminated prior to the
Closing as follows:
(i) at the election of the Stockholders, if any one or more of
the conditions to the obligation of the Stockholders to close has not been
fulfilled as of the scheduled Closing Date;
46
<PAGE>
(ii) at the election of Metromedia, if any one or more of the
conditions to its respective obligations to close has not been fulfilled as of
the scheduled Closing Date; (iii) at the election of the Stockholders, if
Metromedia has breached any material representation, warranty, covenant or
agreement contained in this Agreement, which breach cannot be or is not cured by
the Closing Date; (iv) at the election of Metromedia, if any of the Stockholders
has breached any material representation, warranty, covenant or agreement
contained in this Agreement, which breach cannot be or is not cured by the
Closing Date; or (v) at the election of Metromedia if Metromedia is not
satisfied with the results of its Due Diligence Investigation; (vi) at the
election of the Stockholders if there is a Material Adverse Change in the
business operations or prospects of Metromedia at any time on or prior to the
Closing Date; (vii) at the election of Metromedia, if there is a Material
Adverse Change in the business operations or prospects of the Company at any
time on or prior to the Closing Date; or (viii) by mutual written consent of the
Stockholders and Metromedia.
If this Agreement so terminates, it shall become null and void and have no
further force or effect, except as provided in Section 11.2.
11.2 Survival After Termination. If this Agreement is terminated in
accordance with Section 11.1 and the Contemplated Transactions are not
consummated, this Agreement shall become void and of no further force and
effect, except for (i) the provisions of Section 6.2 relating to the obligation
of Metromedia to keep confidential and not to use certain information and data
obtained by it from the Company or the Subsidiaries and to return documents to
the Company or the Subsidiaries, and (ii) the provisions of Sections 6.4, 6.5
and 12.2; provided, however, that none of the parties shall have any liability
in respect of a termination of this Agreement except to the extent that failure
to
47
<PAGE>
satisfy the conditions of Article 7 or Article 8, as the case may be, results
from the intentional or willful violation of such party contained in this
Agreement.
ARTICLE 12
MISCELLANEOUS
12.1 Certain Definitions. (a) As used in this Agreement, the following
terms have the following meanings:
(i) "Active Preproduction" means, with respect to any item of
Product as commencing upon the earlier of (i)eight weeks prior to the scheduled
date on which principal photography with respect to such item of Product is to
commence or (ii) the date that such item of Product has been "greenlighted" as
such term is understood in the motion picture industry.
(ii) "Affiliate" means, with respect to any Person, any other
Person controlling, controlled by or under common control with, or the parents,
spouse, lineal descendants or beneficiaries of, such Person.
(iii) "Budgeted Negative Cost" means, with respect to any item of
Product, the amount of the cash budget for such item of Product including all
costs customarily included in connection with the acquisition of all underlying
literary and musical rights with respect to such item of Product and in
connection with the preparation, production and completion of such item of
Product including costs of materials, equipment, physical properties, personnel
and services utilized in connection with such item of Product, both
"above-the-line" and "below-the-line", any completion guaranty fee, and all
other items customarily included in negative costs, but excluding contingency of
up to 10%, production fees and overhead charges payable to the Company or its
Subsidiaries, finance charges and interest expense.
(iv) "Contingent Compensation" means compensation that is
contingent upon and payable only (a) to the extent of the receipt of revenues
from the exploitation of a particular motion picture, video, television or
interactive program or (b) upon the passage of time or the occurrence of an
identified event. Examples of such
48
<PAGE>
contingent compensation include, but are not limited to, deferred cash payments
for rights or services, or gross or net profit or proceed participations.
(v) "Distribution Contract" shall mean any agreement entered into
by the Company or any of its Subsidiaries pursuant to which the Company or any
of its Subsidiaries has licensed, leased, assigned or sold distribution or other
exploitation rights to any item of Product in any media or territory.
(vi) "Knowledge" with respect to the Company or any of the
Subsidiaries means the actual Knowledge, after due inquiry, of any of the
following officers or directors of the Company or any of the Subsidiaries:
Bradley Krevoy, Steven Stabler and Jeffrey Ivers and "Knows" has a correlative
meaning.
(vii) "Person" means any individual, corporation, partnership,
firm, joint venture, association, joint-stock company, trust, unincorporated
organization, Governmental Body or other entity.
(viii) "Product" shall mean any motion picture, film or video
tape produced for theatrical, non-theatrical, television or video release or for
release in any other medium, in each case whether recorded on film, videotape,
cassette, cartridge, disc or on or by any other means, method, process or device
whether now known or hereafter developed, with respect to which the Company or
its Subsidiaries (i) is the initial copyright owner or (ii) has acquired or has
contracted to acquire an equity interest or distribution rights. The term "item
of Product" shall include, without limitation, the scenario, screenplay or
script upon which such Product is based, all of the properties thereof, tangible
and intangible, and whether now in existence or hereafter to be made or
produced, whether or not in possession of the Company or its Subsidiaries, and
all rights therein and thereto, of every kind and character.
(ix) "Property" or "Properties" means real, personal or mixed
Property, tangible or intangible.
(b) The following capitalized terms are defined in the following
Sections of this Agreement:
49
<PAGE>
Term Section
- ---- -------
Asserted Liability 10.3.1
Audited Financials 3.7
Balance Sheet 3.7
Balance Sheet Date 3.7
Buyer Preamble
Claims 3.13
Claims Notice 10.3.1
Closing 1.2
Closing Date 1.2
Company Preamble
Contemplated Transactions 3.12
Contracts 3.12
Documents 3.28
General Claim 9(x)
Governmental Body 3.10
HSR Act 3.26
Indemnifying Party 10.3.1
Indemnitee 10.3.1
Interim Financials 3.7
Laws 3.10
Liabilities 3.19
Liens 3.4
Losses 10.1
Material Adverse Effect 3.8
Orders 3.10
Permits 3.11
Projections 3.27
50
<PAGE>
Purchase Price 1.1
Required Consents 3.12
Stockholder Preamble
Shares Preamble
Subsidiaries 3.2
Tax Claim 9(y)
Taxes 3.9
12.2 Consent to Jurisdiction and Service of Process. Any legal action,
suit or proceeding arising out of or relating to this Agreement or the
Contemplated Transactions may be instituted in any federal court of the Southern
District of New York or any state court located in New York County, State of New
York, and each party agrees not to assert, by way of motion, as a defense or
otherwise, in any such action, suit or proceeding, any claim that it is not
subject personally to the jurisdiction of such court, that the action, suit or
proceeding is brought in an inconvenient forum, that the venue of the action,
suit or proceeding is improper or that this Agreement or the subject matter
hereof may not be enforced in or by such court. Each party further irrevocably
submits to the jurisdiction of such court in any such action, suit or
proceeding. Any and all service of process and any other notice in any such
action, suit or proceeding shall be effective against any party if given
personally or by registered or certified mail, return receipt requested, or by
any other means of mail that requires a signed receipt, postage prepaid, mailed
to such party as herein provided. Nothing herein contained shall be deemed to
affect the right of any party to serve process in any manner permitted by law or
to commence legal proceedings or otherwise proceed against any other party in
any other jurisdiction.
12.3 Notices. Any notice or other communication required or permitted
hereunder shall be in writing and shall be delivered personally, sent by
facsimile transmission (receipt confirmed) or sent by certified, registered or
express mail, postage prepaid. Any such notice shall be deemed given when so
delivered personally, or sent by facsimile transmission or, if mailed, five days
after the date of deposit in the United States mails, as follows:
51
<PAGE>
(i) if to Metromedia:
Metromedia International Group, Inc.
c/o Metromedia Company
One Meadowlands Plaza
East Rutherford, New Jersey 07073
Attention: General Counsel
Facsimile: 201-531-2803
(ii) if to the Company or the Stockholders, to:
Motion Picture Corporation of America
1401 Ocean Avenue
Suite 301
Santa Monica, California 90401
Attention: Bradley Krevoy and Steven Stabler
Facsimile: 310-319-9501
with a copy to:
Loeb & Loeb, LLP.
345 Park Avenue
New York, New York 10154
Attention: David S. Schaefer, Esq.
Facsimile: 212-407-4990
Any party may by notice given in accordance with this Section to the other
parties designate another address or Person for receipt of notices hereunder.
12.4 Entire Agreement. This Agreement (including the Exhibits and
Schedules) and any collateral agreements executed in connection with the
consummation of the Contemplated Transactions contain the entire agreement among
the parties with respect to the purchase of the Shares and supersede all prior
agreements, written or oral, with respect thereto.
12.5 Waivers and Amendments; Non-Contractual Remedies; Preservation of
Remedies. This Agreement may be amended, superseded, cancelled, renewed or
extended, and the terms hereof may be waived, only by a written instrument
signed by Metromedia and the Stockholders or, in the case of a waiver, by the
party waiving compliance. No delay on the part of any party in exercising any
right, power or privilege hereunder shall operate as a waiver thereof, nor shall
any waiver on the part of any party of
52
<PAGE>
any such right, power or privilege, nor any single or partial exercise of any
such right, power or privilege, preclude any further exercise thereof or the
exercise of any other such right, power or privilege. The rights and remedies
herein provided are not exclusive of any rights or remedies that any party may
otherwise have at law or in equity. The rights and remedies of any party based
upon, arising out of or otherwise in respect of any inaccuracy in or breach of
any representation, warranty, covenant or agreement contained in this Agreement
or any Documents delivered pursuant to this Agreement shall in no way be limited
by the fact that the act, omission, occurrence or other state of facts upon
which any claim of any such inaccuracy or breach is based may also be the
subject matter of any other representation, warranty, covenant or agreement
contained in this Agreement or any Documents delivered pursuant to this
Agreement (or in any other agreement between the parties) as to which there is
no inaccuracy or breach.
12.6 Governing Law. This Agreement shall be governed and construed in
accordance with the laws of the State of New York applicable to agreements made
and to be performed entirely within such State.
12.7 Binding Effect; No Assignment. This Agreement shall be binding
upon and inure to the benefit of the parties and their respective successors and
legal representatives. This Agreement is not assignable except by operation of
law, except that Metromedia may assign its rights hereunder to any of its
Affiliates.
12.8 Variations in Pronouns. All pronouns and any variations thereof
refer to the masculine, feminine or neuter, singular or plural, as the context
may require.
12.9 Counterparts. This Agreement may be executed by the parties
hereto in separate counterparts, each of which when so executed and delivered
shall be an original, but all such counterparts shall together constitute one
and the same instrument. Each counterpart may consist of a number of copies
hereof each signed by less than all, but together signed by all of the parties
hereto.
12.10 Exhibits and Schedules. The Exhibits and Schedules are a part of
this Agreement as if fully set forth herein. All references herein to Sections,
Exhibits and
53
<PAGE>
Schedules shall be deemed references to such parts of this Agreement, unless the
context shall otherwise require.
12.11 Headings. The headings in this Agreement are for reference only,
and shall not affect the interpretation of this Agreement.
12.12 Interpretation. The parties acknowledge and agree that: (i) each
party and its counsel reviewed and negotiated the terms and provisions of this
Agreement and have contributed to its revision; (ii) the rule of construction to
the effect that any ambiguities are resolved against the drafting party shall
not be employed in the interpretation of this Agreement; and (iii) the terms and
provisions of this Agreement shall be construed fairly as to all parties hereto,
regardless of which party was generally responsible for the preparation of this
Agreement.
12.13 Severability of Provisions. If any provision or any portion of
any provision of this Agreement, or the application of any such provision or any
portion thereof to any Person or circumstance, shall be held invalid or
unenforceable, the remaining portion of such provision and the remaining
provisions of this Agreement, and the application of such provision or portion
of such provision as is held invalid or unenforceable to Persons or
circumstances other than those as to which it is held invalid or unenforceable,
shall not be affected thereby.
54
<PAGE>
IN WITNESS WHEREOF, the parties have executed this Agreement on the date
first above written.
METROMEDIA INTERNATIONAL GROUP, INC.
By ------------------------------
Name: Silvia Kessel
Title: Senior Vice President
MOTION PICTURE CORPORATION OF AMERICA
By ------------------------------
Name: Bradley Krevoy
Title:
------------------------------
STOCKHOLDERS:
------------------------------
Name: Bradley R. Krevoy
------------------------------
Name: Steven Stabler
MPCA MERGER CORP.
By: ------------------------------
Name: Silvia Kessel
Title: Senior Vice President
55
================================================================================
Metromedia International Group, Inc.
================================================================================
Exhibit 11
METROMEDIA INTERNATIONAL GROUP, INC.
Computation of Earnings Per Share
(in thousands, except per share amounts)
<TABLE>
<CAPTION>
Years Ended
---------------------------------------------------------
December 31, 1996 December 31, 1995 February 28, 1995
---------------------------------------------------------
<S> <C> <C> <C>
Loss Per Share - Primary
Loss from continuing operations before
discontinued operations and extraordinary item $ (94,433) $ (87,024) $ (69,411)
Loss on disposal of assets held for sale (16,305) (293,570) --
Loss on early extinguishment of debt (4,505) (32,382) --
--------- --------- ---------
Net loss available for Common Stock and
Common Stock equivalents $(115,243) $(412,976) $ (69,411)
========= ========= =========
Common Stock and Common Stock
Equivalents (A)
Weighted average common shares
outstanding during the period 54,293 24,541 20,246
========= ========= =========
Loss Per Share - Primary
Continuing operations $ (1.74) $ (3.54) $ (3.43)
Discontinued operations (0.30) (11.97) --
Extraordinary item (0.08) (1.32) --
--------- --------- ---------
Net Loss $ (2.12) $ (16.83) $ (3.43)
========= ========= =========
Loss Per Share - Assuming Full Dilution $ n/a(B) $ n/a(B) $ n/a(B)
========= ========= =========
</TABLE>
A) Common stock equivalents are not included in primary loss per share in
Calendar 1996, Calendar 1995 and Fiscal 1995 because they would be
anti-dilutive.
B) Fully diluted loss per share is not used in Calendar 1996, Calendar 1995
and Fiscal 1995 because it is less than primary loss per share.
The Board of Directors
Metromedia International Group, Inc.:
We consent to incorporation by reference in the registration statements (Nos.
333-02301, 333- 07387, and 333-13763) on Form S-8 of Metromedia International
Group, Inc. of our report dated March 27, 1997, relating to the consolidated
balance sheets of Metromedia International Group, Inc. and subsidiaries as of
December 31, 1996, and 1995, and the related consolidated statements of
operations, stockholders' equity, and cash flows for each of the years in the
two-year period ended December 31, 1996, and for the year ended February 28,
1995, and all related financial statement schedules, which report appears in the
December 31, 1996, annual report on Form 10-K of Metromedia International Group,
Inc.
KPMG Peat Marwick LLP
New York, New York
March 27, 1997
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
consolidated financial statements filed as part of the annual report on
form 10K and is qualified in its entirety by reference to such financial
statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> Dec-31-1996
<PERIOD-END> Dec-31-1996
<CASH> 91,130
<SECURITIES> 0
<RECEIVABLES> 84,025
<ALLOWANCES> (13,291)
<INVENTORY> 120,560
<CURRENT-ASSETS> 290,547
<PP&E> 81,100
<DEPRECIATION> (7,172)
<TOTAL-ASSETS> 944,740
<CURRENT-LIABILITIES> 242,941
<BONDS> 403,421
0
0
<COMMON> 66,153
<OTHER-SE> 153,529
<TOTAL-LIABILITY-AND-EQUITY> 944,740
<SALES> 201,755
<TOTAL-REVENUES> 201,755
<CGS> 161,564
<TOTAL-COSTS> 256,277
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 36,256
<INCOME-PRETAX> (93,019)
<INCOME-TAX> 1,414
<INCOME-CONTINUING> (94,433)
<DISCONTINUED> (16,305)
<EXTRAORDINARY> (4,505)
<CHANGES> 0
<NET-INCOME> (115,243)
<EPS-PRIMARY> (2.12)
<EPS-DILUTED> (2.12)
</TABLE>
