<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON APRIL 4, 1997
REGISTRATION NO. 333-
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------------
FORM S-3
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------------
METROMEDIA INTERNATIONAL GROUP, INC.
(Exact name of Registrant as specified in its charter)
<TABLE>
<S> <C>
DELAWARE 58-0971455
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
</TABLE>
ONE MEADOWLANDS PLAZA
EAST RUTHERFORD, NEW JERSEY 07073-2137
(201) 531-8000
(Address, including zip code and telephone number, including area code, of
Registrant's principal executive offices)
ARNOLD L. WADLER, ESQ.
EXECUTIVE VICE PRESIDENT, GENERAL COUNSEL AND SECRETARY
METROMEDIA INTERNATIONAL GROUP, INC.
ONE MEADOWLANDS PLAZA
EAST RUTHERFORD, NEW JERSEY 07073-2137
(201) 531-8000
(Name, address, including zip code, and telephone number, including area code of
agent for service)
------------------------------
COPIES OF COMMUNICATIONS TO:
<TABLE>
<S> <C>
JAMES M. DUBIN, ESQ. NICHOLAS P. SAGGESE, ESQ.
PAUL, WEISS, RIFKIND, WHARTON & GARRISON SKADDEN, ARPS, SLATE, MEAGHER & FLOM LLP
1285 AVENUE OF THE AMERICAS 300 SOUTH GRAND AVENUE, 34TH FLOOR
NEW YORK, NEW YORK 10019-6064 LOS ANGELES, CALIFORNIA 90071
(212) 373-3000 (213) 687-5000
</TABLE>
------------------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: From time
to time after the Registration Statement becomes effective.
------------------------------
If the securities registered on this Form are being offered pursuant to
dividend or interest reinvestment plans, please check the following box. / /
If any of the securities registered on this Form are to be offered on a
delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, other than securities offered only in connection with dividend or interest
reinvestment plans, check the following box. /X/
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier
registration statement for the same offering. / /
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. / /
If the delivery of the Prospectus is expected to be made pursuant to Rule
434, please check the following box. / /
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
PROPOSED MAXIMUM PROPOSED MAXIMUM AMOUNT OF
TITLE OF SHARES AMOUNT TO BE OFFERING PRICE PER AGGREGATE OFFERING REGISTRATION
TO BE REGISTERED REGISTERED SHARE PRICE FEE
<S> <C> <C> <C> <C>
% Cumulative Convertible Preferred Stock,
$1.00 par value per share................. 2,875,000(1) $50.00 $143,750,000 $43,561(2)(3)
Common Stock, $1.00 par value per share..... (1) $-- $-- $--(5)
</TABLE>
(1) Includes shares to cover exercise of the Underwriters' over-allotment
option, if any.
(2) Estimated solely for the purpose of calculating the registration fee
pursuant to Rule 457 under the Securities Act of 1933, as amended (the
"Securities Act"), based upon the $50.00 price per share at which the
Preferred Stock was initially sold.
(3) $43,561 was wired to the Securities and Exchange Commission's (the
"Commission") account at Mellon Bank in payment of the required registration
fee due in connection with this Registration Statement.
(4) The shares of Common Stock being registered hereunder include the number of
shares of Common Stock initially issuable upon conversion of the Preferred
Stock ( shares) plus such indeterminate number of additional shares as
may become issuable upon conversion of the Preferred Stock as a result of
adjustments in the conversion price thereof or upon redemption and dividend
payments made on the Preferred Stock by the delivery of Common Stock in
accordance with the terms of the Preferred Stock.
(5) Pursuant to Rule 457(i) under the Securities Act, no registration fee is
required for the Common Stock issuable upon conversion of the Preferred
Stock because no additional consideration will be required in connection
with the issuance of such shares.
------------------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OR UNTIL THIS REGISTRATION STATEMENT SHALL BECOME EFFECTIVE
ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A), MAY
DETERMINE.
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<PAGE>
SUBJECT TO COMPLETION DATED APRIL 4, 1997
PROSPECTUS
, 1997
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES
IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR
TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE.
<PAGE>
2,500,000 SHARES
METROMEDIA INTERNATIONAL GROUP, INC. [LOGO]
% CUMULATIVE CONVERTIBLE PREFERRED STOCK
Metromedia International Group, Inc., a Delaware corporation (the
"Company"), is offering 2,500,000 shares of % Cumulative Convertible Preferred
Stock (the "Preferred Stock"), with a liquidation preference of $50 per share.
Dividends on the Preferred Stock are cumulative from the date of issuance
and payable quarterly, in arrears, commencing on , 1997. The Company may
make any payments due on the Preferred Stock, including redemption and dividend
payments, (i) in cash, (ii) by delivery of fully paid and nonassessable shares
of common stock, par value $1.00 per share, of the Company (the "Common Stock")
or (iii) through a combination thereof. The Preferred Stock is convertible at
the option of the holder at any time, unless previously redeemed, into fully
paid and nonassessable shares of Common Stock, at a conversion price of
$ per share (equivalent to the conversion rate of approximately
shares of Common Stock for each share of Preferred Stock), subject to
adjustment under certain conditions. On April 3, 1997, the closing price of the
Common Stock (symbol "MMG") as reported on the American Stock Exchange (the
"AMEX") was $8 7/16 per share. Prior to this offering, there has been no trading
market for the Preferred Stock.
The Preferred Stock is redeemable at any time on or after , 2000, in
whole or in part, at the option of the Company, initially at a price of
$ and thereafter at prices declining to $50 per share on or after ,
2007, plus in each case all accrued and unpaid dividends to the redemption date.
See "Description of the Preferred Stock."
Upon any Change of Control (as defined herein), each holder of Preferred
Stock shall have a one-time option to convert such holder's shares of Preferred
Stock into fully paid and nonassessable shares of Common Stock, at a conversion
price equal to the greater of (x) the Market Value (as defined herein) for the
period ending on the Change of Control Date (as defined herein) and (y) 66.67%
of the Market Value for the period ending on the date of this Prospectus. In
lieu of issuing the shares of Common Stock issuable upon conversion in the event
of a Change of Control, the Company may, at its option, make a cash payment
equal to the value of such Common Stock otherwise issuable. See "Description of
the Preferred Stock."
Simultaneously with the offering of the Preferred Stock, the Company is
registering with the Commission shares of Common Stock, initially issuable
upon conversion of the Preferred Stock plus such indeterminate number of
additional shares as may become issuable upon conversion of the Preferred Stock
as a result of adjustments in the conversion price thereof or upon redemption
payments and dividend payments made on the Preferred Stock by delivery of Common
Stock in accordance with the terms of the Preferred Stock. Application is being
made to list the Preferred Stock on the AMEX and the Pacific Stock Exchange (the
"PSE").
SEE "RISK FACTORS" BEGINNING ON PAGE 14 FOR A DISCUSSION OF CERTAIN FACTORS
THAT SHOULD BE CONSIDERED IN CONNECTION WITH AN INVESTMENT IN THE SECURITIES
OFFERED HEREBY.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION
TO THE CONTRARY IS A CRIMINAL OFFENSE.
<TABLE>
<CAPTION>
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PRICE UNDERWRITING PROCEEDS
TO THE DISCOUNTS AND TO THE
PUBLIC(1) COMMISSIONS(2) COMPANY(3)
- -------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Per Share.....................................
Total (4).....................................
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</TABLE>
(1) PLUS ACCRUED DIVIDENDS, IF ANY, FROM THE DATE OF ISSUANCE.
(2) THE COMPANY HAS AGREED TO INDEMNIFY THE UNDERWRITERS (AS DEFINED BELOW)
AGAINST CERTAIN LIABILITIES, INCLUDING LIABILITIES UNDER THE SECURITIES ACT.
(3) BEFORE DEDUCTING ESTIMATED EXPENSES OF THE OFFERING PAYABLE BY THE COMPANY,
ESTIMATED TO BE $ .
(4) THE COMPANY HAS GRANTED THE UNDERWRITERS AN OPTION, EXERCISABLE WITHIN 30
DAYS OF THE DATE HEREOF, TO PURCHASE UP TO 375,000 ADDITIONAL SHARES OF
PREFERRED STOCK, SOLELY FOR THE PURPOSE OF COVERING OVER-ALLOTMENTS, IF ANY.
TO THE EXTENT THE OPTION IS EXERCISED, THE UNDERWRITERS WILL OFFER THE
ADDITIONAL SHARES OF PREFERRED STOCK AT THE PRICE TO THE PUBLIC SHOWN ABOVE.
IF THE OPTION IS EXERCISED IN FULL, THE TOTAL PRICE TO THE PUBLIC,
UNDERWRITING DISCOUNTS AND PROCEEDS TO THE COMPANY WILL BE $ ,
$ AND $ , RESPECTIVELY. SEE "UNDERWRITING."
The Preferred Stock is offered by Donaldson, Lufkin & Jenrette Securities
Corporation, Goldman, Sachs & Co. and BT Securities Corporation, as the
underwriters (the "Underwriters"), subject to prior sale, when, as and if issued
to and accepted by the Underwriters and subject to certain conditions, including
the right of the Underwriters to reject any order in whole or in part. It is
expected that delivery of the Preferred Stock will be made against payment
therefor in immediately available funds in New York, New York on or about
, 1997.
DONALDSON, LUFKIN & JENRETTE
SECURITIES CORPORATION
GOLDMAN, SACHS & CO.
BT SECURITIES CORPORATION
<PAGE>
[Logo and artwork](1)
CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE PREFERRED STOCK.
SPECIFICALLY, THE UNDERWRITERS MAY OVERALLOT IN CONNECTION WITH THIS OFFERING,
AND MAY BID FOR, AND PURCHASE, SHARES OF THE PREFERRED STOCK IN THE OPEN MARKET.
FOR A DESCRIPTION OF THESE ACTIVITIES, SEE "UNDERWRITING."
- ------------------------
(1)To be filed by Amendment.
2
<PAGE>
PROSPECTUS SUMMARY
THE FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY BY THE MORE DETAILED
INFORMATION AND FINANCIAL STATEMENTS APPEARING ELSEWHERE IN THIS PROSPECTUS. ALL
REFERENCES TO "$" OR "DOLLARS" ARE TO U.S. DOLLARS. UNLESS OTHERWISE INDICATED,
THE INFORMATION IN THIS PROSPECTUS ASSUMES NO EXERCISE OF THE UNDERWRITERS'
OVER-ALLOTMENT OPTION. TERMS NOT DEFINED IN THIS SUMMARY ARE DEFINED ELSEWHERE
HEREIN. THE COMMUNICATIONS GROUP REPORTS THE RESULTS OF OPERATIONS OF ITS
CONSOLIDATED AND UNCONSOLIDATED JOINT VENTURES ON A THREE MONTH LAG. SEE NOTE 1
TO THE "NOTES TO CONSOLIDATED FINANCIAL STATEMENTS" OF THE COMPANY FOR THE YEAR
ENDED DECEMBER 31, 1996, INCLUDED ELSEWHERE IN THIS PROSPECTUS. ACCORDINGLY, THE
NUMBER OF SUBSCRIBERS REPORTED AT DECEMBER 31, 1996 AND 1995 CONTAINED IN THIS
PROSPECTUS REFLECT THE NUMBER OF SUBSCRIBERS AT SEPTEMBER 30, 1996 AND 1995.
SPECIAL NOTE: CERTAIN STATEMENTS BELOW THIS CAPTION CONSTITUTE "FORWARD-LOOKING
STATEMENTS" WITHIN THE MEANING OF THE PRIVATE SECURITIES LITIGATION REFORM ACT
OF 1995 (THE "REFORM ACT"). SEE "SPECIAL NOTE REGARDING FORWARD-LOOKING
STATEMENTS" ON PAGE 96 FOR ADDITIONAL FACTORS RELATING TO SUCH STATEMENTS.
THE COMPANY
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. In addition, 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, the Communication Group's
joint ventures reported aggregate subscribers to its various services at
December 31, 1996 of 120,596, representing a growth of 130% over the December
31, 1995 total of 52,360 subscribers. The Communications Group's joint ventures
also acquired a total of 16 new licenses to provide its various services in 1996
in both existing and new markets. 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.
Messrs. John W. Kluge and Stuart Subotnick, the general partners of
Metromedia Company, are collectively the Company's largest stockholders, and
beneficially own approximately 23% of the outstanding shares of Common Stock.
Mr. Kluge serves as Chairman of the Board of the Company and Mr. Subotnick
serves as Vice Chairman of the Board and President and Chief Executive Officer
of the Company.
THE COMMUNICATIONS GROUP
The Communications Group was founded in 1990 to take advantage of the
rapidly growing demand for modern communications services in Eastern Europe, the
republics of the former Soviet Union and in other selected emerging markets and
launched its first operating system in 1992. 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
3
<PAGE>
addition, the Communications Group has interests in and participates with
partners in the management of 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 telecommunications systems, 1 trunked mobile radio
system and 1 company providing sales, financing and service for wireless local
loop telecommunications equipment to telecommunications operators, each of which
the Communications Group believes will be launched during 1997. The Company
generally owns 50% or more of the joint ventures in which it invests. The
Company believes that the Communications Group is poised for significant growth,
as it continues to expand its existing systems' subscriber base, construct and
launch new systems in areas where it is currently licensed and obtain new
licenses in additional attractive markets. 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 Communications Group's joint ventures experienced rapid growth in 1996.
The Communications Group's joint ventures reported aggregate subscribers to its
various services at December 31, 1996 of 120,596, a growth of 130% over
aggregate subscribers at December 31, 1995 of 52,360. Total combined revenues
reported by consolidated and unconsolidated joint ventures in which the
Communications Group had an investment for the year ended December 31, 1996 were
$56.2 million, as compared to $23.9 million for the year ended December 31,
1995. The Communications Group invested approximately $49.9 million during
calendar 1996 in the construction and development of its consolidated and
unconsolidated joint ventures' communications networks and broadcasting
stations, of which $33.3 million, or 67%, was invested subsequent to the
Company's common stock offering in July 1996 (the "1996 Offering"). The
Communications Group's joint ventures acquired a total of 16 licenses to provide
its various services in 1996 in both existing and new markets. In addition, in
January 1997, one of the Communications Group's joint ventures acquired an
existing wired network in Romania, adding a total of approximately 37,000
connected cable television subscribers.
The Communications Group's markets generally have large populations, with
high density and strong economic potential, but lack reliable and efficient
communications services. The Company believes that most of these markets have a
growing number of persons who desire and can afford high quality communications
services. The Communications Group has assembled a management team consisting of
executives who have significant experience in the communications services
industry and developing markets. This management team believes that the
Communications Group's systems can be constructed with relatively low capital
investments and focuses on markets where the Company can provide multiple
communications services. The Communications Group believes that the
establishment of a far-reaching communications infrastructure is important to
the development of the economies of these countries, and that such development
will, in turn, supplement the growth of the Communications Group.
The Communications Group believes that the performance of its communications
joint ventures has demonstrated that there is significant demand for its
services in its license areas. While certain of the Communications Group's
operating systems have experienced rapid growth to date, many of the systems are
still in the early stages of rolling out their services, and, therefore, the
Communications Group believes its subscriber and customer bases will continue to
increase significantly as these systems mature. In addition, as one of the first
entrants into these markets, the Communications Group believes that it has
developed a reputation for providing quality service and has formed important
relationships with local entities. As a result, the Communications Group
believes it is well-positioned to capitalize on opportunities to provide
additional communications services in its markets as new licenses are awarded.
4
<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/ AGGREGATE
MARKETS SUBSCRIBERS
OPERATIONAL AT HOUSEHOLDS (MM)(A) REPORTED
AT
PRE- OPERATIONAL DECEMBER 31, REPORTED AT DECEMBER
MARKETS AT DECEMBER 31, 31,(K)
COMMUNICATIONS DECEMBER 31, ------------- -------------------- ---------
SERVICE 1996 1996 1995 1996 1995 1996
- ------------------------------------------------ ----------------- ----- ----- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
Wireless Cable Television....................... 1(b) 9 7 9.5 7.2 69,118
AM/FM Radio..................................... -- 6 5 23.8 22.2 (l)
Paging (c)...................................... 1(d) 9 8 89.5 73.3 44,836
Cellular Telecommunications..................... 2(e) -- -- 8.2 -- --
International Toll Calling (f).................. -- 1 1 5.5 5.5 (l)
Trunked Mobile Radio (g)........................ 1(h) 4 -- 36.2 -- 6,642
Wireless Local Loop (i)......................... 1 -- -- 72.6(j) -- --
<CAPTION>
COMMUNICATIONS
SERVICE 1995
- ------------------------------------------------ ---------
<S> <C>
Wireless Cable Television....................... 37,900
AM/FM Radio..................................... (l)
Paging (c)...................................... 14,460
Cellular Telecommunications..................... --
International Toll Calling (f).................. (l)
Trunked Mobile Radio (g)........................ --
Wireless Local Loop (i)......................... --
</TABLE>
- ------------------------
(a) Covers both pre-operational markets and operation markets. 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.
(b) Subsequent to December 31, 1996, one of the Communications Group joint
ventures acquired a wired network in Romania adding approximately 37,000
connected cable television subscribers.
(c) Target population for the Communications Group's paging joint ventures
includes the total population in the jurisdictions where such joint ventures
are licensed to provide services. In many markets, however, the
Communication Group's paging system currently only covers the capital city
and is expanding into additional cities.
(d) Since December 31, 1996, the Communications Group has commenced a paging
operation in Vienna, Austria, which is licensed to provide paging services
nationwide.
(e) The Communications Group owns 23.6% of Baltcom GSM, which, subsequent to
December 31, 1996, completed construction and launched commercial service of
a cellular telecommunications system in Latvia which plans to provide
nationwide service. The Communications Group also owns 34.3% of a joint
venture that holds a license and is constructing a nationwide cellular
telecommunications system in Georgia. In addition, subsequent to December
31, 1996, the Communications Group acquired approximately 57% of a company
which owns an interest in a joint venture which is constructing a cellular
telecommunications system for up to 50,000 subscribers in the City of
Ningbo, PRC. See "Business--The Communications Group."
(f) 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.
(g) 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 currently only operational in major
cities.
(h) Since December 31, 1996, the Communications Group has commenced trunked
mobile radio services in Almaty and Atyrau, Kazakstan.
(i) The Communications Group owns a 60% interest in a pre-operational joint
venture in the PRC that provides wireless local loop telecommunications
equipment, financing, network planning, installation and maintenance
services to telecommunications operators.
(j) Indicates population of the Hebei and Tianjin Provinces in the PRC in which
the Communications Group's joint venture has tested its equipment.
(k) The Communications Group reports the number of subscribers to its various
services on a three-month lag. Accordingly, the aggregate number of
subscribers reported by the Communications Group's consolidated and
unconsolidated joint ventures at December 31, 1996 and 1995 reflect the
number of subscribers at September 30, 1996 and 1995.
(l) Not applicable.
5
<PAGE>
In addition to its existing projects and licenses, the Communications Group
is exploring 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 markets. The Company
believes that wireless local loop telephony is a high quality and cost effective
alternative to the existing often antiquated and overloaded telephone systems in
these markets. The Communications Group also believes that its wireless system
has a competitive advantage in these markets because its equipment can be
installed quickly, at a competitive price, as compared to alternative wireline
providers which often take several years to provide telephone service. In
addition, unlike many other existing wireless telephony systems in the
Communications Group's target markets, the equipment the Communications Group
uses utilizes digital, high-speed technology, which can be used for high-speed
facsimile and data transmission, including Internet access. In February 1997,
the Communications Group, through Metromedia Asia Corporation ("MAC"), acquired
Asian American Telecommunications Corporation ("AAT"), a company that owns
interests in and participates in the management of two separate joint ventures
in the PRC. These joint ventures have entered into agreements in the PRC with
China United Telecommunications Corporation ("China Unicom"), one of the PRC's
two major providers of telephony services 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 wireless local loop technology, and (ii)
construct and develop a Global System for Mobile Communications ("GSM") cellular
telecommunications system for up to 50,000 subscribers in the City of Ningbo.
Following the acquisition of AAT, the Communications Group owns approximately
57% of MAC.
The Communications Group intends to expand its subscriber and customer
bases, as well as its revenues and cash flow, by pursuing the following
strategies:
- UTILIZING LOW COST WIRELESS TECHNOLOGY THAT ALLOWS FOR RAPID BUILD-OUT.
The use of wireless technologies has allowed and will continue to allow
the Communications Group to build-out its existing and future license
areas faster and at a lower cost than the construction of comparable wired
networks. Many of the cities where the Communications Group has or is
pursuing wireless licenses have limitations on wireline construction above
ground and/or underground.
- COMPLETING BUILD-OUT OF EXISTING LICENSE AREAS. Since its formation in
1990, the Communications Group has been investing in joint ventures to
obtain communications licenses in emerging markets. Since the 1996
Offering, the Communications Group has accelerated the construction and
marketing of its communications systems. In the calendar year ended
December 31, 1996, the Communications Group invested in consolidated and
unconsolidated subsidiaries approximately $49.9 million in the
construction and development of its consolidated and unconsolidated joint
ventures' communications networks and broadcast stations in existing
license areas, of which $33.3 million, or 67%, was invested subsequent to
the 1996 Offering. For example, in 1996, the Communications Group expanded
the build-out of its paging operations in Uzbekistan by adding several
additional cities as part of its long-term plan to provide nationwide
paging service.
- AGGRESSIVELY GROWING THE SUBSCRIBER AND ADVERTISER BASE IN EXISTING
LICENSE AREAS. The Communications Group's existing license areas, in the
aggregate, represent a large potential revenue base. The Communications
Group is aggressively marketing its services in these areas and is
experiencing significant increases in its subscriber count and advertising
base. The Communications Group believes it will continue to rapidly add
subscribers by (i) targeting each demographic 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 customer service;
(iv) providing new and targeted programming on its radio stations to
increase advertising revenue; and (v) opportunistically acquiring
additional existing systems in its service areas and in other strategic
areas to increase its subscriber base.
6
<PAGE>
- PURSUING ADDITIONAL LICENSES IN EXISTING MARKETS. 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 cellular telecommunications
services 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 brand
loyalty and to capitalize on marketing opportunities afforded by bundling
its services. The Communications Group believes that it has several
competitive advantages that will enable it to obtain additional licenses
in these markets, including: (i) established relationships with local
strategic joint venture partners and local governments; (ii) a proven
track record of building and operating quality systems; and (iii) a
fundamental understanding of the regions' political, economic and cultural
climate.
- INVESTING IN NEW MARKETS. 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 Company is targeting emerging markets with strong economic
potential which lack adequate communications services. In evaluating
whether to enter a new market, the Communications Group assesses, among
other factors, the (i) potential demand for the Communications Group's
services and the availability of competitive services; (ii) strength of
local partners; and (iii) political, social and economic climate. The
Communications Group has identified several attractive opportunities in
Eastern Europe and the Pacific Rim. For example, two of the Communications
Group's joint ventures recently began to provide paging services in
Austria and radio broadcasting in Prague, Czech Republic and in February
1997, through MAC, the Communications Group acquired AAT, a company that
owns interests in and participates in the management of joint ventures
with agreements to provide wireless telephony equipment and services in
certain provinces in the PRC.
THE ENTERTAINMENT GROUP
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 Entertainment Group holds a
valuable library of over 2,200 feature film and television titles, including
Academy Award-Registered Trademark- 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 and
GUYS AND DOLLS. This library provides the Entertainment Group 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 pictures 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 theaters and
distributes motion picture 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 for well-defined
target audiences. 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 such box office successes as BEVERLY
HILLS NINJA, DUMB AND DUMBER, THREESOME and the Academy
Award-Registered Trademark- 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-Registered Trademark- nominated best foreign language feature film
PRISONER OF THE MOUNTAINS, which was
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released on January 31, 1997. The Entertainment Group also owns the Landmark
Theatre Group ("Landmark"), which management believes is the leading specialty
theater circuit in the United States, consisting of 50 theaters with a total of
138 screens at December 31, 1996.
The Entertainment Group intends to further enhance the value of its assets
by pursuing the following strategies:
- LOW COST PRODUCTION/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, on
average, than those for feature films produced or acquired by the major
motion picture studios. The Entertainment Group also plans to continue to
be a leader in the production, acquisition and distribution of specialized
motion pictures and art films, including those films management believes
may have crossover commercial potential. This strategy is based upon
management's success with producing such films as BEVERLY HILLS NINJA and
the Entertainment Group's 1996 release BIG NIGHT as well as its earlier
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 Entertainment Group's portion of the production cost will
generally range from $5.0 million to $10.0 million. The Entertainment
Group 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.
- CAPITALIZING ON WELL-ESTABLISHED DISTRIBUTION NETWORK. 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 generally must 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. 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 arthouse pictures.
- EXPLOITING THE EXISTING LIBRARY. The Entertainment Group expects its
library of over 2,200 feature film and television titles, one of the
largest in the entertainment industry, to generate significant cash flow
from its existing, long-term distribution contracts and from further
exploitation of its film and television library in traditional domestic
and international media, such as free and pay television and home video.
In addition, the Entertainment Group believes that its production
capabilities enhance the value of its existing library by allowing the
Entertainment Group to distribute existing library product in conjunction
with new product in the free and pay television and home video markets
worldwide. The Entertainment Group also expects to benefit from the
emergence of new technologies such as digital compression,
video-on-demand, direct-to-home-broadcasting and digital variable disc
(video compact discs or "DVD"), which are expected to increase the
worldwide demand for programming. The Entertainment Group is also
marketing its film and television library in new international markets in
which the multi-channel television industry has recently emerged or is in
the early stages of development.
- ENHANCING VALUE OF LANDMARK THEATRE CIRCUIT. The Entertainment Group
believes that Landmark is one of the largest exhibitors of specialized
motion pictures and art films in the United States. The Company's theater
circuit currently consists of 50 theaters with a total of 138 screens. 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
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additional screens; and (iii) maximize revenues and cash flow from its
existing theaters by capitalizing on the demand for art and specialty
films in the United States and by continuing to reduce operating and
overhead costs as a percentage of revenues.
CAPITALIZE ON SYNERGIES BETWEEN THE COMPANY'S PRINCIPAL BUSINESSES
Through its two principal businesses, the Company controls a strategic
combination of content and distribution capabilities, and is capitalizing on the
opportunities arising from the convergence of the communications, entertainment
and media businesses. For example, the Communications Group's wireless cable
television system in Romania has established the Metromedia Entertainment
Network ("MEN") programming package which includes the "Orion Film Channel," a
channel containing product primarily produced and/or distributed by the
Entertainment Group. The Company believes that as the Communications Group
continues to expand its services in Eastern Europe, the republics of the former
Soviet Union, the PRC and other selected emerging markets and to grow its range
of services, additional opportunities to utilize the Entertainment Group's film
and television library will arise.
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THE OFFERING
<TABLE>
<S> <C>
Securities Offered................ 2,500,000 shares of % Cumulative Convertible
Preferred Stock (2,875,000 shares if the over-allotment
option is exercised in full).
Dividends......................... Cumulative annual dividends of per share, payable
quarterly out of assets legally available therefor on
March 31, June 30, September 30 and December 31 of each
year, commencing , 1997 (with respect to the
period from the Issue Date (as defined below) to
, 1997), when, as and if declared by the Board
of Directors. Dividends will accrue from the original
date of issuance of the Preferred Stock (the "Issue
Date"). Dividends may, at the option of the Company, be
paid in cash, by delivery of fully paid and
nonassessable shares of Common Stock or a combination
thereof.
Liquidation Preference............ $50 per share.
Conversion Rights................. Each share of Preferred Stock may be converted at any
time at the option of the holder, unless previously
redeemed, into fully paid and nonassessable shares of
Common Stock, at a conversion price of $ per
share of Common Stock (equivalent to a conversion rate
of approximately shares of Common Stock for each
share of Preferred Stock). The conversion price is
subject to adjustment upon the occurrence of certain
events.
Optional Redemption............... The Preferred Stock may not be redeemed prior to ,
2000. On or after , 2000, the Preferred Stock may
be redeemed, in whole or in part, at the option of the
Company, in cash, by delivery of fully paid and
nonassessable shares of Common Stock or a combination
thereof, initially at a price of $ and
thereafter at prices declining to $50 per share on or
after , 2007, plus in each case all accrued and
unpaid dividends to the redemption date.
Change in Control................. Upon any Change of Control, each holder of Preferred
Stock shall have a one-time option to convert such
holder's shares of Preferred Stock into shares of Common
Stock at a conversion price equal to the greater of (x)
the average closing price of the Common Stock on the
AMEX for the five trading day period (the "Market
Value") ending on the date on which a Change of Control
event is consummated (the "Change of Control Date") and
(y) 66.67% of the Market Value as of the date of this
Prospectus. In lieu of issuing the shares of Common
Stock issuable upon conversion in the event of a Change
of Control, the Company may, at its option, make a cash
payment equal to the value of such Common Stock
otherwise issuable.
Ranking........................... The Preferred Stock will rank prior to the Common Stock
and senior or PARI PASSU with other existing and future
offerings of preferred stock in right of payment.
</TABLE>
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<TABLE>
<S> <C>
Voting Rights..................... Except as required by law, the holders of Preferred
Stock will have no voting rights unless dividends
payable on the Preferred Stock are in arrears for six
quarterly periods, in which case the holders of the
Preferred Stock voting separately as a class with the
shares of any other preferred stock or preference
securities having similar voting rights, will be
entitled at the next regular or special meeting of
stockholders of the Company to elect two directors of
the Company (such voting rights will continue until such
time as the dividend arrearage on the Preferred Stock
has been paid in full). The affirmative consent of
holders of at least 66 2/3% of the outstanding Preferred
Stock will be required for the issuance of any class or
series of stock (or security convertible into stock) of
the Company ranking senior to the Preferred Stock as to
dividends, liquidation rights or voting rights and for
amendments to the Company's Restated Certificate of
Incorporation that would affect adversely the rights of
holders of the Preferred Stock. See "Description of the
Preferred Stock--Voting Rights."
Use of Proceeds................... The Company intends to use the net proceeds of the
Offering (i) to finance the continued build-out of the
Communications Group's systems in Eastern Europe, the
republics of the former Soviet Union, the PRC and other
selected emerging markets and (ii) for general corporate
purposes, including, but not limited to, the working
capital needs of the Company and its subsidiaries, the
repayment of certain indebtedness of the Company and its
subsidiaries and potential future acquisitions.
Common Stock...................... The Common Stock is traded on the AMEX and the PSE under
the symbol "MMG." On , 1997, the Company had
shares of Common Stock issued and outstanding and
approximately shares of Common Stock issuable upon
the exercise of outstanding options. See "Description of
the Common Stock."
Listing........................... Application is being made to list the Preferred Stock on
the AMEX and the PSE.
Tax Consequences.................. The Federal income tax consequences of acquiring and
holding the Preferred Stock and the shares of Common
Stock issuable upon conversion of such Preferred Stock
or in redemption therefor or as a dividend thereon are
described in "Certain Federal Tax Consequences."
Prospective investors are urged to consult their own tax
advisors regarding the tax consequences of acquiring,
holding or disposing of the Preferred Stock or the
shares of Common Stock issuable upon conversion of such
Preferred Stock or in redemption therefor or as a
dividend thereon in light of their personal investment
circumstances, including consequences resulting from the
possibility that distributions on the Preferred Stock
may exceed the Company's current and accumulated
earnings and profits in which case they would not be
treated as dividends for tax purposes.
</TABLE>
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SUMMARY CONSOLIDATED FINANCIAL DATA
The following table presents selected historical financial data of the
Company, which are derived from the audited financial statements of the Company.
The data is qualified by reference to and should be read in conjunction with the
consolidated financial statements of the Company and the related notes thereto
and "Management's Discussion and Analysis of Financial Condition" relating to
the Company incorporated by reference and included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
YEARS ENDED
DECEMBER 31, YEARS ENDED FEBRUARY 28,
---------------------- ----------------------------------
1996(1) 1995(2) 1995 1994 1993
---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
(IN THOUSANDS, EXCEPT PER SHARE 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 per common share from continuing operations
before discontinued operations and extraordinary
item............................................... (1.74) (3.54) (3.43) (7.71) (19.75)
</TABLE>
- ------------------------
(1) The consolidated financial statements for the twelve months ended December
31, 1996 include two months (November and December 1996) of the results of
operations of the Company's Snapper, Inc. subsidiary ("Snapper") and the
results of operations for Goldwyn Entertainment Company (formerly known as
The Samuel Goldwyn Company) ("Goldwyn") and Motion Picture Corporation of
America ("MPCA") since July 2, 1996.
(2) The consolidated financial statements for the twelve months ended December
31, 1995 include operations for The Actava Group Inc. ("Actava") (an
acquired company for accounting purposes) and MCEG Sterling Incorporated
("Sterling") from November 1, 1995 and two months for Orion Pictures
Corporation ("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.
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OTHER INFORMATION
In addition to its Communications Group and Entertainment Group, the Company
also owns two non-strategic assets: Snapper 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 Merger (as defined below).
Snapper manufactures Snapper-Registered Trademark- brand premium-priced power
lawnmowers, lawn tractors, garden tillers, snow throwers and related parts and
accessories. RDM, a New York Stock Exchange ("NYSE")-listed company, 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, 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. The results of operations for Snapper 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. Since 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. The equity in earnings and losses of RDM have been excluded from the
Company's results of operations since the November 1 Merger. See
"Business--Snapper." The Company is continuing 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.
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 and Metromedia International Telecommunications, Inc. ("MITI") with and
into wholly-owned subsidiaries of the Company and the merger of Sterling with
and into the Company (collectively, the "November 1 Merger"), the Company
changed its strategic focus to become a global communications, entertainment and
media company and 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.
RISK FACTORS
The Preferred Stock offered hereby involves a high degree of risk. See "Risk
Factors."
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RISK FACTORS
IN ADDITION TO THE OTHER INFORMATION CONTAINED IN THIS PROSPECTUS, THE
FOLLOWING FACTORS SHOULD BE CONSIDERED CAREFULLY IN EVALUATING THE COMPANY AND
ITS BUSINESS BEFORE PURCHASING THE PREFERRED STOCK. CERTAIN STATEMENTS SET FORTH
BELOW UNDER THIS CAPTION CONSTITUTE "FORWARD-LOOKING STATEMENTS" WITHIN THE
MEANING OF THE REFORM ACT. SEE "SPECIAL NOTE REGARDING FORWARD-LOOKING
STATEMENTS" ON PAGE 96 FOR ADDITIONAL FACTORS RELATING TO SUCH STATEMENTS.
COMPANY-RELATED AND GENERAL CONSIDERATIONS
OPERATING LOSSES; NO ASSURANCE OF PROFITABILITY
For the years ended December 31, 1996 and 1995, the Company reported a loss
from continuing operations of approximately $94.4 million and $87 million,
respectively, and a net loss of $115.2 million and $413 million, respectively.
The Company expects that it will report significant operating losses for the
fiscal year ended December 31, 1997 including losses attributable to Snapper,
whose results of operations will be consolidated and reported with the Company's
consolidated results of operations as of November 1, 1996. See
"Business--Snapper." In addition, because the Company's Communications Group is
in the early stages of development, the Company expects this group to continue
to generate significant losses as it continues to build out and market its
services. Accordingly, the Company expects to generate consolidated losses for
the foreseeable future.
LEVERAGE AND DEBT SERVICE PAYMENTS
The Company and certain of its subsidiaries are highly leveraged companies.
The level of the Company's indebtedness could have important consequences to
holders of the Preferred Stock including (i) a substantial part of the Company's
cash flow from operations must be dedicated to debt service (including principal
payments on subordinated debt (exclusive of its subsidiaries' indebtedness) of
approximately $60 million for the year ended December 31, 1998 and $4.4 million
for the year ended December 31, 1999) and will not be available for other
purposes (including paying cash dividends on the Preferred Stock); (ii) the
Company's ability to obtain needed additional financing in the future may be
limited; (iii) the Company's leveraged position and covenants contained in its
subsidiaries' credit facilities (or any replacement thereof) could limit its
ability to expand and make capital improvements and acquisitions; and (iv) the
Company's level of indebtedness could make it more vulnerable to economic
downturns, limit its ability to withstand competitive pressures and limit its
flexibility in reacting to changes in its industry and economic conditions
generally. Certain of the Company's competitors currently operate on a less
leveraged basis and have significantly greater operating and financing
flexibility than the Company.
HOLDING COMPANY STRUCTURE
The Company is a holding company that conducts operations solely through its
subsidiaries. The Company's ability to pay dividends on the Preferred Stock is
dependent primarily upon the earnings of its subsidiaries, and the distribution
or other payment of such earnings to the Company. The Entertainment Group Credit
Facility and Snapper's credit facility each contain substantial restrictions on
dividend or other payments by such subsidiaries to the Company. In addition, the
Company's Communications Group is in its early stages of development and will
require cash contributions from the Company in order to fund its operations.
Accordingly, in order to be able to meet its cash requirements (including paying
cash dividends on the Preferred Stock), the Company may rely upon (i) cash on
hand and net proceeds obtained as a result of this Offering; (ii) proceeds from
the disposition of non-strategic assets; or (iii) net proceeds obtained from
additional financings through a public or private sale of debt or equity
securities of the Company. There can be no assurance that the matters specified
in (ii) or (iii) can be accomplished on reasonably acceptable terms, if at all.
Management of the Company periodically reviews market conditions for the
possible sale of the Company's equity or debt securities. In addition, because
of the Company's
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status as a holding company, the Company's rights and the rights of its
stockholders and creditors, including holders of the Preferred Stock, to
participate in the distribution of assets of any person in which the Company
owns an equity interest upon such person's liquidation or reorganization will be
subject to prior claims of such person's creditors, including trade creditors,
except to the extent that the Company may itself be a creditor with recognized
claims against such person (in which case the claims of the Company would still
be subject to the prior claims of any secured creditor of such person and of any
holder of indebtedness of such person that is senior to that held by the
Company). Accordingly, the rights of holders of the Preferred Stock will be
effectively subordinated to such claims.
RESTRICTIONS ON THE COMPANY'S ABILITY TO PAY DIVIDENDS ON OR REDEEM SHARES OF
CAPITAL STOCK
Under Delaware law, dividends on capital stock may only be paid from
"surplus" or if there is no surplus, from the corporation's net profits for the
then-current or the preceding fiscal year. In addition, a corporation may
repurchase or redeem shares of capital stock only if it has sufficient funds
legally available to effect such repurchase or redemption, so that the
corporation's capital is not "impaired" by such repurchase or redemption. Any
repurchase or redemption of capital stock requiring more than the amount of
"surplus" would result in an impairment of capital under Delaware law. The
Company does not anticipate having net profits for the foreseeable future and
its ability to pay dividends on and to redeem shares of Preferred Stock will
require the availability of adequate "surplus," which is defined as the excess,
if any, of the Company's net assets (total assets less total liabilities) over
its capital (generally the par value of its issued capital stock). As a result,
there can be no assurance that adequate surplus will be available to pay
dividends on or to redeem shares of Preferred Stock.
FUTURE FINANCING NEEDS
Each of the Company's operating businesses is engaged in an industry which
requires significant cash and capital expenditures prior to the receipt of
revenue. Generally, producers of motion picture product are required to spend
significant capital in order to fund the development, production and
distribution costs associated with such motion picture product prior to its
theatrical release or other distribution and the receipt of any revenues. The
Entertainment Group is attempting to reduce the risks associated with
substantial up-front production costs by obtaining financing from third party
production partners and/or by "pre-selling" certain rights in films prior to
production. See "Business--The Entertainment Group." There can be no assurance,
however, that the Entertainment Group will be successful in either pre-selling
rights or obtaining production partners on commercially reasonable terms, if at
all, and as a result, the Entertainment Group must rely on amounts available
under its revolving line of credit, its own cash flow or cash from the Company
to finance its production and distribution of feature films. As of December 31,
1996, $37.5 million was available under the revolving credit portion of the
Entertainment Group Credit Facility. The Company believes that amounts available
under this revolving credit facility together with cash provided by operations
will satisfy the Entertainment Group's cash requirements through December 31,
1997. See "Management's Discussion and Analysis of Financial
Conditions--Liquidity and Capital Resources." The Entertainment Group expects to
release approximately 17 feature films during 1997. If these films are not
commercially successful, the cash flow provided by the feature films may not be
adequate to replenish the Entertainment Group's revolving credit facility,
thereby forcing the Entertainment Group to reduce its production spending or
rely upon the Company or third party sources for additional financing. The
Communications Group's businesses are similarly capital intensive and require
the investment of significant amounts of capital in order to construct and
develop operational systems and market its services. See "Business--The
Communications Group". As a result, the Company may require additional financing
in order to satisfy its on-going working capital and debt service requirements
and to achieve its long-term business strategies. Such additional capital may be
provided through the public or private sale of debt or equity securities. No
assurance can be given that additional financing will be available to the
Company on acceptable terms, if at all. If adequate additional funds are not
available, the
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Company may be required to curtail significantly its long term business
objectives and the Company's results from operations may be materially and
adversely affected.
COMPETITIVE INDUSTRIES
The Company operates in businesses which are highly competitive and such
businesses compete with many other communications, entertainment and media
companies, many of which are well-known global communications, entertainment and
media companies with substantially greater financial, management and other
resources than the Company. The Communications Group operates in industries that
are highly competitive worldwide. The Company recognizes that in the future the
Communications Group is likely to encounter significant competition from other
entities which may be led by successful and experienced members of the
communications industry and which may have established operating infrastructures
and superior access to financial resources. The Communications Group also faces
potential competition from competing technologies which could emerge over time
in Eastern Europe, the republics of the former Soviet Union, the PRC and other
selected emerging markets and compete directly with the Communications Group's
operations. In addition, the Company does not expect to maintain or to be
granted exclusive licenses to operate its communications businesses in any of
the markets where it currently provides or plans to provide its services. See
"Business--The Communications Group." Similarly, the Entertainment Group
competes with many motion pictures companies, including the "major" motion
picture studios, many of which are owned by larger, diversified entertainment
companies and, accordingly, which have substantial resources to devote to film
production and which have other operations to offset the performance of their
motion picture operations. See "Business--The Entertainment Group--Competition
and Seasonality."
CONTROL OF THE COMPANY BY METROMEDIA COMPANY DUE TO CONCENTRATION OF SHARE
OWNERSHIP AND VOTING CONTROL
Metromedia Company and its affiliates collectively own approximately 23% of
the outstanding shares of Common Stock and is the Company's largest stockholder.
Metromedia Company has nominated or designated a majority of the members of the
Company's Board of Directors. In accordance with the Restated Certificate of
Incorporation and By-laws of the Company and Delaware law, in the future, the
majority of the members of the Company's Board of Directors will nominate the
directors for election to the Company's Board of Directors. Accordingly, it is
likely that directors designated or nominated by Metromedia Company will
continue to constitute a majority of the members of the Company's Board of
Directors. As such, Metromedia Company will likely control the direction of
future operations of the Company, including decisions regarding acquisitions and
other business opportunities, the declaration of dividends and the issuance of
additional shares of the Company's capital stock and other securities. Such
concentration of ownership may also have the effect of delaying, deferring or
preventing a change of control of the Company pursuant to a transaction which
might otherwise be beneficial to stockholders.
ANTI-TAKEOVER PROVISIONS IN THE COMPANY'S CHARTER AND BY-LAWS
The Company's Restated Certificate of Incorporation and By-laws contain
provisions that could delay, defer or prevent a change in control without the
approval of its incumbent Board of Directors. These provisions, among other
things, (i) divide the Board of Directors into three classes, with members of
each class to be elected in staggered three-year terms; (ii) prohibit
stockholder action by written consent in lieu of a meeting; (iii) limit the
right to call special meetings of stockholders to the Chairman or Vice Chairman
of the Company's Board of Directors; and (iv) authorize the Board of Directors
to issue preferred stock in one or more classes or series without any action on
the part of stockholders. Such provisions could limit the price that investors
might be willing to pay in the future for shares of Common Stock and
significantly impede the ability of the holders of Common Stock to replace
management. In addition, the Company's Board of Directors intends to adopt a
stockholder rights plan which will have certain anti-takeover effects.
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The Company does not intend to solicit stockholder approval with respect to its
stockholder rights plan. Although the exact terms of such rights plan have not
been determined, it is anticipated that such rights plan will cause substantial
dilution to a person or group that attempts to acquire the Company on terms not
approved by the Company's Board of Directors. Provisions and agreements that
inhibit or discourage takeover attempts could reduce the market value of the
Common Stock.
ENVIRONMENTAL MATTERS
The Company is subject to federal, state and local laws, regulations and
ordinances that (i) govern activities or operations that may have adverse
environmental effects, such as discharges to air and water, as well as handling
and disposal practices for solid and hazardous wastes and (ii) impose liability
for the costs of cleaning up, and certain damages resulting from, sites of past
spills, disposals or other releases of hazardous substances (together,
"Environmental Laws"). The Company, through its predecessors, has been in
operation since 1929 and, over the years, has operated in diverse industries,
including, various equipment, sporting goods and furniture manufacturing, sheet
metal processing, and trucking. With the exception of Snapper and the Company's
interest in RDM, the Company has divested itself of all non-communications,
entertainment and media-related operations. However, in the course of certain
such divestitures, the Company has retained certain indemnification obligations
for environmental cleanup matters, and in one case a contaminated parcel at
which the Company has undertaken cleanup activities. See
"Business--Environmental Matters." In other cases, particularly for operations
that were divested in the past, the Company could incur unanticipated
environmental cleanup obligations, to the extent they may exist or arise in the
future, as a result, at least in part, of changes in legal requirements that
have occurred since such divestitures. At the present time, the Company is not
aware of any environmental liabilities related to any such divestitures that the
Company believes would have a material adverse effect on its results of
operations or financial condition. However, because some divestitures may have
occurred many years ago, there can be no assurance that environmental matters
will not arise in the future that could have such an effect.
COMMUNICATIONS GROUP CONSIDERATIONS
POLITICAL, SOCIAL AND ECONOMIC RISKS
The Communications Group's operations may be materially and adversely
affected by significant political, social and economic uncertainties in Eastern
Europe, the republics of the former Soviet Union, the PRC and in other selected
emerging markets where it conducts or may in the future conduct business.
Political stability in many of the Communications Group's markets has been
affected by political tensions between different branches of government. In
addition, internal military conflicts have occurred in certain regions of some
of the countries in which the Communications Group has made investments. There
are also concerns about potential civil unrest fueled by, among other things,
economic and social crises in certain of the Communications Group's markets.
Moreover, political tensions between national and local governments in certain
of the Communications Group's markets could have a material adverse effect on
the Communications Group's operations in such areas. The Communications Group's
operations may also be materially and adversely affected by bureaucratic
infighting between government agencies with unclear and overlapping
jurisdictions.
The governments in the Communications Group's markets exercise substantial
influence over many aspects of the private sector. The governments in these
areas have been attempting to a varying degree to implement economic reform
policies and encourage private economic activity. However, these reforms have
been only partially successful to date. The economies in many of the
Communications Group's markets are still characterized by high unemployment,
high inflation, high foreign debt, weak currencies and the possibility of
widespread bankruptcies. Moreover, in some of the Communications Group's
markets, the governments have continued to reserve large sectors of the economy
for state ownership and
17
<PAGE>
have not dismantled all portions of the command economy system. Important
infrastructure and utility sectors, such as certain sectors of the
telecommunications industry, of some of the economies in which the
Communications Group conducts or plans to conduct business are still primarily
state-owned and operated and are subject to pervasive regulatory control.
Despite some success in implementing reform policies and developing the private
sector, there can be no assurance that the pursuit of economic reforms by any of
these governments will continue or prove to be ultimately effective, especially
in the event of a change in leadership, social or political disruption or other
circumstances affecting economic, political or social conditions.
GENERAL OPERATING RISKS
The Communications Group's operating results are dependent upon the ability
to attract subscribers to its cable, paging and telephony systems, the sale of
commercial advertising time on its radio stations and its ability to control
overall operating expenses. The ability to attract subscribers is dependent on
the general economic conditions in the market where each cable, paging and
telephony system is located, the relative popularity of such systems, the
demographic characteristics of the potential subscribers to such systems, the
technical attractiveness to customers of the equipment and service of such
systems, the activities of competitors and other factors which may be outside of
the Communications Group's control. In addition, the sale of commercial
advertising time on the Communications Group's AM/FM radio stations is similarly
dependent on economic conditions in the market in which such stations are
located, the relative popularity of such stations, the demographic
characteristics of the audience of such stations, the activities of competitors
and other factors beyond the control of the Communications Group.
The Communications Group relies heavily in many of the countries in which it
operates upon the availability and accessibility of government-owned broadcast
and transmission facilities for distribution of its signal throughout its
license areas. Most of the joint ventures in which the Communications Group
makes investments require substantial construction of new systems and additions
to the physical plant of existing systems. Construction projects are adversely
affected by cost overruns and delays not within the control of the
Communications Group or its subcontractors, such as those caused by governmental
action or inaction. In addition, delays also can occur as a result of design
changes and material or equipment shortages or delays in delivery of material or
equipment. The failure to complete construction of a communications system on a
timely basis could jeopardize the franchise or license for such system or
provide opportunities to the Communications Group's competitors.
RISKS INHERENT IN FOREIGN INVESTMENT
The Communications Group has invested substantially all of its resources in
operations outside of the United States and, in the ordinary course of its
business, plans to make additional international investments in the near future.
Risks inherent in foreign operations include loss of revenue, property and
equipment from expropriation, nationalization, war, insurrection, terrorism and
other political risks, risks of increases in taxes and governmental royalties
and involuntary modifications of contracts with or licenses issued by foreign
governments or their affiliated commercial enterprises.
The Communications Group is also vulnerable to the risk of changes in
foreign and domestic laws and policies that govern operations of overseas-based
companies. Exchange control regulations currently in place or which could be
enacted in many of the Communication Group's markets could create substantial
barriers to the conversion or repatriation of funds, and such restrictions could
adversely affect the Communications Group's and the Company's ability to pay
overhead expenses, meet any of their respective debt obligations and to continue
and expand its communications businesses. Tax laws and regulations may also be
amended or differently interpreted and implemented, thereby adversely affecting
the profitability after tax of the Communications Group's ventures. In addition,
criminal organizations in certain of the countries in which the Communications
Group operates may threaten and intimidate businesses. While the Communications
Group has thus far not experienced widespread difficulties with
18
<PAGE>
criminal organizations in these countries, there can be no assurance that such
pressures from criminal organizations will not increase in the future and have a
material adverse effect on the Company and its operations.
There is significant uncertainty as to the extent to which local parties and
entities, particularly government authorities, in the Communications Group's
markets will respect the contractual and other rights of foreign parties, such
as the Communications Group, and also the extent to which the "rule of law" has
taken hold and will be upheld in each of these countries. Although the general
legal framework and the governments' strategy in some of the Communications
Group's markets currently encourage foreign trade and investments, relevant laws
of the countries in which the Communications Group has invested may not be
enforced in accordance with their terms or implemented in countries in which
they do not now exist. Laws in the Communications Group's markets affecting
foreign investment, trade and communications activities often change and create
uncertainty and confusion. Additionally, foreign investment and sales may be
materially and adversely affected by conflicting and restrictive administrative
regulations in many of the Communications Group's markets.
The Communications Group 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 that 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 Communications Group. 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, AAT, unlike the Communications Group's joint ventures in
Eastern Europe and in the republics of the former Soviet Union, must structure
its transactions as a provider of telephony equipment and technical and support
services as opposed to a direct provider of such services. These legal
restrictions in the PRC may limit the ability of AAT to control the management
and direction of the telecommunications systems in which it invests in the PRC.
In addition, there is no way of predicting whether other 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.
DEVELOPING LEGAL STRUCTURES IN TARGET MARKETS
As a result of political, economic and social changes in Eastern Europe, the
republics of the former Soviet Union, the PRC and in other selected emerging
markets, the bodies of commercial and corporate laws in the Communications
Group's markets are, in most cases, in their formative stages. Despite the fact
that many of these areas have undergone radical changes in recent years,
commercial and corporate laws in these markets are still significantly less
developed or clear than comparable laws in the United States and
19
<PAGE>
countries of Western Europe and are subject to frequent changes, preemption and
reinterpretation by local or administrative regulations, by administrative
officials and, in the case of Eastern Europe and republics of the former Soviet
Union, by new governments. Such lack of development or clarity makes it
difficult for the Communications Group's businesses to plan operations and
maintain compliance with administrative interpretations of the law. No assurance
can be given that the uncertainties associated with the existing and future laws
and regulations in the Communications Group's markets will not have a material
adverse effect on the Communications Group's ability to conduct its business and
to generate profits.
Laws relating to telecommunications are also in their developmental stage in
most of the markets in which the Communications Group operates and are often
modified. In one market in which the Communications Group operates, the
government has begun to charge license fees for use of newly and previously
issued licenses. At this time, the Communications Group does not yet know the
amount its joint venture will be charged for the use of its license in this
market.
In addition, the courts in many of the Communications Group's markets often
do not have the experience, resources or authority to resolve significant
economic disputes and enforce their decisions. In some cases courts are not
insulated from political considerations and other outside pressures and
sometimes do not function in an independent manner. Enforcement of legal rights
in these areas is also affected in some cases by political discretion and
lobbying. This creates particular concerns for the Communications Group because
the licenses held by the Communications Group's businesses or the contracts
providing such businesses access to the airwaves or other rights essential for
operations may be significantly modified, revoked or canceled without
justification, and legal redress may be substantially delayed or even
unavailable in such cases.
RISK INHERENT IN GROWTH STRATEGY
The Communications Group has grown rapidly since its inception. Many of the
Communications Group's ventures are either in developmental stages or have only
recently commenced operations. The Communications Group has incurred significant
operating losses to date. The Communications Group is pursuing additional
investments in a variety of communications businesses in both its existing
markets and additional markets. This growth strategy entails the risks inherent
in assessing the strength and weaknesses of development opportunities, in
evaluating the costs and uncertain returns of developing and constructing the
facilities for operating systems and in integrating and managing the operations
of existing and additional systems. The Company's growth strategy requires the
Company to expend significant capital in order to enable it 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
capital needs of the Communications Group's current investments or any of the
Communications Group's additional investment opportunities or that the
Communications Group will be able to obtain financing from third parties. If
such financing is unavailable, the Communications Group may not be able to
further develop its existing ventures and the number of additional ventures in
which it invests may be significantly curtailed.
APPROVALS AND UNCERTAINTY OF LICENSE RENEWALS
The Communications Group's joint ventures' operations are subject to
governmental regulation in its markets and its operations require certain
governmental approvals. The licenses pursuant to which the Communications
Group's joint ventures operate are issued for limited periods, including certain
licenses which are renewable annually. Certain of these licenses expire over the
next several years. In addition, licenses held by two of the Communications
Group's joint ventures have recently expired, although these joint ventures have
been permitted to continue operations while the reissuance is pending. Such
joint ventures applied for renewals and expects new licenses to be issued. Six
other licenses held or used by Communications Group joint ventures will expire
during 1997. While there can be no assurance on the 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's
joint ventures, no statutory
20
<PAGE>
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 Company. There can also be no assurance that the
Communications Group's joint ventures 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.
Additionally, certain of the licenses pursuant to which the Communications
Group's businesses operate contain network build-out milestones. The failure to
satisfy such milestones could result in the loss of such licenses which may have
a material adverse effect on the Company.
EXCHANGE RATE FLUCTUATIONS AND INFLATION RISKS IN TARGET MARKETS
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
U.S. 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 U.S. dollar accounts to service their U.S.
dollar-denominated credit lines, thereby reducing foreign currency risk. As the
Communications Group and its joint venture investees 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 U.S. dollars to the
Company. In addition, the economies of certain of the Communications Group's
target markets have experienced significant and, in some periods, extremely high
rates of inflation over the past few years. Inflation and rapid fluctuation in
exchange rates have had and may continue to have a negative effect on these
economies and may have a negative impact on the Company's business, financial
condition and results of operations.
POSSIBLE INABILITY TO CONTROL CERTAIN JOINT VENTURES
The Communications Group has invested in virtually all of its joint ventures
with local partners. Although the Communications Group exercises significant
influence in the management and operations of the joint ventures in which it has
an ownership interest and intends to invest in the future only in joint ventures
in which it can exercise significant influence in management, the degree of its
voting power and the voting power and veto rights of its joint venture partners
may limit the Communications Group from effectively controlling the operations,
strategies and financial decisions of the joint ventures in which it has an
ownership interest. In certain markets where the Communications Group conducts
or may in the future conduct business, increases in the capitalization of a
joint venture require not only the consent of all joint venture partners, but
also government approval, thereby creating a risk that a venture may not be able
to obtain additional capital without cooperation of the joint venture partner
and government approval. The Communications Group is dependent on the continuing
cooperation of its partners in the joint ventures and any significant
disagreements among the participants could have a material adverse effect on any
such venture. In addition, in many instances, the Communications Group's
partners in a joint venture include a governmental entity or an affiliate of a
governmental entity. The presence of a governmental entity or affiliate thereof
as a partner poses a number of risks, including the possibility of decreased
governmental support or enthusiasm for the venture as a result of a change of
government or government officials, a change of policy by the government and
perhaps most significantly the ability of the governmental entities to exert
undue control or influence over the project in the event of a dispute or
otherwise. In addition, to the extent joint ventures become profitable and
generate sufficient cash flows in the future, there can be no assurance that the
joint ventures will pay dividends or return capital at any time. Moreover, the
equity
21
<PAGE>
interests of the Communications Group in these investments generally are not
freely transferable. Therefore, there can be no assurance of the Company's
ability to realize economic benefits through the sale of the Communications
Group's interests in its joint ventures.
TECHNICAL APPROVAL OF TELEPHONY EQUIPMENT
Many of the Communications Group's proposed wireless local loop telephony
operations are dependent upon type approval of the Communications Group's
proposed wireless local loop telephony equipment by the communications
authorities in the markets where the Communications Group and its ventures plan
to operate. While the Communications Group believes that such equipment will be
type approved, there is no assurance that this will occur and the failure to
obtain such type approvals could have a materially adverse effect on many of the
Communications Group's proposed telephony operations. In addition, while the
Communications Group believes that it will be able to acquire sufficient amounts
of wireless local loop telephony equipment from its supplier on a timely basis,
there can be no assurance that this will be the case or that the Communications
Group would be able to procure alternative equipment.
TECHNOLOGICAL OBSOLESCENCE
The communications industry has been characterized in recent years by rapid
and significant technological changes. New market entrants could introduce new
or enhanced technologies with features which would render the Communications
Group's technology obsolete or significantly less marketable. The ability of the
Communications Group to compete successfully will depend to a large extent on
its ability to respond quickly and adapt to technological changes and advances
in its industry. There can be no assurance that the Communications Group will be
able to keep pace, or will have the financial resources to keep pace, with the
technological demands of the marketplace.
ENTERTAINMENT GROUP CONSIDERATIONS
SUBSTANTIAL COSTS OF MOTION PICTURES
The motion picture business in which the Entertainment Group is engaged
requires substantial outlays of capital. The costs of producing and marketing
motion pictures have increased in recent years, and may continue to increase in
the future, thereby increasing the costs to the Entertainment Group of the
motion pictures it produces or with respect to which it acquires distribution
rights. Consequently, the Entertainment Group may be subject to substantial
financial risks relating to the production, completion and release of motion
pictures. Moreover, there can be no assurance that the Company will be able to
obtain additional financing if it is required. See "--Company-Related and
General Considerations-- Future Financing Needs" above.
MOTION PICTURE INDUSTRY INVOLVES A SUBSTANTIAL DEGREE OF RISK
The Entertainment Group is engaged in the exploitation of its film libraries
and other assets and the distribution and production of theatrical motion
pictures and television programming. The motion picture industry is
unpredictable and involves a substantial degree of risk. The success of the
Entertainment Group's motion picture product is heavily dependent on public
taste, which is both unpredictable and susceptible to change. Accordingly, there
can be no assurance as to the financial success of any motion picture or
television programming.
22
<PAGE>
USE OF PROCEEDS
The net proceeds to the Company from the sale of the Preferred Stock offered
hereby, after deducting underwriting discounts and commissions and the estimated
expenses of the offering, are estimated to be $ million ($ million
if the Underwriters' over-allotment option is exercised in full). The Company
intends to use the estimated net proceeds (i) to finance the continued build-out
of the Communications Group's systems in Eastern Europe, the republics of the
former Soviet Union, the PRC and other selected emerging markets and (ii) for
general corporate purposes, including the working capital needs of the Company
and its subsidiaries, the repayment of certain indebtedness of the Company and
its subsidiaries and potential future acquisitions.
PRICE RANGE OF COMMON STOCK AND DIVIDEND POLICY
Since November 2, 1995, the Common Stock has been listed and traded on the
AMEX and the PSE under the symbol "MMG". Prior to November 2, 1995, the Common
Stock was listed and traded on both 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 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 for the Common Stock as reported by the AMEX
from November 2, 1995 through the present. The reported last sale price of the
Common Stock on the AMEX on April 3, 1997 was $8 7/16.
<TABLE>
<CAPTION>
PRICE RANGE OF
COMMON STOCK
--------------------
FISCAL QUARTER ENDED HIGH LOW
- ---------------------------------------------------------------------------- --------- ---------
<S> <C> <C>
1995:
March 31.................................................................... $ 11 $ 8 3/4
June 30..................................................................... 13 3/8 8 5/8
September 30................................................................ 19 1/8 13 1/4
December 31................................................................. 18 7/8 13 1/4
1996:
March 31.................................................................... $ 14 1/4 $ 11 1/2
June 30..................................................................... 16 5/8 12 1/4
September 30................................................................ 12 1/2 9 1/2
December 31................................................................. 12 1/8 8 7/8
1997:
March 31.................................................................... $ 12 1/4 $ 8 11/16
June 30 (through April 3, 1997)............................................. 8 7/8 8 7/16
</TABLE>
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. Any future dividends will depend
upon the Company's earnings, capital requirements, financial condition and other
relevant factors, including the existence or absence of any contractual
limitations on the payment of dividends. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations."
23
<PAGE>
CAPITALIZATION
The following table sets forth the capitalization of the Company as of
December 31, 1996, and as adjusted to give effect to the sale of the Preferred
Stock offered hereby (without giving effect to the exercise of the Underwriters'
over-allottment option). The table should be read in conjunction with the
audited consolidated financial statements of the Company and the related notes
thereto and "Management's Discussion and Analysis of Financial Condition and
Results of Operations" relating to the Company incorporated by reference and
included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
AS OF DECEMBER 31, 1996
------------------------
<S> <C> <C>
ACTUAL AS ADJUSTED
----------- -----------
<CAPTION>
(IN THOUSANDS)
<S> <C> <C>
Cash, cash equivalents and short-term investments....................................... $ 91,130 $ 210,755
----------- -----------
----------- -----------
Debt:
Entertainment Group Credit Facility................................................... $ 247,500 $ 247,500
6 1/2% Convertible Debentures due August 1, 2002...................................... 59,739 59,739
9 1/2% Debentures due August 1, 1998.................................................. 59,398 59,398
9 7/8% Debentures due March 15, 1997.................................................. 15,038 15,038
10% Debentures due October 1, 1999.................................................... 5,467 5,467
Snapper Revolver...................................................................... 46,419 46,419
Other long-term debt, including capital leases........................................ 25,498 25,498
----------- -----------
Total debt........................................................................ 459,059 459,059
Stockholders' equity:
Preferred stock....................................................................... -- 125,000
Common stock.......................................................................... 66,153 66,153
Paid-in surplus....................................................................... 959,558 954,183
Other................................................................................. (2,680) (2,680)
Accumulated deficit................................................................... (803,349) (803,349)
----------- -----------
Total stockholders' equity........................................................ 219,682 339,307
----------- -----------
Total capitalization.............................................................. $ 678,741 $ 798,366
----------- -----------
----------- -----------
</TABLE>
24
<PAGE>
PRO FORMA CONSOLIDATED CONDENSED FINANCIAL INFORMATION
OF THE COMPANY
The following unaudited Pro Forma Balance Sheet of MIG as of December 31,
1996 and unaudited Pro Forma Statement of Operations for the year ended December
31, 1996 illustrates the effect of the Offering, the acquisitions of Goldwyn and
MPCA and the consolidation of Snapper at the beginning of the period presented.
The unaudited Pro Forma Balance Sheet assumes that the Offering occurred on
December 31, 1996 and the Unaudited Pro Forma Combining Statement of Operations
assumes that the Offering, the acquisitions of Goldwyn and MPCA and the
consolidation of Snapper occurred at the beginning of the period presented.
The unaudited Pro Forma Combining Financial Statements are not necessarily
indicative of either future results of operations or results that might have
been achieved if the foregoing transactions had been consummated as of the
indicated dates. The unaudited Pro Forma Combining Financial Statements should
be read in conjunction with (i) the consolidated financial statements and the
related notes thereto of the Company and "Management's Discussion and Analysis
of Financial Condition and Results of Operations" relating to the Company
included elsewhere in this Prospectus and (ii) the consolidated financial
statements and related notes thereto of Goldwyn incorporated by reference
elsewhere in this Prospectus.
25
<PAGE>
METROMEDIA INTERNATIONAL GROUP, INC.
UNAUDITED PRO FORMA BALANCE SHEET
(IN THOUSANDS)
<TABLE>
<CAPTION>
DECEMBER 31, 1996
-------------------------------------
PRO FORMA
HISTORICAL ADJUSTMENTS PRO FORMA
---------- ----------- ------------
<S> <C> <C> <C>
Cash and cash equivalents............................................ $ 91,130 $ 119,625(1) $ 210,755
Accounts receivable.................................................. 70,734 -- 70,734
Inventories.......................................................... 54,404 -- 54,404
Film inventories..................................................... 66,156 -- 66,156
Other current assets................................................. 8,123 -- 8,123
---------- ----------- ------------
Current assets....................................................... 290,547 119,625 410,172
Film inventories..................................................... 186,143 -- 186,143
Property and equipment, net.......................................... 73,928 -- 73,928
Intangibles.......................................................... 258,783 -- 258,783
Other assets......................................................... 135,339 -- 135,339
---------- ----------- ------------
Total assets..................................................... $ 944,740 $ 119,625 $ 1,064,365
---------- ----------- ------------
---------- ----------- ------------
Accounts payable and accrued expenses................................ $ 134,050 $ -- $ 134,050
Short-term debt...................................................... 55,638 -- 55,638
Other current liabilities............................................ 53,253 -- 53,253
---------- ----------- ------------
Current liabilities.................................................. 242,941 -- 242,941
Deferred revenues.................................................... 48,188 -- 48,188
Long-term debt....................................................... 403,421 -- 403,421
Other liabilities.................................................... 30,508 -- 30,508
---------- ----------- ------------
Total liabilities................................................ 725,058 -- 725,058
---------- ----------- ------------
Stockholders' equity:
Preferred stock.................................................... -- 125,000(1) 125,000
Common stock....................................................... 66,153 -- 66,153
Paid-in surplus.................................................... 959,558 (5,375) 954,183
Other.............................................................. (2,680) -- (2,680)
Accumulated deficit................................................ (803,349) -- (803,349)
---------- ----------- ------------
Total stockholders' equity....................................... 219,682 119,625 339,307
---------- ----------- ------------
Total liabilities and stockholders' equity....................... $ 944,740 $ 119,625 $ 1,064,365
---------- ----------- ------------
---------- ----------- ------------
</TABLE>
26
<PAGE>
METROMEDIA INTERNATIONAL GROUP, INC.
UNAUDITED PRO FORMA COMBINING STATEMENT OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1996
----------------------------------------------------------------------------------
PRO FORMA
MERGER AND COMPANY
COMPANY CONSOLIDATION PRO FORMA
HISTORICAL SNAPPER GOLDWYN MPCA ADJUSTMENTS COMBINED
----------- HISTORICAL HISTORICAL HISTORICAL ------------- -----------
------------- ------------- -----------
(UNAUDITED)(8) (UNAUDITED)(8) (UNAUDITED)(8)
<S> <C> <C> <C> <C> <C> <C>
Revenues........................ $ 201,755 $ 130,623 $ 54,112 $ 10,920 $ -- $ 397,410
Costs and expenses:
Cost of sales and rentals and
operating expenses............ (161,564) (102,687) (53,617) (11,769) 10,062(4) (319,575)
Selling, general and
administrative................ (81,481) (38,658) (10,543) (3,801) (528)(6) (135,011)
Depreciation and
amortization.................. (13,232) (6,001) (1,984) -- 354(2) (24,069)
(2,509)(5)
(697)(7)
----------- ------------- ------------- ----------- ------------- -----------
Operating loss.................. (54,522) (16,723) (12,032) (4,650) 6,682 (81,245)
Interest expense................ (36,256) (6,859) (5,823) (300) -- (49,238)
Interest income................. 8,838 -- -- 41 -- 8,879
----------- ------------- ------------- ----------- ------------- -----------
Loss before provision for income
taxes, equity in losses in
joint ventures................ (81,940) (23,582) (17,855) (4,909) 6,682 (121,604)
Provision for income taxes...... (1,414) -- (779) -- 779(3) (1,414)
Equity in losses of joint
ventures...................... (11,079) -- -- -- -- (11,079)
----------- ------------- ------------- ----------- ------------- -----------
Loss from continuing
operations.................... $ (94,433) $ (23,582) $ (18,634) $ (4,909) $ 7,461 $(134,097)
----------- ------------- ------------- ----------- ------------- -----------
----------- ------------- ------------- ----------- ------------- -----------
Number of shares issued and
outstanding................... 54,293 n/a n/a n/a 56,812(9)
----------- ------------- ------------- ----------- -----------
----------- ------------- ------------- ----------- -----------
Loss per share.................. $ (1.74) n/a n/a n/a $
----------- ------------- ------------- ----------- -----------
----------- ------------- ------------- ----------- -----------
Ratio of earnings to fixed
charges(10)................... n/a n/a n/a n/a n/a
----------- ------------- ------------- ----------- -----------
----------- ------------- ------------- ----------- -----------
</TABLE>
- ------------------------
(1) Reflects the issuance of 2.5 million shares of Preferred Stock at $50.00 per
share, net of estimated issuance cost of $5.4 million.
(2) Reflects elimination of six months of historical Goldwyn goodwill
amortization.
(3) Reflects elimination of historical Goldwyn income tax expense.
(4) Reflects elimination of film inventory write downs included in Goldwyn's
historical results of operations due to purchase accounting adjustments to
reduce Goldwyn's film inventories to net realizable value.
(5) Reflects six months of amortization of goodwill related to the acquisition
of Goldwyn and MPCA.
(6) Reflects six months of compensation expense in connection with the issuance
of restricted stock in the MPCA acquisition.
(7) Reflects ten months of amortization of goodwill related to the consolidation
of Snapper.
(8) Reflects Snapper's results of operations for the period January 1, 1996
through October 31, 1996 and the results of operations for Goldwyn and MPCA
from January 1, 1996 through July 1, 1996.
(9) Reflects issuance of stock related to the acquisitions of Goldwyn and MPCA
as if outstanding for entire period presented.
(10) For purposes of this computation, earnings are defined as pre-tax earnings
or loss before discontinued operations and extraordinary items and fixed
charges. Fixed charges are the sum of (i) interest costs, (ii) amortization
of deferred financing costs, premium and debt discounts, (iii) the portion
of operating lease rental expense that is representative of the interest
factor (deemed to be one-third) and (iv) dividends on preferred stock. The
ratio of earnings to fixed charges of the Company after giving effect to the
Offering was less than 1.00 for the year ended December 31, 1996; thus,
earnings available for fixed charges were inadequate to cover fixed charges
for the period. The deficiency in earnings to fixed charges for pro forma
December 31, 1996 after giving effect to the Offering was $ .
27
<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA
The following selected consolidated financial data presented below as of and
for the years ended December 31, 1996 and December 31, 1995 and as of and for
each of the years in the three year period ended February 28, 1995 have been
derived from financial statements audited by KPMG Peat Marwick LLP, independent
certified public accountants. The consolidated financial statements as of
December 31, 1996 and December 31, 1995 and for each of the years in the two
year period ended December 31, 1996 and for the year ended February 28, 1995
together with the report of KPMG Peat Marwick LLP, are contained in the
Company's Annual Report on Form 10-K for the year ended December 31, 1996 and
included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
YEARS ENDED
DECEMBER 31, YEARS ENDED FEBRUARY 28,
---------------------- ----------------------------------
<S> <C> <C> <C> <C> <C>
1996(1) 1995(2) 1995 1994 1993
---------- ---------- ---------- ---------- ----------
<CAPTION>
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<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)
Net income (loss).................................. (115,243) (412,976) (69,411) (132,530) 250,240
Loss per common share from continuing operations
before discontinued operations and extraordinary
item............................................. (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
Ratio of earnings to fixed charges(3).............. n/a n/a n/a n/a n/a
Weighted average common shares outstanding......... 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
Total debt......................................... 459,059 304,643 237,027 284,500 325,158
</TABLE>
- ------------------------
(1) The consolidated financial statements for the twelve months ended December
31, 1996 include two months (November and December 1996) of the results of
operations of the Company's Snapper subsidiary and the results of operations
for Goldwyn and MPCA since July 2, 1996.
(2) The consolidated financial statements for the twelve months ended December
31, 1995 include operations for Actava and Sterling from November 1, 1995
and 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.
(3) For purposes of this computation, earnings are defined as pre-tax earnings
or loss before discontinued operations and extraordinary items and fixed
charges. Fixed charges are the sum of (i) interest costs, (ii) amortization
of deferred financing costs, premium and debt discounts, (iii) the portion
of operating lease rental expense that is representative of the interest
factor (deemed to be one-third) and (iv) dividends on preferred stock. The
ratio of earnings to fixed charges of the Company was less than 1.00 for the
years ended December 31, 1996 and 1995 and for the years ended February 28,
1995, 1994 and 1993; thus, earnings available for fixed charges were
inadequate to cover fixed charges for such periods. The deficiency in
earnings to fixed charges for the years ended December 31, 1996 and 1995 and
for the years ended February 28, 1995, 1994 and 1993 was $93,019, $86,257,
$68,111, $130,430 and $67,273, respectively.
28
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
THE SECTION BELOW INCLUDES PORTIONS OF "MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS" RELATING TO THE COMPANY WHICH
HAVE BEEN INCORPORATED BY REFERENCE IN THIS PROSPECTUS, AS UPDATED IN CERTAIN
PLACES TO REFLECT THE CONSUMMATION OF THE SALE OF THE PREFERRED STOCK OFFERED
HEREBY. A DETAILED "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS" RELATING TO THE COMPANY, INCLUDING AN ANALYSIS OF THE
COMPANY'S CONSOLIDATED FINANCIAL STATEMENTS, IS INCORPORATED BY REFERENCE FROM
THE COMPANY'S FORM 10-K FOR THE YEAR ENDED DECEMBER 31, 1996. SPECIAL NOTE:
CERTAIN STATEMENTS SET FORTH BELOW UNDER THIS CAPTION CONSTITUTE
"FORWARD-LOOKING STATEMENTS" WITHIN THE MEANING OF THE REFORM ACT. SEE "SPECIAL
NOTE REGARDING FORWARD-LOOKING STATEMENTS" ON PAGE 96 FOR ADDITIONAL INFORMATION
RELATING TO SUCH STATEMENTS.
GENERAL
In connection with the November 1 Merger, for accounting purposes only,
Orion and MITI were deemed to be the joint acquirers of Actava and Sterling. The
acquisition of Actava and Sterling was 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. During 1995, the
Company adopted a formal plan to dispose of Snapper, 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, 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 Company believes that the historical results of operations are not
indicative of future operating performance because (i) the majority of the
Communications Group's joint ventures are in their early stages of contruction
and marketing, (ii) approximately one-half of the Entertainment Group's film
inventories are stated at estimated net realizable value and as such do not
generate gross profit upon recognition of revenues and (iii) the Entertainment
Group had a reduced theatrical release schedule through calendar 1995 and as a
result had reduced theatrical, video and ancillary revenues and gross profits.
The strategic business activities of the Company consist of two 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, and (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. The Company also owns a non-strategic business,
Snapper, which is engaged in the manufacture of lawn and garden products.
THE 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 Eastern Europe, the republics of the former Soviet Union,
the PRC and other selected emerging markets.
29
<PAGE>
The Communications Group's joint ventures currently offer wireless cable
television, AM/FM radio, paging, cellular telecommunications, international toll
calling and trunked mobile radio. Joint ventures are principally entered into
with governmental agencies or ministries under the existing laws of the
respective countries.
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, Vilnius Cable
and Protocall Ventures Ltd. ("Protocall"), 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
JOINT VENTURE BUSINESS MARKET COVERED (MM)(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 Moscow, Russia 12.0
Romsat............................ Cable Television Bucharest, Romania 0.9
Vilnius Cable..................... Cable Television Vilnius, Lithuania 2.0
Protocall......................... 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 "Notes to the Consolidated Financial Statements" of the
Company for the year ended December 31, 1996, included elsewhere in this
Prospectus for these joint ventures and their summary financial information.
THE 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 Entertainment Group's product on
network and on other free television outlets begins generally 3 to 5 years from
the initial theatrical release date in each territory.
30
<PAGE>
SNAPPER
Snapper manufacturers Snapper-Registered Trademark- brand premium-priced
power lawnmowers, lawn tractors, garden tillers, snow throwers 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.
RESULTS OF OPERATION--SEGMENT INFORMATION
The following table sets forth the operating results and financial condition
of the Company's Entertainment Group and Communications Group for the calendar
years ended December 31, 1996 and 1995 and for the fiscal year ended February
28, 1995. Financial information summarizing the results of operations of
Snapper, which, until November, 1996, was classified as an asset held for sale,
is presented in the consolidated financial statements of the Company and the
related notes thereto incorporated by reference and included elsewhere in this
Prospectus.
SEGMENT INFORMATION
<TABLE>
<CAPTION>
CALENDAR YEAR CALENDAR YEAR FISCAL YEAR
1996 1995 1995
------------- ------------- -----------
(IN THOUSANDS)
<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 adminsitrative............................... (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)
</TABLE>
31
<PAGE>
<TABLE>
<CAPTION>
CALENDAR YEAR CALENDAR YEAR FISCAL YEAR
1996 1995 1995
------------- ------------- -----------
(IN THOUSANDS)
Interest income....................................................... 8,838 3,575 3,094
<S> <C> <C> <C>
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>
THE COMPANY 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 acquisitions of Goldwyn and MPCA, 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 to the "Notes to the Consolidated Financial Statements" of the
Company for the year ended December 31, 1996, included elsewhere in this
Prospectus) 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 the Company 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
32
<PAGE>
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.
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 to the "Notes to the Consolidated Financial Statements" of the
Company for the year ended December 31, 1996, included elsewhere in this
Prospectus) and a noninterest bearing promissory note from the Company, 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.
THE COMMUNICATIONS GROUP--RESULTS OF OPERATIONS
YEAR ENDED DECEMBER 31, 1996 COMPARED TO YEAR ENDED DECEMBER 31, 1995
REVENUES. Revenues increased to $14 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 "Notes to the Consolidated
Financial Statements" of the Company for the year ended December 31, 1996,
included elsewhere in this Prospectus. 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.
33
<PAGE>
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.
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, 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 a wireless cable television 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 television venture. Losses were offset by an
increase in equity in income of $1.2 million realized at the Communications
Group's international toll calling venture in Tblisi, Georgia.
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 reported wireless cable television,
paging and trunked mobile radio joint ventures subscriber growth:
<TABLE>
<CAPTION>
WIRELESS TRUNKED
CABLE MOBILE
TELEVISION PAGING RADIO
----------- --------- -----------
<S> <C> <C> <C>
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
</TABLE>
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 U.S. 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 U.S. dollar accounts to service
their U.S. 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
34
<PAGE>
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 U.S. dollars to the Company.
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 wireless cable television
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 6 wireless cable
television TV joint ventures in operation as compared to 4 in the prior year.
The Communications Group's wireless cable television 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 wireless cable television 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.
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.
35
<PAGE>
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 U.S. 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 U.S. dollar accounts to service
their U.S. 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 U.S. dollars to the
Company.
THE 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 (the "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 3 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.
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 6 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 United Kingdom, Mitsubishi Corporation, for rights in Japan
and Principal Network, for rights in Italy. In calendar 1995, the
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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 the Acquired Businesses 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, Landmark,
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.
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 the Entertainment Group 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
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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 6 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.
OPERATING LOSS. Operating loss increased $4 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 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.
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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.
LIQUIDITY AND CAPITAL RESOURCES
THE COMPANY
The Company 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 the Company. The Communications Group is dependent on the Company
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 Communications Group may not be able to
further develop existing ventures and the number of additional ventures in which
it invests may be significantly curtailed.
The Company is obligated to make principal and interest payments under its
own various debt agreements (see Note 9 to the "Notes to the Consolidated
Financial Statements" of the Company for the year ended December 31, 1996,
included elsewhere in this Prospectus), in addition to funding its working
capital needs, which consist principally of corporate overhead and payments on
self insurance claims (see Note 1 to the "Notes to the Consolidated Financial
Statements" of the Company for the year ended December 31, 1996, included
elsewhere in this Prospectus). The Company does not currently anticipate
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receiving dividends from its subsidiaries but intends to use its cash on hand,
net proceeds from this Offering and proceeds from asset sales described below to
meet these cash requirements.
At December 31, 1996, $15 million of the Company's 9 7/8% Senior
Subordinated Debentures due in 1997 remained outstanding. All of these
debentures were subsequently paid on March 17, 1997.
The Company'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.
The Company'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 $41 5/8 per share at the holder's option and do not
require annual principal payments.
Interest on the Company's outstanding subordinated debentures is
approximately $11.8 million for 1997.
At December 31, 1996, the Company had $82.7 million of cash on hand
remaining from the 1996 Offering of 18.4 million shares of Common Stock. Net
proceeds from the 1996 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.
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, 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.
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.
The wireless cable television, paging, wireless loop telephony, cellular
telecommunications and international toll calling businesses require significant
capital investment. The Communications Group generally is the primary source of
funding for its joint ventures with the exception of its GSM joint ventures. The
GSM joint ventures have been funded to date on a pro rata basis by the
Communications Group and its strategic partners. The Communications Group has
and continues to have discussions with
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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 $18.9 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.
The ability of the Communications Group and its consolidated and
unconsolidated joint ventures to establish profitable operations is subject to
political, economic and social risks inherent in doing business in Eastern
Europe, the republics of the former Soviet Union, the PRC and other selected
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. 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.
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.
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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.
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 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 Term Loan requires quarterly repayments of $7.5 million commencing
September 1996 and a final payment of $50 million on maturity (June 30, 2001),
and the Revolving Credit Facility 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 the Company (other than $15
million of subordinated loans which may be repaid to the Company), 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" of the Company for the year ended
December 31, 1996, included elsewhere in this Prospectus. The Entertainment
Credit Facility is secured by a security
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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 $37.5 million available
under the 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 the Company 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.
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 the Snapper Credit Agreement (as defined below)
with AmSouth (as defined below), pursuant to which AmSouth has agreed to make
available to Snapper the Snapper Revolver (as defined below) for a period ending
on the Snapper Revolver Termination Date (as defined below). 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 to the "Notes to the
Consolidated Financial Statements" of the Company for the year ended December
31, 1996, included elsewhere in this Prospectus.
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, the $10.0 million working capital facility, and the cash flow
generated by operating activities will provide sufficient funds for Snapper to
meet its obligations.
THE COMPANY 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 million loss in calendar 1995.
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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 acquisitions of Goldwyn and MPCA.
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.
The principal reason for the increase of $269 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 million
represents the Term Loan (as defined below), and $77.3 million was borrowed
under the Revolving Credit Facility (as defined below). See Note 9 to the "Notes
to the Consolidated Financial Statements" of the Company for the year ended
December 31, 1996, included elsewhere in this Prospectus. 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 Revolving Credit Facility,
$15.0 million was payment under the Term Loan, $28.8 million was the repayment
of the revolving credit agreement by the Company. 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.
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The calendar 1995 net loss of $413 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 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
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.
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's 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's 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 to the "Notes to the
Consolidated Financial Statements" of the Company for the year ended December
31, 1996, included elsewhere in this Prospectus. The Entertainment Group repaid
its outstanding plan debt with $135.0 million of proceeds from the 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 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.
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BUSINESS
THE COMMUNICATIONS GROUP
The Communications Group was founded in 1990 to take advantage of the
rapidly growing demand for modern communications services in Eastern Europe, the
republics of the former Soviet Union and in other selected emerging markets and
launched its first operating system in 1992. 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 participated with
partners in the management of 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 telecommunications systems, 1 trunked mobile radio
system and 1 company providing sales, financing and service for wireless local
loop telecommunications equipment to telecomunications operators, each of which
the Company believes will be launched during 1997. The Communications Group
generally owns 50% or more of the joint ventures in which it invests. The
Company believes that the Communications Group is poised for significant growth,
as it continues to expand its existing systems' subscriber base, construct and
launch new systems in areas where it is currently licensed and obtain new
licenses in other attractive markets. 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 Communications Group's joint ventures experienced rapid growth in 1996.
The Communications Group's joint ventures reported aggregate subscribers to its
various services at December 31, 1996 of 120,596, a growth of 130% over
aggregate subscribers at December 31, 1995 of 52,360. Total combined revenues
reported by consolidated and unconsolidated joint ventures in which the
Communications Group had an investment for the year ended December 31, 1996 were
56.2 million, as compared to $23.9 million for the year ended December 31, 1995.
The Communications Group invested in consolidated and unconsolidated
subsidiaries approximately $49.9 million during calendar 1996 in the
construction and development of its consolidated and unconsolidated joint
ventures' communications networks and broadcasting stations, of which $33.3
million, or 67%, was invested subsequent to the 1996 Offering. The
Communications Group's joint ventures acquired a total of 16 licenses to provide
its various services in 1996 in both existing and new markets. In addition, in
January 1997, one of the Communications Group's joint ventures acquired an
existing wired network in Romania, adding a total of approximately 37,000
connected cable television subscribers.
The Communications Group's markets generally have large populations, with
high density and strong economic potential, but lack reliable and efficient
communications services. The Communications Group believes that most of these
markets have a growing number of persons who desire and can afford high quality
communications services. The Communications Group has assembled a management
team consisting of executives who have significant experience in the
communications services industry and developing markets. This management team
believes that the Communications Group's systems can be constructed with
relatively low capital investments and focuses on markets where the Company can
provide multiple communications services. The Company believes that the
establishment of a far-reaching communications infrastructure is crucial to the
development of the economies of these countries, and such development will, in
turn, supplement the growth of the Communications Group.
The Communications Group believes that the performance of its joint ventures
has demonstrated that there is significant demand for its services in its
license areas. While the Communications Group's operating systems have
experienced rapid growth to date, many of the systems are still in the early
stages of rolling out their services, and, therefore, the Communications Group
believes it will significantly increase its subscriber and customer bases as
these systems mature. In addition, as one of the first entrants into these
markets, the Communications Group believes that it has developed a reputation
for providing quality
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service and has formed important relationships with local entities. As a result,
the Company believes it is well positioned to capitalize on opportunities to
provide additional communications services in its markets as new licenses are
awarded.
The following chart summarizes operating statistics by service type of both
the pre-operational and operational systems constructed by the Communications
Group's joint ventures:
<TABLE>
<CAPTION>
AGGREGATE
SUBSCRIBERS
TARGET POPULATION/ REPORTED
PRE-OPERATIONAL MARKETS HOUSEHOLDS(MM)(A) AT
COMMUNICATIONS MARKETS AT OPERATIONAL AT REPORTED AT DECEMBER DECEMBER
SERVICE DECEMBER 31, DECEMBER 31, 31, 31,(K)
- ------------------------------------------- ------------------- ------------------------ -------------------- ---------
<S> <C> <C> <C> <C> <C> <C>
1996 1996 1995 1996 1995 1996
------------------- ----- ----- --------- --------- ---------
Wireless Cable Television.................. 1(b) 9 7 9.5 7.2 69,118
AM/FM Radio................................ -- 6 5 23.8 22.2 (l)
Paging (c)................................. 1(d) 9 8 89.5 73.3 44,836
Cellular Telecommunications................ 2(e) -- -- 8.2 -- --
International Toll Calling (f)............. -- 1 1 5.5 5.5 (l)
Trunked Mobile Radio (g)................... 1(h) 4 -- 36.2 -- 6,642
Wireless Local Loop (i).................... 1 -- -- 72.6(j) -- --
<CAPTION>
COMMUNICATIONS
SERVICE
- -------------------------------------------
<S> <C>
1995
---------
Wireless Cable Television.................. 37,900
AM/FM Radio................................ (l)
Paging (c)................................. 14,460
Cellular Telecommunications................ --
International Toll Calling (f)............. (l)
Trunked Mobile Radio (g)................... --
Wireless Local Loop (i).................... --
</TABLE>
- ------------------------
(a) Covers both pre-operational markets and operational markets. 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.
(b) Subsequent to December 31, 1996, one of the Communications Group joint
ventures acquired a wired network in Romania adding approximately 37,000
connected cable television subscribers.
(c) Target population for the Communications Group's paging joint ventures
includes the total population in the jurisdictions where such joint ventures
are licensed to provide services. In many markets, however, the
Communication Group's paging system currently only covers the capital city
and is expanding into additional cities.
(d) Since December 31, 1996, the Communications Group has commenced a paging
operation in Vienna, Austria, which is licensed to provide paging services
nationwide.
(e) The Communications Group owns 23.6% of Baltcom GSM, which, subsequent to
December 31, 1996, completed construction and launched commercial service of
a cellular telecommunications system in Latvia which plans to provide
nationwide service. The Communications Group also owns 34.3% of a joint
venture that holds a license and is constructing a nationwide cellular
telecommunications system in Georgia. In addition, subsequent to December
31, 1996, the Communications Group acquired 57% of a company which owns an
interest in a joint venture which is constructing a cellular
telecommunications system for up to 50,000 subscribers in the City of
Ningbo, PRC.
(f) 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.
(g) 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 currently only operational in major
cities.
(h) Since December 31, 1996, the Company has commenced trunked mobile radio
services in Almaty and Atyrau, Kazakstan.
(i) The Communications Group owns a 60% interest in a pre-operational joint
venture in the PRC that provides wireless local loop telecommunications
equipment, financing, network planning, installation and maintenance
services to telecommunications operators.
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<PAGE>
(j) Indicates population of the Hebei and Tianjin Provinces in the PRC in which
the Communications Group's joint venture has tested its equipment.
(k) The Communications Group reports the number of subscribers to its various
services on a three-month lag. Accordingly, the aggregate number of
subscribers reported by the Communications Group's consolidated and
unconsolidated joint ventures at December 31, 1996 and 1995 reflect the
number of subscribers at September 30, 1996 and 1995.
(l) Not applicable.
In addition to its existing projects and licenses, the Communications Group
is exploring 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 markets. The
Communications Group believes that its wireless local loop telephony technology
will be a high quality and cost effective alternative to the existing, often
antiquated and overloaded, telephone systems in these markets. The
Communications Group also believes that its system has a competitive advantage
in these markets because its equipment can be installed quickly, at a
competitive price, as compared to alternative wireline providers which often
take several years to provide telephone service. In addition, unlike certain
other existing wireless telephony systems in the Communications Group's target
markets, the equipment the Communications Group uses utilizes digital,
high-speed technology, which can be used for high-speed facsimile and data
transmission, including Internet access. In February 1997, the Communications
Group, through MAC, acquired AAT which owns interests in and participates in the
management of two separate joint ventures in the PRC. These joint ventures have
entered into agreements in the PRC with China Unicom to (i) construct and
develop a local telephone network for up to 1,000,000 lines in the Sichuan
Province, which will utilize wireless local loop technology and (ii) construct
and develop a wireless GSM cellular telecommunications system for up to 50,000
subscribers in the City of Ningbo.
STRATEGIES
The Communications Group intends to expand its subscriber and customer
bases, as well as its revenues and cash flow by pursuing the following
strategies:
UTILIZING LOW COST WIRELESS TECHNOLOGY THAT ALLOWS FOR RAPID BUILD-OUT. The
use of wireless technologies has allowed and will continue to allow the
Communications Group to build-out its existing and future license areas faster
and at a lower cost than the construction of comparable wired networks. Many of
the cities where the Communications Group has or is pursuing wireless licenses
have limitations on wireline construction above ground and/or underground.
COMPLETING BUILD-OUT OF EXISTING LICENSE AREAS. Since its formation in
1990, the Communications Group has been investing in joint ventures to obtain
communications licenses in emerging markets. Since the 1996 Offering, the
Communications Group has accelerated the construction and marketing of its
communications systems. In the calendar year ended December 31, 1996, the
Communications Group invested in consolidated and unconsolidated subsidiaries
approximately $49.9 million in the construction and development of its
consolidated and unconsolidated joint ventures' communications networks and
broadcast stations in existing license areas, of which $33.3 million, or 67%,
was invested subsequent to the 1996 Offering. For example, 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.
AGGRESSIVELY GROWING THE SUBSCRIBER AND ADVERTISER BASE IN EXISTING LICENSE
AREAS. The Communications Group's existing license areas, in the aggregate,
represent a large potential revenue base. The Communications Group is
aggressively marketing its services in these areas and is experiencing
significant increases in subscriber count and advertising base. The
Communications Group believes it will continue to rapidly add subscribers by (i)
targeting each demographic in its markets with customized communications
48
<PAGE>
services; (ii) cross-marketing and bundling communications services to existing
customers; (iii) providing technologically-advanced services and a high level of
customer service; (iv) providing new and targeted programming on its radio
stations to increase advertising revenue; and (v) opportunistically acquiring
additional existing systems in its service areas and in other strategic areas to
increase its subscriber base.
PURSUING ADDITIONAL LICENSES IN EXISTING MARKETS. 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 cellular telecommunications services 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 brand loyalty and to capitalize on
marketing opportunities afforded by bundling its services and build brand
loyalty and awareness. The Communications Group believes that it has several
competitive advantages that will enable it to obtain additional licenses in
these markets, including: (i) established relationships with local strategic
joint venture partners and local government; (ii) a proven track record of
handling and operating quality systems; and (iii) a fundamental understanding of
the regions' political, economic and cultural climate.
INVESTING IN NEW MARKETS. 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
Company is targeting emerging markets with strong economic potential which lack
adequate communications services. In evaluating whether to enter a new market,
the Communications Group assesses, among other factors, the (i) potential demand
for the Communications Group's services and the availability of competitive
services; (ii) strength of local partners; and (iii) political, social and
economic climate. The Communications Group has identified several attractive
opportunities in Eastern Europe and the Pacific Rim. For example, two of the
Communications Group's joint ventures began to provide paging services in
Austria and radio broadcasting in Prague, Czech Republic and in February 1997,
the Communications Group acquired AAT, a company which owns interests in and
participates in the management of joint ventures with agreements to provide
wireless telephony equipment and services in certain provinces in the PRC.
WIRELESS CABLE TELEVISION
OVERVIEW. The Communications Group commenced offering wireless cable
television services in 1992 with the launch by its joint venture 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 9 markets in Eastern Europe and the
republics of the former Soviet Union that reported 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 in Romania, adding a total of
approximately 37,000 connected cable television 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
demand is being driven by several factors including: (i) the lack of quality
television and alternative entertainment options in these markets; (ii) the
growing demand for Western-style entertainment programming; and (iii) the
increase in disposable income in each market which increases 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 a MMDS system generally are significantly 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
49
<PAGE>
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 Company'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
Company on building rooftops as part of the system, receive the multiple channel
signals transmitted by the transmission tower. The signal is then transmitted to
each subscriber via a coaxial cabling system within the building. In each city
where the Company provides or expects to provide service, a substantial
percentage of the population (e.g., approximately 90% in Moscow) 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 Company is wiring buildings so
that it can serve all of the apartment dwellers in such buildings through one
microwave receiving location. Subscribers to the Company's premium tiered
services typically utilize a set-top converter which descrambles the signal and
are also used as channel selectors. The Company generally utilizes the same
equipment across all its wireless cable television systems, which enables it to
realize purchasing efficiencies in the build-out of its networks.
While the Communications Group's wireless cable television systems are
generally a leading provider of multi-channel television services in each of its
markets, in many markets there are several small undercapitalized wireline
competitors. The Communications Group's joint ventures in Bucharest, Romania and
Chisinau, Moldova have each acquired existing wireline systems and are in the
process of integrating them into their wireless systems. The Communications
Group believes there are additional acquisition/consolidation opportunities in
several of its markets and will pursue the acquisition of select competitors on
an opportunistic basis.
PROGRAMMING. The Communications Group believes that programming is a
critical component in building successful 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
or 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.
The content of each programming tier varies from market to market, but generally
includes channels such as MTV, Eurosport, NBC Super Channel, Bloomberg TV,
Cartoon Network/TNT, BBC World, CNN, SKY News, Discovery Channel and an adult
channel. Each tier also offers localized programming.
One of the Communications Group's joint ventures 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 joint venture 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 to most of the Communications Group's
other
50
<PAGE>
wireless cable television ventures. Centralized dubbing and distribution of this
movie channel has enabled the Communications Group to avoid the cost of
separately creating 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 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 exploring the roll-out of MEN in certain other markets.
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 generally within the economic reach of, a substantial and
growing percentage 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 system, the Communications Group uses a combination of event
sponsorships, billboard, radio and broadcast television advertising 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 undercapitalized, small, local companies that are providing
limited programming to subscribers in limited service areas. In many of its
wireless cable television markets, the Communications Group 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 in its lower cost and
its ability to offer localized programming.
AM/FM RADIO
OVERVIEW. The Communications Group entered the radio broadcasting business
in Eastern Europe through the acquisition of Radio Juventus in Hungary in 1994.
Today, the Company is a leading operator of 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 strategy is generally 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
51
<PAGE>
strong listenership 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.
MARKETING. Radio station programming is generally targeted towards that
segment which the Communications Group believes to be the most affluent within
the 25- to 55-year-old demographic in each of its 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 and international advertisers.
COMPETITION. While the Communications Group's radio stations are generally
leaders in each of their respective markets, in each market there are a number
of competing stations currently in operation or anticipated to be in service
shortly. 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
OVERVIEW. The Communications Group commenced offering radio paging services
in 1994 with the launch of paging networks serving the countries of Estonia and
Romania. Paging systems are useful as a means for one-way business/personal
communications without the need for a recipient to access a telephone network,
which in many of the Communication Group's 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
is currently expanding the services of such operations to cover additional
areas. The Communications Group believes that these joint ventures are leading
providers of paging service in their respective markets and, as of December 31,
1996, reported an aggregate of 44,836 subscribers, which is an increase of
approximately 210% from 14,460 subscribers at December 31, 1995.
Management believes that its paging joint ventures will continue to
experience rapid subscriber growth due to (i) the low landline telephone
penetration that characterizes each of its markets; (ii) the rapid increase in
the number of individuals, corporations and other organizations that desire
communication services that offer substantial mobility, accessibility and the
ability to receive timely information; and (iii) the continued economic growth
in these markets which is expected to make paging services relatively more
affordable to the general population.
The Communications Group offers several types of pagers. However,
substantially all of the Communications 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 Communications 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, a "cap code," which allows it to pick up only
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<PAGE>
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.
Each of the Communications Group's paging joint ventures uses 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 a satellite uplink which is 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 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 businesspeople without ready access to telephones. The Communications Group
targets its paging system primarily to local businesses, the police, the
military and expatriates. Paging provides an affordable way for local businesses
to communicate with employees in the field and with their customers. Subscribers
are charged a monthly fee which entitles a subscriber to receive an unlimited
number of pages each month.
COMPETITION. The Communications Group believes that its joint ventures are
leading providers of paging services in each of their respective markets. In
some of the Communications Group's paging markets, however, 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
from, in a few cases, 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
cellular telecommunications system in Latvia which plans to provide nationwide
service. 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. Western Wireless,
a leading U.S. cellular provider, is a partner in each of these joint ventures.
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 telephony service.
Landline telephone penetration is 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.
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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 potential subscribers. The Communications
Group's joint venture is entitled to 73% of the distributed cash flow, as
defined in the agreement, from the network for a 15-year period.
TECHNOLOGY. The Communications Group's cellular telephone network in Latvia
has been constructed and the cellular 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 the rapidly growing number of 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.
Management believes that its cellular systems will benefit from several
competitive advantages in each of its markets. 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
Communications Group believes that this database of names will be useful in
marketing its cellular telephony services, as these are customers who have
already exhibited an interest in modern communications services. In addition,
these joint ventures intend to market these systems 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 services 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 penetration rates in Latvia and Georgia and 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
OVERVIEW. 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
interconnect arrangements with several international long distance
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<PAGE>
carriers such as Sprint and Telespazio. For every international call made to the
Republic of Georgia, a payment is due to Telecom Georgia by the interconnect
carrier and for every call made from the Republic of Georgia to another country,
Telecom Georgia charges its subscribers and pays 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 Telecom
Georgia is the only entity licensed to handle all international call traffic in
and out of Georgia.
TRUNKED MOBILE RADIO
OVERVIEW. 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, servicing an aggregate of 6,642
subscribers at December 31, 1996. After December 31, 1996, one of the
Communications Group's joint ventures 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 service (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. The Communications Group believes that lower costs and
the ability to provide dispatch services affords trunked mobile radio
significant advantages over cellular telephony or the public switched telephone
network in fleet applications.
COMPETITION. The Communications Group is a leading provider of trunked
mobile radio in its markets although it 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 proposed
wireless local loop telephony technology 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 Communications Group plans to partner with the local telephone service
provider in each of its target markets to provide wireless local loop telephony
services to customers. The Company believes that wireless local loop technology
is a rapid and cost effective method to increase the number of subscribers to
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<PAGE>
local telephone services. Wireless local loop telephony systems 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 subscribers' building, thus reducing the time
and expense involved in expanding telephone service to customers.
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; and (ii) provide telephone consulting and
financing services to China Unicom within Sichuan Province. With a population of
over 100 million and a telephone penetration 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, as defined in the agreement, 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 the network
infrastructure is already in place means that it is a source of competition for
the Communications Group's proposed wireless telephony operations. 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 the Communications Group's
services 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
alternative 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 which the Communications
Group is using operates at 64 kilobits per second, it can be used for high speed
facsimile and data transmission, including Internet access.
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JOINT VENTURE OWNERSHIP STRUCTURES/LIQUIDITY ARRANGEMENTS
The following table summarizes the Communications Group's joint ventures at
December 31, 1996 as well as the amount contributed, amount loaned and total
amount invested by the Communications Group in such joint ventures as of
December 31, 1996:
<TABLE>
<CAPTION>
AMOUNT AMOUNT TOTAL
COMPANY CONTRIBUTED LOANED TO INVESTMENT
OWNERSHIP TO JOINT JOINT IN JOINT
JOINT VENTURE(1) % VENTURE VENTURE VENTURE
- ------------------------------------------------- ----------------- --------------- -------------- --------------
<S> <C> <C> <C> <C>
(US DOLLARS, IN THOUSANDS)
WIRELESS CABLE TELEVISION
Kosmos TV (Moscow, Russia)..................... 50% $ 1,093 $ 8,959 $ 10,052
Baltcom TV (Riga, Latvia)...................... 50 819 11,201 12,020
Ayety TV (Tbilisi, Georgia).................... 49 779 6,116 6,895
Romsat Cable TV (Bucharest, Romania)........... 99 682 1,680 2,362
Sun TV (Chisinau, Moldova)..................... 50 400 3,582 3,982
Alma TV (Almaty, Kazakstan).................... 50 222 3,147 3,369
Cosmos TV (Minsk, Belarus)..................... 50 400 1,581 1,981
Vilnius Cable (Vilnius, Lithuania)............. 55 434 1,029 1,463
Kamalak TV (Tashkent, Uzbekistan).............. 50 754 5,489 6,243
Teleplus (St. Petersburg, Russia)(5)........... 45 554 -- 554
PAGING
Baltcom Estonia (Estonia)...................... 39 396 3,895 4,291
CNM (Romania).................................. 54 490 3,709 4,199
Kamalak Paging (Tashkent, Samarkand, Bukhara
and Andijan, Uzbekistan)(2).................. 50 -- -- --
Paging One (Tbilisi, Georgia).................. 45 250 801 1,051
Paging Ajara (Ajara, Georgia).................. 35 43 212 255
Raduga Poisk (Nizhni Novgorod, Russia)......... 45 330 78 408
Alma Page (Almaty and Ust-Kamenogorsk,
Kazakstan)(3)................................ 50 -- -- --
Baltcom Plus (Latvia).......................... 50 250 2,577 2,827
Pt-Page (St. Petersburg, Russia)............... 40 1,058 -- 1,058
Paging One Services (Austria)(5)(6)............ 100 1,007 1,048 2,055
RADIO BROADCASTING
Radio Juventus (Budapest, Siofok and Khebegy,
Hungary)..................................... 100 8,107 274 8,381
SAC (Moscow, Russia)........................... 83 631 2,892 3,523
Radio Karusha (St. Petersburg, Russia)......... 50 133 769 902
Radio Nika (Socci, Russia)..................... 51 224 120 344
Radio Skonto (Riga, Latvia).................... 55 302 227 529
Radio One (Prague, Czech Republic)............. 80 283 -- 283
INTERNATIONAL TOLL CALLING
Telecom Georgia (Georgia)...................... 30 2,554 -- 2,554
TRUNKED MOBILE RADIO
Protocall Ventures, Ltd.(4).................... 56 2,530 2,600 5,130
Spectrum (Kazakstan)(5)(7)..................... 31 36 -- 36
CELLULAR TELECOMMUNICATIONS
Baltcom GSM (Latvia)(5)(8)..................... 24 7,883 -- 7,883
Magticom (Georgia)(5).......................... 34 2,450 -- 2,450
WIRELESS LOCAL LOOP
Metromedia-Jinfeng (PRC)(5)(9)................. 60 3,019 -- 3,019
------- ------- --------------
TOTAL............................................ $ 38,113 $ 61,986 $ 100,098
------- ------- --------------
------- ------- --------------
</TABLE>
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- ------------------------
(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 above under wireless cable television.
(3) The Communications Group's cable and paging services in Kazakstan are
provided by the same company, Alma TV. All amounts contributed and loaned to
Alma TV are listed above under wireless cable television.
(4) The Communications Group's owns its trunked mobile radio ventures through
Protocall, in which it has a 56% ownership interest. Through Protocall, the
Communications Group owns interests in (i) Belgium Trunking (24%), which
provides services in Brussels and Flanders, Belgium; (ii) Radiomovel
Telecomunicacoes (14%), which provides services in Portugal; (iii) Teletrunk
Spain (6-16%, depending on the venture), which provides services through 4
joint ventures in Madrid, Valencia, Aragon and Catalonia, Spain; and (iv)
National Business Communications ("NBC") (58%), which provides services in
Bucharest, Cluj, Brasov, Constanta and Timisoira, Romania. A portion of the
Communications Group's interest in NBC is held directly. Includes $30,097
and $215,000, respectively, contributed and loaned, respectively, to NBC
directly by the Company.
(5) Pre-operational.
(6) Paging One Services launched commercial paging service in Vienna, Austria
in February 1997.
(7) Spectrum, owned in part by the Communication Group's Protocall joint
venture, launched commercial trunked mobile radio service in Almaty and
Atyrau, Kazakstan in March 1997.
(8) Baltcom GSM launched commercial GSM cellular service in Latvia in March
1997.
(9) Metromedia-Jinfeng is a pre-operational joint venture that plans to provide
wireless local loop telecommunications equipment, financing, network
planning, installation and maintenance services to telecommunications
operators in the PRC.
Generally, the Communications Group owns, on average, 50% or more of the
equity in a joint venture with the balance of such equity being owned by a local
entity, often a government-owned enterprise. Typically, the Communications
Group's joint venture provides frequency licenses and/or transmission
facilities. In some cases, the Communications Group owns or acquires interests
in entities (including competitors) that are already licensed and are providing
service. Each joint venture's day-to-day activities is 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 Company loans
funds to a joint venture provides the Company with the right to appoint the
general manager of the joint venture and to approve unilaterally the annual
business plan of the venture. These rights continue so long as amounts are
outstanding under the credit agreement. In other cases, such rights may also
exist by reason of the Company'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, the joint ventures' equity holders have limited liability
to the extent of their investment. Under the joint venture agreements, each of
the Communications Group and
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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 Company has established or plans to establish an agreement with
the joint venture whereby, in addition to cash contributions by the Company,
each of the Company and the local partner makes in-kind contributions (usually
communications equipment in the case of the Company 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 Company pursuant to which the
Company loans the venture certain funds. Typically, such credit agreements
provide for interest payments to the Company at rates ranging generally from
prime to prime plus 6% and for payment of principal and interest from 90% of the
joint venture's available cash flow. Prior to repayment of its credit agreement,
the joint ventures are significantly limited or prohibited from distributing
profits to its shareholders. As of December 31, 1996, the Company 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 Company) and
(ii) up to an additional $18.9 million to fund the various credit lines the
Company has extended to its joint ventures. The Company's funding commitments
under such credit lines are contingent upon its approval of the joint ventures'
business plans. To the extent that the Company does not approve a joint
venture's business plan, the Company is not required to provide funds to such
joint venture under the credit line. The distributions (including profits) from
the joint venture to the Company and the local partner are made on a pro rata
basis in accordance with their respective ownership interests.
In addition to loaning funds to the joint ventures, the Communications Group
often provides certain services to many of the joint ventures for a 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 Company institutes various payment mechanisms to have the
joint venture reimburse it for such services where they are provided. The
failure of the Company 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 will be subject to taxation.
The laws in the Communications Group's markets vary markedly with respect to the
tax treatment of distributions to joint venture partners and such laws have also
recently been revised significantly in many of the Communications Group's
markets. There can be no assurance that such laws will not continue to undergo
major changes in the future which could have a significant negative impact on
the Company 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 Entertainment Group also holds
a valuable library of over 2,200 feature film and television titles, including
Academy Award-Registered Trademark- 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 and
GUYS AND DOLLS. This library provides the Entertainment Group 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 theaters and
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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. 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, THREESOME and the Academy
Award-Registered Trademark- 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-Registered Trademark- nominated best foreign language feature film
PRISONER OF THE MOUNTAINS, which was released in January 1997. The Entertainment
Group also owns Landmark, which management believes is the leading specialty
theatre circuit in the United States, consisting of 50 theatres with a total of
138 screens at December 31, 1996.
LOW COST 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 produced or acquired by the major
motion picture studios. The Company believes that the Entertainment Group 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. The Entertainment Group also
plans to continue to be a leader in the production, acquisition and distribution
of specialized motion pictures and art films, including those films management
believes may have crossover commercial potential. 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 earlier 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 Entertainment
Group's portion of the production cost will generally range from $5.0 million to
$10.0 million. The Entertainment Group 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 Entertainment Group'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 Entertainment Group intends to finance a
significant portion of each film's budget by "pre-selling" or pre-licensing
foreign distribution rights. Furthermore, certain of the Entertainment Group's
executives will, on behalf of the Company, enter into "producer-for-hire"
agreements with other studios for which the Entertainment Group 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.
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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, Orion theatrically released a number of films produced
by Live Entertainment for which Orion 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, the Company
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 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 arthouse pictures. During 1996, the
Entertainment Group released 13 pictures including, BIG NIGHT, I SHOT ANDY
WARHOL, 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.
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The following is a list of the Entertainment Group's scheduled 1997
releases:
<TABLE>
<CAPTION>
EXPECTED RELEASE
RELEASE DATE TITLE CAST DESCRIPTION LABEL
- ------------ ------------------------------ ------------------- ------------------------------ -------------
<S> <C> <C> <C> <C>
JANUARY 31 PRISONER OF THE MOUNTAINS (1) Oleg Menshikov An Academy ORION
Sergei Bodrov, Jr. Award-Registered Trademark- CLASSICS
nominee and 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 GOLDWYN
Samuel L. Jackson seasoned gambler whose
John C. Reilly friendship with a young man is
Phillip Baker Hall threatened by a dark secret
from his past.
MARCH 7 CITY OF INDUSTRY (1) Harvey Keitel A hard-edged film-noir ORION
Stephen Dorff thriller concerning two
Timothy Hutton brothers, small time L.A.
Famke Janssen criminals, whose 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 DUFFLE BAG Joe Pesci A raucous comedy about a mob ORION
(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
SUMMER ULEE'S GOLD (4) Peter Fonda A Jonathan Demme (Academy ORION
Patricia Richardson Award-Registered Trademark-
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.
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.
</TABLE>
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<TABLE>
<CAPTION>
EXPECTED RELEASE
RELEASE DATE TITLE CAST DESCRIPTION LABEL
- ------------ ------------------------------ ------------------- ------------------------------ -------------
<S> <C> <C> <C> <C>
SEPTEMBER 17 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.
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 ORION
Dean Cain friends in a nowhere town
Luke Wilson headed for their buddies'
Sean Patrick wedding whose lives take a
Flanery major detour as they find
Andy Dick themselves holding up a bank
Mitchell Whitfield in a rebellious search for
Fred Ward independence.
TBA STOREFRONT HITCHCOCK (4) Robyn Hitchcock A concert/performance film ORION
showcasing the singular CLASSICS
personal style of British
singer/songwriter Robyn
Hitchcock, directed by
Jonathan Demme, who directed
Orion's Academy
Award-Registered Trademark-
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 FIREWORKS Billy Zane A film-noir potboiler, set in ORION
(1) Gina Gershon the 1950's, based on one of CLASSICS
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 TOUCH Julie Davis A bold and sexy romantic GOLDWYN
ME (1) comedy 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.
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HOME VIDEO. The Entertainment Group distributes its own product and product
produced by third parties, in the United States and Canada, through its in-house
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) and other emerging multimedia formats. The
Company provides exclusive distribution services for Major League Baseball
Properties home video product which the Entertainment Group believes it was able
to attract because of its existing home video distribution system.
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. 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 the Entertainment Group 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 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 aggressively
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 freshness and 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 CIRCUIT
The Entertainment Group believes that its Landmark theatre circuit, with, at
December 31, 1996, 138 screens in 50 theaters, is the largest exhibitor of
specialized motion pictures 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 revenues and cash flow from its
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existing theaters by capitalizing on the demand for art and specialty films in
the U.S. by continuing to reduce operating and overhead costs as a percentage of
revenues.
Landmark currently operates theaters in 18 cities in California, Colorado,
Louisiana, Massachusetts, Minnesota, Ohio, Texas, Washington and Wisconsin.
Landmark 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
Landmark is approximately 39,000, of which 56% is in theaters located in
California. The following table summarizes the location and number of theaters
and screens operated by Landmark:
<TABLE>
<CAPTION>
LOCATION THEATERS SCREENS
- -------------------------------------------------------------------------- ------------- -----------
<S> <C> <C>
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
</TABLE>
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 theaters than commercial films produced by the major studios.
Exhibitors of wide-release films typically must commit a substantial percentage
of their screens to a small number of films. Landmark typically shows
approximately 30 to 40 different films on its screens at any given time. In the
normal course of its business, Landmark actively pursues opportunities to
acquire or construct new theaters in promising locations and closes theaters
that are not performing well or for which it may not be feasible to renew the
lease.
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 histories of obtaining film properties, as well as 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
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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 theaters. 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, Landmark faces direct competition in each market from local or
regional exhibitors of specialized motion pictures and art films. To a lesser
degree, Landmark 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 Landmark. Many of these companies have greater financial and other
resources than Landmark. 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 Landmark 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. Landmark 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
Studios, Inc., Warner Bros. (including New Line Cinema), Twentieth Century Fox,
Sony Pictures Entertainment (including Columbia Pictures, Tri-Star Pictures and
Sony Classics), Paramount Pictures, 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. The average reported cost of making a film in
1995-96 was approximately $39.8 million, and the average reported cost of
marketing and advertising a film in the same period was approximately $19.8
million, making the total reported cost of an average film approximately $60
million.
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
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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 $40 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.
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.
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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
theaters 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:
<TABLE>
<CAPTION>
MONTHS AFTER APPROXIMATE
INITIAL RELEASE RELEASE PERIOD
--------------- ---------------
<S> <C> <C>
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
</TABLE>
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.
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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.
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.
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.
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"), each DVD 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
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believes that it will experience additional demand for its library product,
particularly sell-through product, as DVD equipment becomes more prevalent.
DTH. Recently, a number of international, well-capitalized companies have
launched DTH systems in the United States (such as DirecTV, USSB, ASkyB) and in
other major markets, including Japan (such as DirecTV, Perfect TV, JSKYB). Each
of these systems will require programming for their multi-channel systems
thereby creating additional demand for the Company's library.
SNAPPER
Snapper manufactures Snapper-Registered Trademark- 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 dealers and distributors prior to this period, the
largest volume of sales to the ultimate consumer is made during this time. The
main sales revenues during the late fall and winter periods are related to snow
thrower 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 to the program is non-recourse to Snapper. If there is a default and the
equipment is retained by the dealer inventory, Snapper is obligated to
repurchase any 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 over time. Customers also receive Snapper credit cards
which can be used to purchase additional Snapper products.
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 to 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 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-Registered Trademark-" 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
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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 Co., American Yard Products, Inc., MTD
Products, Inc. and Simplicity Manufacturing, Inc.
INVESTMENT IN 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, the Company 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.
LEGAL PROCEEDINGS
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 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., predecessor to Triton Group Ltd.
("Intermark"), which owned approximately 25% of the outstanding shares of the
Common Stock. The Company was named as a nominal defendant in this lawsuit. The
action was brought derivatively in the right and on behalf of the Company and
was purportedly filed as a class action lawsuit on behalf of all holders of the
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 attorney's fees. On December 29, 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.
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. The complaint alleges that Goldwyn's Board of Directors breached
its fiduciary duties to the stockholders of Goldwyn by agreeing to sell Goldwyn
to the Company at no premium, yet providing Mr. Samuel Goldwyn, Jr., The Samuel
Goldwyn, Jr. Family Trust and Mr. Meyer Gottlieb with additional consideration,
and seeks damages resulting therefrom. The Company believes that the suit is
without merit and intends to vigorously defend such action.
71
<PAGE>
ENVIRONMENTAL MATTERS
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 1996, 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.
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") that 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. The Opelika Property was transferred to the
Company's wholly-owned subsidiary in connection with the sale of the Company's
former sporting goods subsidiary. In connection with such sale, the Company
entered into an Environmental Indemnity Agreement (the "Environmental Indemnity
Agreement") under which the Company is obligated for costs and liabilities
resulting from the presence on or migration of regulated materials from the
Opelika Property. The Company's obligations under the Environmental Indemnity
Agreement with respect to the Opelika Property are not limited. The
Environmental 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 the remediation 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.
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MANAGEMENT
The executive officers of the Company and certain executive officers of the
Company's subsidiaries and their respective ages and positions are as follows:
<TABLE>
<CAPTION>
NAME AGE OFFICE
- ----------------------------------------------------- --- -----------------------------------------------------
<S> <C> <C>
John W. Kluge........................................ 82 Chairman
Stuart Subotnick..................................... 55 Vice Chairman, President and Chief Executive Officer
Silvia Kessel........................................ 46 Executive Vice President, Chief Financial Officer and
Treasurer
Arnold L. Wadler..................................... 53 Executive Vice President, General Counsel and
Secretary
Robert A. Maresca.................................... 62 Senior Vice President
COMMUNICATIONS GROUP:
Carl C. Brazell...................................... 55 Co-President
Richard J. Sherwin................................... 53 Co-President
ENTERTAINMENT GROUP:
Samuel Goldwyn, Jr. ................................. 70 Chairman of Goldwyn
Meyer Gottlieb....................................... 57 President and Chief Operating Officer of Goldwyn
Bradley R. Krevoy.................................... 40 Senior Executive Vice President of Orion and
Co-President of MPCA
Steven Stabler....................................... 41 Senior Executive Vice President of Orion and
Co-President of MPCA
Leonard White........................................ 56 President and Chief Executive Officer of Orion
</TABLE>
The following is a biographical summary of the experience of the executive
officers of the Company and certain executive officers of the Company's
subsidiaries.
MR. KLUGE has served as Chairman of the Board of Directors of the Company
since the consummation of the November 1 Merger and as Chairman of the Board of
Orion since 1992. In addition, Mr. Kluge has served as Chairman and President of
Metromedia Company and its predecessor-in-interest, Metromedia, Inc. for over
six 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 since
the consummation of the November 1 Merger and as President and Chief Executive
Officer of the Company since December, 1996. In addition, Mr. Subotnick has
served as Vice Chairman of the Board of Orion since November 1992. Mr. Subotnick
has served as Executive Vice President of Metromedia Company and its
predecessor-in-interest, Metromedia, Inc., for over six years. Mr. Subotnick is
also a director of Carnival Cruise Lines, Inc, and, since February 28, 1997,
RDM. 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, from November 1, 1995 until that date,
as Senior Vice President, Chief Financial Officer and Treasurer of the Company.
In addition, Ms. Kessel has served 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 and a Director of Orion from June 1991 to November 1992
and Managing Director of Kluge & Company (and its predecessor) from
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<PAGE>
April 1990 to January 1994. Ms. Kessel has been a member of the Board of
Directors of RDM since February 28, 1997. 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, from November 1, 1995 until that date, as
Senior Vice President, General Counsel and Secretary of the Company. In
addition, Mr. Wadler has served as a Director of Orion since 1991 and as Senior
Vice President, Secretary and General Counsel of Metromedia Company for over six
years. Mr. Wadler is Chairman of the Nominating Committee of the Company.
MR. MARESCA has served as a Senior Vice President of the Company since
November 1, 1995. Mr. Maresca has served as a Senior Vice President--Finance of
Metromedia Company for over six years.
MR. BRAZELL has served as Co-President and Director of MITI and a
predecessor company since 1993. Prior to that time, Mr. Brazell served as
President and Chief Executive Officer of Command Communications, Inc., an owner
of radio properties, and prior to that served in various capacities in the radio
broadcasting industry, including serving as President of the radio division of
Metromedia, Inc., the predecessor-in-interest to Metromedia Company.
MR. SHERWIN has served as Co-President and Director of MITI and a
predecessor company since October, 1990. Prior to that time, Mr. Sherwin served
as the Chief Operating Officer of Graphic Scanning Corp., a paging and wireless
telecommunications company. Mr. Sherwin has served as Chairman of the Board and
a director of the Personal Communications Industry Association.
MR. GOLDWYN founded Goldwyn in 1979 and has been its Chairman of the Board
of Directors and Chief Executive Officer since that time. Mr. Goldwyn has been
involved in the filmed entertainment business his entire adult life and has
produced a number of feature films. Mr. Goldwyn is also a prize-winning
documentary producer, an Emmy Award-winning television producer, a writer for
theatrical motion pictures and television and a director. Mr. Goldwyn has served
as a member of the Board of Governors of the Academy of Motion Picture Arts and
Sciences.
MR. GOTTLIEB has served as Chief Operating Officer and a director of Goldwyn
since 1979 and President of Goldwyn since 1987. Mr. Gottlieb assisted Mr.
Goldwyn in creating the business plan which resulted in the founding of Goldwyn.
From 1975 to 1979, Mr. Gottlieb was associated with Mr. Goldwyn in various
executive positions in the motion picture production and distribution
organization that was the predecessor to Goldwyn. Mr. Gottlieb is a member of
the Academy of Motion Picture Arts and Sciences.
MR. KREVOY has served as the Co-Chairman of the Board of Directors and
Co-President of MPCA since 1985. From the inception of MPCA in 1985 until the
present, Mr. Krevoy has presided over all aspects of MPCA's film production and
corporate management, sharing duties with Mr. Stabler. Mr. Krevoy's recent
production credits include BEVERLY HILLS NINJA, DUMB AND DUMBER, IF LUCY FELL,
BIO-DOME and THREESOME. Prior to MPCA, Mr. Krevoy served as Executive Vice
President of Concorde Pictures and President of Concorde Pictures International,
overseeing the completion of more than 200 motion pictures. Mr. Krevoy is a
member of the executive branch of the Academy of Motion Picture Arts and
Sciences.
MR. STABLER has served as the Co-Chairman of the Board of Directors and
Co-President of MPCA since 1985. From the inception of MPCA in 1985 until the
present, Mr. Stabler has presided over all aspects of MPCA's film production and
corporate management, sharing duties with Mr. Krevoy, Mr. Stabler's production
credits include BEVERLY HILLS NINJA, DUMB AND DUMBER, IF LUCY FELL, BIO-DOME and
THREESOME. Prior to 1985, Mr. Stabler spent two years working in both the News
and Network Operations Departments of ABC Television. Mr. Stabler is currently a
member of the Directors' Guild of America and the Academy of Motion Picture Arts
and Sciences.
MR. WHITE has served as President and Chief Executive Officer of Orion since
March 1992. He served as interim president and Chief Executive Officer of Orion
from March 1992 until November 1992. Prior to that time, Mr. White was the
Chairman of the Board of Directors and the Chief Executive Officer of Orion
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<PAGE>
Home Entertainment Corporation, a subsidiary of Orion ("OHEC"), from March 1991
until March 1992 and President and Chief Operating Officer of the Orion Home
Video Division of OHEC from March 1987 until March 1991. Mr. White is a member
of the executive branch of the Academy of Motion Picture Arts and Sciences.
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<PAGE>
PRINCIPAL STOCKHOLDERS
The following table sets forth the beneficial ownership of the Common Stock
with respect to (i) each director of the Company, (ii) executive officers of the
Company and the Company's subsidiaries and (iii) all of such persons as a group.
<TABLE>
<CAPTION>
NUMBER OF SHARES OF
COMMON STOCK BENEFICIALLY PERCENTAGE OF
NAME OF BENEFICIAL OWNER OWNED (1) COMMON STOCK
- -------------------------------------------------------------- ------------------------- -----------------
<S> <C> <C>
Carl C. Brazell............................................... 138,535(2) *
Samuel Goldwyn Jr............................................. 1,695,605 2.6%
Meyer Gottlieb................................................ 116,145(3) *
John P. Imlay, Jr............................................. 20,000(4) *
Clark A. Johnson.............................................. 38,000(4)(5) *
Bradley R. Krevoy............................................. 937,729 1.4
John W. Kluge................................................. 15,040,903(4)(6) 22.7
Robert A. Maresca............................................. 30,000(7) *
Silvia Kessel................................................. 103,085(8) *
Carl E. Sanders............................................... 42,097(4)(5)(9) *
Richard J. Sherwin............................................ 912,605(10) 1.4
Steven Stabler................................................ 647,863 1.0
Stuart Subotnick.............................................. 12,666,680(4)(11) 19.2
Arnold L. Wadler.............................................. 115,415(8) *
Leonard White................................................. 100,000(8) *
All Directors and Officers as a group (15 persons)............ 20,189,207 30.5%
</TABLE>
- ------------------------
* Holdings do not exceed one percent of the total outstanding shares of Common
Stock.
(1) Unless otherwise indicated by footnote, the named individuals have sole
voting and investment power with respect to the shares of Common Stock
beneficially owned.
(2) Includes 7,769 options issued under the Metromedia International
Telecommunications, Inc. 1994 Stock Plan, exercisable within 60 days of the
date hereof and 84,462 options issued under the Metromedia International
Group, Inc. 1996 Incentive Stock Plan (the "1996 Stock Plan"), exercisable
within 60 days of the date hereof.
(3) Includes 24,179 options issued under The Samuel Goldwyn Company Stock Awards
Plan, as amended, which options are exercisable within 60 days of the date
hereof.
(4) Includes 20,000 options issued under the 1996 Stock Plan, exercisable within
60 days of the date hereof.
(5) Includes 10,000 shares subject to purchase within 60 days of the date hereof
under the Company's 1991 Non-Employee Director Stock Plan.
(6) Represents 12,415,455 shares beneficially owned through Metromedia Company
and Met Telcell, Inc. ("Met Telcell"), a corporation owned and controlled by
Messrs. Kluge and Subotnick, and 2,605,448 shares of Common Stock owned
directly by a trust affiliated with Mr. Kluge.
(7) Includes 30,000 options issued under the 1996 Stock Plan, exercisable within
60 days of the date hereof.
(8) Includes 100,000 options issued under the 1996 Stock Plan, exercisable
within 60 days of the date hereof.
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<PAGE>
(9) Includes 600 shares subject to purchase by Mr. Sanders, pursuant to the
conversion of the $25,000 face amount (less than 1%) of the Company's 6 1/2%
Convertible Subordinated Debentures due 2002 beneficially owned by Mr.
Sanders, which are convertible into shares of Common Stock at a conversion
price of $41 5/8 per share, within 60 days of the date hereof.
(10) Includes options to purchase 657,908 shares of Common Stock, exercisable
within 60 days of the date hereof at an exercise price equal to $1.08.
(11) Represents 12,415,455 shares beneficially owned through Metromedia Company
and Met Telcell and 231,225 shares owned directly by Mr. Subotnick.
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<PAGE>
DESCRIPTION OF THE PREFERRED STOCK
GENERAL
Under the Company's Restated Certificate of Incorporation, the Company's
Board of Directors is authorized, without further stockholder action, to provide
for the issuance of up to 70,000,000 shares of preferred stock, par value $1.00
per share, in one or more series, with such voting powers or without voting
powers, and with such designations, preferences and relative, participating,
optional or other special rights, and qualifications, limitations or
restrictions, as shall be set forth in the resolutions providing therefor. As of
the date of this Prospectus, the Company has no preferred stock issued and
outstanding. The Preferred Stock, with respect to dividends and upon
liquidation, dissolution or winding up, will not rank junior to any future
preferred stock issued by the Company.
The Preferred Stock will, when issued, be fully paid and nonassessable. The
transfer agent, registrar, redemption, conversion and dividend disbursing agent
for shares of the Preferred Stock will be ChaseMellon Shareholder Services,
L.L.C. (the "Transfer Agent"). The Transfer Agent will send notices to
stockholders of any special meetings at which holders of the Preferred Stock
have the right to vote. See "-- Voting Rights" below.
Set forth below is a description of the terms of the Preferred Stock. The
following summary of the Preferred Stock does not purport to be complete and is
subject to, and qualified in its entirety by reference to, the provisions of the
Certificate of Designation of the % Cumulative Convertible Preferred Stock of
the Company (the "Certificate of Designation"), a copy of which is available
upon request from the Company. Application is being made to list the Preferred
Stock on the AMEX and the PSE.
DIVIDENDS
Holders of the Preferred Stock will be entitled to receive cumulative annual
dividends of $ per share, payable quarterly out of assets legally
available therefor on March 31, June 30, September 30 and December 31, of each
year, commencing , 1997 (with respect to the period from the Issue
Date to , 1997), when, as and if declared by the Board of Directors.
Dividends will accrue from the Issue Date. Dividends may, at the option of the
Company, be paid in cash, by delivery of fully paid and nonassessable shares of
Common Stock or a combination thereof. Dividends will be payable to holders of
record as they appear on the Company's stock register on such record dates, not
more than 60 days nor less than 10 days preceding the payment dates thereof, as
shall be fixed by the Company's Board of Directors. Dividends payable on the
Preferred stock for each full dividend period will be computed by dividing the
annual dividend rate by four. Dividends payable on the Preferred Stock for any
period less than a full dividend period will be computed on the basis of a
360-day year consisting of twelve 30-day months.
If the Company elects to pay dividends in shares of Common Stock, the number
of shares of Common Stock to be distributed will be calculated by dividing such
payment by 95% of the average closing price of the Common Stock on the AMEX for
the five trading day period (the "Market Value") ending on the dividend payment
date.
No dividends or distributions (other than a dividend or distribution in
stock of the Company ranking junior to the Preferred Stock as to dividends and
upon liquidation, other than the Common Stock) may be declared, made or paid or
set apart for payment upon the Common Stock or upon any other stock of the
Company ranking junior to or PARI PASSU with the Preferred Stock as to
dividends, nor may any Common Stock or any other stock of the Company ranking
junior to or PARI PASSU with the Preferred Stock as to dividends or upon
liquidation be redeemed, purchased or otherwise acquired for any consideration
(or any moneys paid to or made available for a sinking fund for the redemption
of any shares of any such stock) by the Company (except by conversion into or
exchange for stock of the Company ranking junior to the Preferred Stock as to
dividends and upon liquidation) unless full cumulative dividends have been or
78
<PAGE>
contemporaneously are paid or declared and a sum sufficient for the payment
thereof is set apart for such payment on the Preferred Stock for all dividend
payment periods terminating on or prior to the date of such declaration,
payment, redemption, purchase or acquisition. Notwithstanding the foregoing, if
full dividends have not been paid on the Preferred Stock and any other preferred
stock ranking PARI PASSU with the Preferred Stock as to dividends, dividends may
be declared and paid on the Preferred Stock and such other preferred stock so
long as the dividends are declared and paid PRO RATA so that the amounts of
dividends declared per share on the Preferred Stock and such other preferred
stock will in all cases bear to each other the same ratio that accrued and
unpaid dividends per share on the shares of the Preferred Stock and such other
preferred stock bear to each other; PROVIDED, that if such dividends are paid in
cash on the other preferred stock, dividends will also be paid in cash on the
Preferred Stock. Holders of shares of the Preferred Stock will not be entitled
to any dividend, whether payable in cash, property or stock, in excess of full
cumulative dividends. No interest, or sum of money in lieu of interest, will be
payable in respect of any dividend payment or payments which may be in arrears.
The Company's ability to declare and pay cash dividends and make other
distributions with respect to its capital stock, including the Preferred Stock,
is limited by provisions contained in various financing agreements which
restrict dividend payments to the Company by its subsidiaries. Similarly, the
Company's ability to declare and pay dividends may be limited by applicable
Delaware law. The Company does not anticipate having net profits from which to
pay dividends in the foreseeable future and will rely on the availability of
adequate surplus (the excess, if any, of total assets less total liabilities
over its capital).
LIQUIDATION PREFERENCE
In the event of any voluntary or involuntary dissolution, liquidation or
winding up of the Company, the holders of the Preferred Stock will be entitled
to receive and to be paid out of the Company's assets available for distribution
to its stockholders, before any payment or distribution is made to holders of
Common Stock or any other class or series of stock of the Company ranking junior
to the Preferred Stock upon liquidation, a liquidation preference in the amount
of $50 per share of the Preferred Stock, plus accrued and unpaid dividends. If
upon any voluntary or involuntary dissolution, liquidation or winding up of the
Company, the amounts payable with respect to the liquidation preference of the
Preferred Stock and any other shares of stock of the Company ranking as to any
such distribution PARI PASSU with the Preferred Stock are not paid in full, the
holders of the Preferred Stock and of such other shares will share PRO RATA in
proportion to the full distributable amounts to which they are entitled. After
payment of the full amount of the liquidating distribution to which they are
entitled, the holders of the Preferred Stock will have no right or claim to any
of the remaining assets of the Company. Neither the sale of all or substantially
all of the property or business of the Company (other than in connection with
the winding up of its business), nor the merger or consolidation of the Company
into or with any other corporation, will be deemed to be dissolution,
liquidation or winding up, voluntary or involuntary, of the Company.
OPTIONAL REDEMPTION
The Preferred Stock is not subject to any sinking fund or other similar
provisions. The Preferred Stock may not be redeemed prior to , 2000. On or
after , 2000, the Preferred Stock may be redeemed, in whole or in part, at
the option of the Company, in cash, by delivery of fully paid and nonassessable
shares of Common Stock or a combination thereof, upon not less than 30 days'
notice nor more than 60 days' notice, during the twelve-month periods commencing
on of the years indicated
79
<PAGE>
below, at the following redemption prices per share, plus in each case all
accrued and unpaid dividends to the date redemption date:
<TABLE>
<CAPTION>
REDEMPTION
PRICE PER
YEAR SHARE
- -------------------------------------------------------------------------------- ------------
<S> <C>
2000............................................................................ $
2001............................................................................
2002............................................................................
2003............................................................................
2004............................................................................
2005............................................................................
2006............................................................................
2007 and thereafter.............................................................
</TABLE>
In the event that fewer than all the outstanding shares of the Preferred
Stock are to be redeemed, the shares to be redeemed will be determined PRO RATA.
If the Company elects to make redemption payments in shares of Common Stock,
the number of shares of Common Stock to be distributed will be calculated by
dividing such payment by 95% of the Market Value for the period ending on the
redemption date.
From and after the applicable redemption date (unless the Company shall be
in default of payment of the redemption price), dividends on the shares of the
Preferred Stock to be redeemed on such redemption date shall cease to accrue,
said shares shall no longer be deemed to be outstanding, and all rights of the
holders thereof as stockholders of the Company (except the right to receive the
redemption price) will cease.
If any dividends on the Preferred Stock are in arrears, no shares of the
Preferred Stock will be redeemed unless all outstanding shares of the Preferred
Stock are simultaneously redeemed.
VOTING RIGHTS
Except as required by law, holders of the Preferred Stock will have no
voting rights except as set forth below or as otherwise required by law from
time to time.
If the dividends payable on the Preferred Stock are in arrears for six
quarterly periods, the holders of the Preferred Stock voting separately as a
class with the shares of any other preferred stock or preference securities
having similar voting rights will be entitled at the next regular or special
meeting of stockholders of the Company to elect two directors of the Company
(such voting rights will continue until such time as the dividend arrearage on
the Preferred Stock has been paid in full). The affirmative vote or consent of
the holders of at least 66 2/3% of the outstanding Preferred Stock will be
required for the issuance of any class or series of stock (or security
convertible into stock) of the Company ranking senior to the Preferred Stock as
to dividends, liquidation rights or voting rights and for amendments to the
Company's Restated Certificate of Incorporation that would affect adversely the
rights of holders of the Preferred Stock, including (i) any increase in the
authorized number of shares of preferred stock and (ii) the issuance of any
shares of Preferred Stock in excess of the number of shares of such stock
authorized in the Certificate of Designation thereof as of the date of the
original issuance of the Preferred Stock. In all such cases each share of
Preferred Stock shall be entitled to one vote.
CONVERSION RIGHTS
The Preferred Stock will be convertible at any time at the option of the
holder thereof into such number of whole shares of Common Stock as is equal to
the aggregate liquidation preference, plus accrued and unpaid dividends to the
date the shares of Preferred Stock are surrendered for conversion, divided by
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<PAGE>
a conversion price of $ , subject to adjustment as described below (such
price or adjusted price being referred to as the "Conversion Price"). A share of
Preferred Stock called for redemption will be convertible into shares of Common
Stock up to and including but not after, unless the Company defaults in the
payment of the amount payable upon redemption, the close of business on the date
fixed for redemption.
No fractional shares of Common Stock or securities representing fractional
shares of Common Stock will be issued upon conversion. Any fractional interest
in a share of Common Stock resulting from conversion will be paid in cash based
on the last reported sale price of the Common Stock on the AMEX at the close of
business on the trading day next preceding the date of conversion.
The Conversion Price is subject to adjustment (in accordance with formulas
set forth in the Certificate of Designation) in certain events, including (i)
any redemption payment or payment of a dividend (or other distribution) payable
in shares of Common Stock on any class of capital stock of the Company (other
than the issuance of shares of Common Stock in connection with the payment in
redemption for, of dividends on or the conversion of Preferred Stock); (ii) any
issuance to all holders of shares of Common Stock of rights, options or warrants
entitling them to subscribe for or purchase shares of Common Stock or securities
convertible into or exchangeable for shares of Common Stock at less than the
Market Value for the period ending on the date of conversion; PROVIDED, HOWEVER,
that no adjustment shall be made with respect to such a distribution if the
holder of shares of Preferred Stock would be entitled to receive such rights,
option or warrants upon conversion at any time of shares of Preferred Stock into
Common Stock and PROVIDED FURTHER, that if such options or warrants are only
exercisable upon the occurrence of certain triggering events, then the
Conversion Price will not be adjusted until such triggering events occur; (iii)
any subdivision, combination or reclassification of the Common Stock; (iv) any
distribution to all holders of shares of Common Stock of evidences of
indebtedness, shares of capital stock other than Common Stock, cash or other
assets (including securities, but excluding those dividends, rights, options,
warrants and distributions referred to above and dividends or distributions made
pursuant to any shareholder rights plan, "poison pill" or similar arrangement
and excluding regular dividends and distributions paid exclusively in cash and
dividends payable upon the Preferred Stock); (v) any distribution consisting
exclusively of cash (excluding any cash portion of distributions referred to in
(iv) above, or cash distributed upon a merger or consolidation to which the
second succeeding paragraph applies) to all holders of shares of Common Stock in
an aggregate amount that, combined together with (a) all other such all-cash
distributions made within the then-preceding 12-months in respect of which no
adjustment has been made and (b) any cash and the fair market value of other
consideration paid or payable in respect of any tender offer by the Company or
any of its subsidiaries for shares of Common Stock concluded within the then-
preceding 12-months in respect of which no adjustment has been made, exceeds 15%
of the Company's market capitalization (defined as the product of the
then-current market price of the Common Stock times the number of shares of
Common Stock then outstanding) on the record date of such distribution; and (vi)
the completion of a tender or exchange offer made by the Company or any of its
subsidiaries for shares of Common Stock that involves an aggregate consideration
that, together with (a) any cash and other consideration payable in a tender or
exchange offer by the Company or any of its subsidiaries for shares of Common
Stock expiring within the then-preceding 12-months in respect of which no
adjustment has been made and (b) the aggregate amount of any such all-cash
distributions referred to in (v) above to all holders of shares of Common Stock
within the then-preceding 12-months in respect of which no adjustments have been
made, exceeds 15% of the Company's market capitalization on the expiration of
such tender offer. No adjustment of the Conversion Price will be required to be
made until the cumulative adjustments amount to 1.0% or more of the Conversion
Price as last adjusted. The Company reserves the right to make such reductions
in the Conversion Price in addition to those required in the foregoing
provisions as it considers to be advisable in order that any event treated for
Federal income tax purposes as a dividend of stock or stock rights will not be
taxable to the recipients. In the event the Company elects to make such a
reduction in the conversion price, the Company will comply with the requirements
of Rule 14e-l under the
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Exchange Act, and any other securities laws and regulations thereunder if and to
the extent that such laws and regulations are applicable in connection with the
reduction of the Conversion Price.
In the event that the Company distributes rights or warrants (other than
those referred to in (ii) in the preceding paragraph) PRO RATA to holders of
shares of Common Stock, so long as any such rights or warrants have not expired
or been redeemed by the Company, the holder of any Preferred Stock surrendered
for conversion will be entitled to receive upon such conversion, in addition to
the shares of Common Stock issuable upon such conversion (the "Conversion
Shares"), a number of rights or warrants to be determined as follows: (i) if
such conversion occurs on or prior to the date for the distribution to the
holders of rights or warrants of separate certificates evidencing such rights or
warrants (the "Distribution Date"), the same number of rights or warrants to
which a holder of a number of shares of Common Stock equal to the number of
Conversion Shares is entitled at the time of such conversion in accordance with
the terms and provisions of and applicable to the rights or warrants and (ii) if
such conversion occurs after such Distribution Date, the same number of rights
or warrants to which a holder of the number of shares of Common Stock into which
such Preferred Stock was convertible immediately prior to such Distribution Date
would have been entitled on such Distribution Date in accordance with the terms
and provisions of and applicable to the rights or warrants. The Conversion Price
will not be subject to adjustment on account of any declaration, distribution or
exercise of such rights or warrants.
In case of any reclassification, consolidation or merger of the Company with
or into another person or any merger of another person with or into the Company
(with certain exceptions), or in case of any sale, transfer or conveyance of all
or substantially all of the assets of the Company (computed on a consolidated
basis), each share of Preferred Stock then outstanding will, without the consent
of any holder of Preferred Stock, become convertible only into the kind and
amount of securities, cash and other property receivable upon such
reclassification, consolidation, merger, sale, transfer or conveyance by a
holder of the number of shares of Common Stock into which such Preferred Stock
was convertible immediately prior thereto, after giving effect to any adjustment
event, who failed to exercise any rights of election and received per share the
kind and amount received per share by a plurality of non-electing shares.
In the case of any distribution by the Company to its stockholders of
substantially all of its assets, each holder of Preferred Stock will participate
PRO RATA in such distribution based on the number of shares of Common Stock into
which such holders' shares of Preferred Stock would have been convertible
immediately prior to such distribution.
CHANGE OF CONTROL
Notwithstanding the foregoing, upon a Change of Control (as defined below),
holders of Preferred Stock will have a one time option, upon not less than 30
days' notice nor more than 60 days' notice, to convert all of their outstanding
shares of Preferred Stock into shares of Common Stock at an adjusted Conversion
Price equal to the greater of (i) the Market Value for the period ending on the
Change of Control Date and (ii) 66.67% of the Market Value for the period ending
on the date of this Prospectus. In lieu of issuing the shares of Common Stock
issuable upon conversion in the event of a Change of Control, the Company may,
at its option, make a cash payment equal to the value of such Common Stock
otherwise issuable.
The Company's Certificate of Designation defines "Change of Control" as any
of the following events: (i) any merger or consolidation of the Company with or
into any person or any sale, transfer or other conveyance, whether direct or
indirect, of all or substantially all of the assets of the Company, on a
consolidated basis, in one transaction or a series of related transactions, if,
immediately after giving effect to such transaction, any "person" or "group"
(other than Metromedia Company and its affiliates) is or becomes the "beneficial
owner," directly or indirectly, of more than 50% of the total voting power, in
the aggregate, normally entitled to vote in the election of directors, managers,
or trustees, as applicable, of the transferee or surviving entity; (ii) when any
"person" or "group" (other than Metromedia Company and its
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affiliates) is or becomes the "beneficial owner," directly or indirectly, of
more than 50% of the total voting power, in the aggregate, normally entitled to
vote in the election of directors of the Company; or (iii) when, during any
period of 12 consecutive months after the original date of issuance of the
Preferred Stock, individuals who at the beginning of any such 12-month period
constituted the Board of Directors of the Company (together with any new
directors whose election by such Board or whose nomination for election by the
stockholders of the Company was approved by a vote of a majority of the
directors then still in office who were either directors at the beginning of
such period or whose election or nomination for election was previously so
approved) cease for any reason to constitute a majority of the Board of
Directors of the Company then in office.
For purposes of the definition of "Change of Control," (i) the terms
"person" and "group" shall have the meaning used for purposes of Rules 13d-3 and
13d-5 of the Exchange Act, as in effect on the original date of issuance of the
Preferred Stock, whether or not applicable and (ii) the term "beneficial owner"
shall have the meaning used in Rules 13d-3 and 13d-5 under the Exchange Act as
in effect on the original date of issuance of the Preferred Stock, whether or
not applicable, except that a "person" shall be deemed to have "beneficial
ownership" of all shares that any such person has the right to acquire, whether
such right is exercisable immediately or only after the passage of time or upon
the occurrence of certain events.
The phrase "all or substantially all" of the assets of the Company is likely
to be interpreted by reference to applicable state law at the relevant time, and
will be dependent on the facts and circumstances existing at such time. As a
result, there may be a degree of uncertainty in ascertaining whether a sale or
transfer is of "all or substantially all" of the assets of the Company.
The holders of shares of Preferred Stock at the close of business on a
dividend payment record date will be entitled to receive the dividend payment on
those shares (except that holders of shares called for redemption on a
redemption date between the record date and the dividend payment date will be
entitled to receive such dividend on such redemption date as indicated above) on
the corresponding dividend payment date notwithstanding the subsequent
conversion thereof or the Company's default in payment of the dividend due on
that dividend payment date. However, shares of Preferred Stock surrendered for
conversion during the period between the close of business on any dividend
payment record date and the close of business on the day immediately preceding
the applicable dividend payment date (except for shares called for redemption on
a redemption date during that period) must be accompanied by payment of an
amount equal to the dividend payable on the shares on that dividend payment
date. A holder of shares of Preferred Stock on a dividend payment record date
who (or whose transferee) tenders any shares for conversion on a dividend
payment date will receive the dividend payable by the Company on the Preferred
Stock on that date, and the converting holder need not include payment in the
amount of such dividend upon surrender of shares of Preferred Stock for
conversion. Except as provided above, the Company shall make no payment or
allowance for unpaid dividends, whether or not in arrears, on converted shares
or for dividends on the shares of Common Stock issued upon conversion.
BOOK ENTRY; THE DEPOSITORY TRUST COMPANY
The Depository Trust Company ("DTC") will act as securities depository for
the shares of Preferred Stock offered hereby. The shares of Preferred Stock will
be issued only as fully-registered securities registered in the name of Cede &
Co. (as nominee for DTC). One or more fully-registered global certificates will
be issued, representing in the aggregate the total number of shares of Preferred
Stock, and will be deposited with DTC (collectively, the "Global Certificate").
The laws of some jurisdictions require that certain purchasers of securities
take physical delivery of securities in definitive form. Such laws may impair
the ability to transfer beneficial interests in the shares of Preferred Stock
represented by a Global Certificate.
DTC is a limited-purpose trust company organized under the New York Banking
Law, a "banking organization" within the meaning of the New York Banking Law, a
member of the Federal Reserve
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System, a "clearing corporation" within the meaning of the New York Uniform
Commercial Code and a "clearing agency" registered pursuant to the provisions of
Section 17A of the Exchange Act. DTC holds securities that its participants
("Participants") deposit with DTC. DTC also facilitates the settlement among
Participants of securities transactions, such as transfers and pledges, in
deposited securities through electronic computerized book-entry changes in
Participants' accounts, thereby eliminating the need for physical movement of
securities certificates. Direct Participants include securities brokers and
dealers, banks, trust companies, clearing corporations and certain other
organizations ("Direct Participants"). DTC is owned by a number of its Direct
Participants and by the NYSE, the AMEX and the National Association of
Securities Dealers, Inc. Access to the DTC system is also available to others
such as securities brokers and dealers, banks and trust companies that clear
through or maintain a custodial relationship with a Direct Participant, either
directly or indirectly ("Indirect Participants").
Purchases of shares of Preferred Stock within the DTC system must be made by
or through Direct Participants, which will receive a credit for the Preferred
Stock on DTC's records. The ownership interest of each actual purchaser of a
share of Preferred Stock ("Beneficial Owner") is in turn to be recorded on the
Direct or Indirect Participant's records. Beneficial Owners will not receive
written confirmation from DTC of their purchases, but Beneficial Owners are
expected to receive written confirmations providing details of the transactions,
as well as periodic statements of their holdings, from the Direct or Indirect
Participants through which the Beneficial Owners purchased the Preferred Stock.
Transfers of ownership interests in the Preferred Stock are to be accomplished
by entries made on the books of Participants acting on behalf of Beneficial
Owners. Beneficial Owners will not receive certificates representing their
ownership interests in the Preferred Stock, except upon a resignation of DTC or
upon a decision by the Company to discontinue the book-entry system for the
Preferred Stock.
To facilitate subsequent transfers, all the Preferred Stock deposited by
Participants with DTC are registered in the name of DTC's nominee, Cede & Co.
The deposit of shares of Preferred Stock with DTC and their registration in the
name of Cede & Co. effect no change in beneficial ownership. DTC has no
knowledge of the actual Beneficial Owners of the Preferred Stock; DTC's records
reflect only the identity of the Direct Participants to whose accounts such
shares of Preferred Stock are credited, which may or may not be the Beneficial
Owners. The Participants will remain responsible for keeping account of their
holdings on behalf of their customers.
Conveyance of notices and other communications by DTC to Direct
Participants, by Direct Participants to Indirect Participants and by Direct
Participants and Indirect Participants to Beneficial Owners will be governed by
arrangements among them, subject to any statutory or regulatory requirements as
may be in effect from time to time.
Redemption notices with respect to the shares of Preferred Stock shall be
sent to Cede & Co. If less than all of the shares of Preferred Stock are being
redeemed, DTC's practice is to determine by lot the amount of the interest of
each Direct Participant in such securities to be redeemed.
Although voting with respect to the Preferred Stock is limited, in those
cases where a vote is required, neither DTC nor Cede & Co. will itself consent
or vote with respect to the Preferred Stock. Under its usual procedures, DTC
would mail an "Omnibus Proxy" (i.e., a proxy conferring on Direct Participants
the right to vote as their interests appear) to the Direct Participants as soon
as possible after the record date. The Omnibus Proxy assigns Cede & Co.'s
consenting or voting rights to those Direct Participants to whose accounts the
Preferred Stock are credited on the record date (identified in a listing
attached to the Omnibus Proxy). The Company believes that the arrangements among
DTC, Direct and Indirect Participants and Beneficial Owners will enable the
Beneficial Owners to exercise rights equivalent in substance to the rights that
can be directly exercised by a Direct Participant.
Cash distribution payments and distribution payments in shares of Common
Stock on the shares of Preferred Stock will be made to DTC. DTC's practice is to
credit Direct Participants' accounts on the relevant payment date in accordance
with their respective holdings shown on DTC's records unless DTC
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has reason to believe that it will not receive payments on such payment date.
Payments by Participants to Beneficial Owners will be governed by standing
instructions and customary practices, as is the case with securities held for
the account of customers in bearer form or registered in "street name," and will
be the responsibility of such Participant and not of DTC or the Company, subject
to any statutory or regulatory requirements as may be in effect from time to
time. Payment of distributions to DTC is the responsibility of the Company,
disbursement of such payments to Direct Participants is the responsibility of
DTC and disbursement of such payments to the Beneficial Owners is the
responsibility of Direct and Indirect Participants.
Except as provided herein, a Beneficial Owner in a Global Certificate will
not be entitled to receive physical delivery of shares of Preferred Stock.
Accordingly, each Beneficial Owner must rely on the procedures of DTC to
exercise any rights under the Preferred Stock, including elections as to form of
payment.
DTC may discontinue providing its services as securities depositary with
respect to the Preferred Stock at any time by giving reasonable notice to the
Company. Under such circumstances, in the event that a successor securities
depositary is not obtained, certificates representing the shares of Preferred
Stock will be printed and delivered. If the Company decides to discontinue use
of the system of book-entry transfers through DTC (or a successor depositary),
certificates representing the shares of Preferred Stock will be printed and
delivered.
The information in this section concerning DTC and DTC's book-entry system
has been obtained from sources that the Company believes to be reliable, but the
Company takes no responsibility for the accuracy thereof.
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DESCRIPTION OF THE COMMON STOCK
The following summary description of the common stock of the Company does
not purport to be complete and is qualified in its entirety by reference to the
Company's Restated Certificate of Incorporation and to the description of the
Company's capital stock contained in its Registration Statement on Form 8-A,
filed with the Commission pursuant to the Securities Exchange Act of 1934, as
amended (the "Exchange Act") on November 1, 1995, which is incorporated herein
by reference.
GENERAL. The total number of shares of authorized stock is 470,000,000
shares, consisting of 70,000,000 shares of preferred stock, par value $1.00 per
share (the "Blank Check Preferred Stock"), and 400,000,000 shares of Common
Stock. Prior to this offering, there are no shares of Blank Check Preferred
Stock issued and outstanding and, as of December 31, 1996, there are 66,153,439
shares of Common Stock issued and outstanding.
DIVIDENDS. Holders of shares of Common Stock are entitled to receive such
dividends, if any, that may be declared from time to time by the Company's Board
of Directors in its discretion from funds legally available therefor, subject to
the dividend priority of the holders of Preferred Stock and other series of
preferred stock, if any. The holders of shares of Common Stock are also entitled
to share in any distribution to stockholders upon liquidation, dissolution or
winding up of the Company, subject to the prior liquidation rights of the
holders of Preferred Stock and other series of preferred stock, if any.
VOTING RIGHTS. Each holder of Common Stock is entitled to one vote for each
share held of record for all matters to be voted upon by the stockholders.
Directors of the Company are elected by a plurality of the votes of the shares
present in person or represented by proxy at the meeting and entitled to vote on
the election of directors.
BOARD OF DIRECTORS. The Board of Directors of the Company is divided into
three classes. Members of each class hold office until their successors are
elected and qualified. At each annual meeting of the stockholders of the
Company, the successors of the class of directors whose term expired at that
meeting are to be elected by a plurality vote of all votes cast at such meeting
and such directors hold office for a three-year term. Class I Directors are John
W. Kluge, Stuart Subotnick, and John P. Imlay, Jr; Class II Directors are
Richard J. Sherwin, and Leonard White; and Class III Directors are Clark A.
Johnson, Silvia Kessel, Carl E. Sanders and Arnold L. Wadler.
NO PREEMPTIVE RIGHTS. All outstanding shares of Common Stock are fully paid
and nonassessable. The holders of Common Stock do not have preemptive rights.
CERTAIN PROVISIONS OF THE RESTATED CERTIFICATE OF INCORPORATION AND BY-LAWS
GENERAL. The rights of stockholders of the Company are governed by Delaware
law and by the Company's Restated Certificate of Incorporation (the
"Certificate") and By-laws. The following does not purport to constitute a
detailed discussion of the provisions of Delaware law, or of the Certificate or
By-laws. Stockholders are referred to such law and the Certificate and By-laws
for a definitive treatment of the subject matter.
CLASSIFICATION OF THE BOARD OF DIRECTORS. Delaware law permits (but does
not require) classification of a corporation's board of directors into one, two
or three classes. The Certificate provides for a Board of Directors divided into
three classes. One class of directors was elected for a term that expired at the
annual meeting of stockholders held in 1997, a second class was elected for a
term expiring at the annual meeting of stockholders to be held in 1998, and the
third class was elected for a term expiring at the annual meeting of
stockholders to be held in 1999. Members of each class hold their respective
offices until their successors are elected and qualified. At each succeeding
annual meeting of stockholders, the successors of the class of directors whose
term expires at that meeting are elected by a plurality vote of all votes cast
at such meeting and will hold office for a three year term.
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AMENDMENTS TO BY-LAWS. Under Delaware law, the power to adopt, amend or
repeal By-laws rests with the stockholders entitled to vote. A Delaware
corporation may, however, in its certificate of incorporation, confer the power
to adopt, amend or repeal By-laws upon its directors. The Certificate and
By-laws provide that the By-laws may be amended by the affirmative vote of
either a majority of the Company's Board of Directors then in office or by the
holders of a majority of the outstanding capital stock of the Company entitled
to vote thereon.
REMOVAL OF DIRECTORS. Under Delaware law, although stockholders may
generally remove directors with or without cause by a majority vote,
stockholders may remove members of classified boards only for cause unless the
certificate of incorporation provides otherwise. The Certificate provides that
the Company's stockholders may only remove members of its Board of Directors for
cause.
POWER TO CALL SPECIAL MEETINGS OF STOCKHOLDERS. Under Delaware law, special
meetings of a corporation's stockholders may be called by the corporation's
Board of Directors or by such person or persons as may be authorized by its
certificate of incorporation or By-laws. The Certificate provides that special
meetings of stockholders may only be called by the Chairman or Vice Chairman of
the Company's Board of Directors.
ACTION BY WRITTEN CONSENT. Delaware law provides that, unless otherwise
provided in the certificate of incorporation, stockholders may act by written
consent in lieu of a meeting if consents are signed representing not less than
the minimum number of votes that would be necessary to take such action at a
meeting where all shares entitled to vote were present and voted. The
Certificate prohibits stockholder action by written consent. Accordingly, all
action by the Company's Stockholders must be taken at a duly called annual or
special meeting.
STOCKHOLDER NOMINATIONS AND PROPOSALS. The By-laws establish procedures
that must be followed for stockholders to nominate individuals to the Company's
Board of Directors or to propose business at the Company's annual meeting of
stockholders. In order to nominate an individual to the Board of Directors, a
Company stockholder must provide timely notice of such nomination in writing to
the Secretary of the Company and a written statement by the candidate of his or
her willingness to serve. Such notice must include the information required to
be disclosed in solicitations for proxies for election of directors pursuant to
Regulation 14A under the Exchange Act, along with the name, record address,
class and number of shares of Common Stock beneficially owned by the stockholder
giving such notice.
In order properly to propose that certain business come before the annual
meeting of stockholders, a stockholder of the Company must provide timely notice
in writing to the Secretary of the Company, which notice must include a brief
description of the business desired to be brought before the annual meeting and
the reasons for conducting such business at the annual meeting. In addition, the
notice must contain the name, record address, class and number of shares of the
Company's capital stock beneficially owned by the stockholder giving such
notice, any material interest of the stockholder in such business and all other
information that would be required to be filed with the Commission if such
person were a participant in a solicitation subject to Section 14 of the
Exchange Act.
To be timely, notice must be received by the Company not less than 60 days
nor more than 90 days prior to the first anniversary of the date of the
Company's annual meeting for the preceding year; PROVIDED, HOWEVER, that in the
event the date of annual meeting of stockholders is advanced by more than 30
days or delayed by more than 60 days from such anniversary date, such notice
must be received within ten days following public disclosure by the Company of
the date of the annual or special meeting at which directors are to be elected
or the proposed business is to be conducted. For purposes of this notice
requirement, disclosure shall be deemed to be first made when disclosure of such
date of the annual or special meeting of stockholders is first made in a press
release reported by the Dow Jones News Service, Associated Press or other
comparable national news services, or in a document which has been publicly
filed by the Company with the Commission pursuant to Sections 13, 14 or 15(d) of
the Exchange Act.
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STOCKHOLDER RIGHTS PLAN. The Board of Directors of the Company has
previously disclosed its intention to adopt a stockholder rights plan. Although
the exact terms of the rights plan are not known, it is anticipated that such
rights plan will cause substantial dilution to a person or group that attempts
to acquire the Company on terms not approved by the Company's Board. Such rights
plan may have an anti-takeover effect.
DESCRIPTION OF PRINCIPAL INDEBTEDNESS
The following table summarizes the indebtedness of the Company and its
consolidated subsidiaries as of December 31, 1996:
<TABLE>
<CAPTION>
AS OF DECEMBER
31, 1996
-----------------
<S> <C>
(IN THOUSANDS)
Entertainment Group Credit Facility........................................ $ 247,500
6 1/2% Convertible Debentures due August 1, 2002........................... 59,739
9 1/2% Subordinated Debentures due August 1, 1998.......................... 59,398
9 7/8% Senior Debentures due March 15, 1997................................ 15,038
10% Subordinated Debentures due October 1, 1999............................ 5,467
Snapper Revolver........................................................... 46,419
Other long-term debt, including capital leases............................. 25,498
--------
Total debt............................................................... $ 459,059
--------
--------
</TABLE>
ENTERTAINMENT GROUP CREDIT FACILITY
The Entertainment Group has entered into a Credit Facility (the
"Entertainment Group Credit Facility") with Chase Bank, as Agent ("Chase") for a
syndicate of lenders which provides for $300.0 million of financing to the
Entertainment Group, consisting of a secured term loan of $200.0 million (the
"Term Loan") and a revolving credit facility of $100.0 million, including a
$10.0 million letter of credit subfacility (the "Revolving Credit Facility"). On
July 2, 1996 the entire amount of the Term Loan and a portion of the Revolving
Credit Facility were used to refinance existing indebtedness of Orion, Goldwyn
and MPCA. The remaining amount of the Revolving Credit Facility has been used to
finance the Entertainment Group's production, acquisition and distribution of
motion pictures, for its domestic theatrical exhibition business and for general
working capital purposes. At December 31, 1996, $185.0 million of the Term Loan
was outstanding and $62.5 million of the Revolving Credit Facility was
outstanding.
Borrowings under the Entertainment Group Credit Facility which do not exceed
the "borrowing base" described below bear interest at the Entertainment Group's
option at a rate of LIBOR plus 2 1/2% or Chase's alternative base rate plus
1 1/2%, and borrowings in excess of the borrowing base, which have the benefit
of the guarantee referred to below, 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 which commenced on September 30, 1996,
with the remaining principal amount due at the final maturity date. The amount
of the Term Loan is based upon a "borrowing base" for the Entertainment Group
calculated using a percentage of its eligible outstanding accounts receivable
(including cash flow from the Entertainment Group's domestic theatrical
exhibition business) and a credit for the Entertainment Group's film and
television library. In addition to the amortization schedule described above,
the Entertainment Group Credit Facility provides that in the event that the
amount outstanding under the Term Loan exceeds the borrowing base, the
Entertainment Group must pay down the excess outstandings. 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 library. Amounts
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outstanding under the Revolving Credit Facility in excess of the borrowing base
are guaranteed jointly and severally by Metromedia Company and by John W. Kluge.
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 covenants
including maintenance of corporate existence, compliance with ERISA, maintenance
of properties, delivery of certain monthly, quarterly and annual financial
information, delivery of budgets and other information regarding new motion
picture productions and made-for-television movies, limitations on the issuance
of additional indebtedness and guarantees, limitations on the creation of new
liens, limitations on the development costs and budgets for such 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 Entertainment Group's theatrical exhibition subsidiary's
capital expenditures), prohibitions on the declaration of dividends or
distributions by the Entertainment Group (other than up to $15 million of
subordinated loans made by the Company to the Entertainment Group which may be
repaid to the Company), 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 Credit Facility
also contains financial covenants, including requiring maintenance by the
Entertainment Group of the ratio of the Entertainment Group's Free Cash Flow (as
defined in the Entertainment Group Credit Facility) to the Entertainment Group's
cumulative investment in film product above certain specified levels at the end
of each fiscal quarter, and requiring that the Entertainment Group's cumulative
investment in film product not exceed Free Cash Flow by more than certain
specified levels. In addition, the Entertainment Group Credit Facility contains
a minimum ratio of (a)(i) Theater Group EBITDA (as defined in the Entertainment
Group Credit Facility) plus (ii) Theater Group Occupancy Charges (as defined in
the Entertainment Group Credit Facility) to (b) Theater Group Occupancy Charges
for each rolling four quarter period.
The Revolving Credit Facility contains the following events of default:
nonpayment of principal or interest on the facility, the occurrence of a "change
of control" (as defined below) and an assertion by the guarantors of such
facility that the guarantee of such facility is unenforceable. For purposes of
the Revolving Credit Facility, "change of control" is defined to mean (i) a
change in ownership of Orion which results in it not being wholly owned by the
Company or (ii)(a) if Metromedia Company, its affiliates and executive officers
of the Company and the Entertainment Group do not control at least 20% of the
outstanding Common Stock or if Metromedia Company and its affiliates do not
control at least 15% of the outstanding Common Stock or (b) if a third party
controls more Common Stock than Metromedia Company and its affiliates or is
entitled to designate a majority of the members of the Company's Board of
Directors. The Term Loan portion of the Entertainment Group 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 below), 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.
For purposes of the Term Loan, a "change of management" is defined to mean a
termination of employment of Existing Management (as defined in the
Entertainment Group Credit Facility) and the objection to such person's
replacement by the required lenders within a designated period.
The Entertainment Group Credit Facility provides for a number of customary
conditions precedent to the making of loans to the Entertainment Group,
including the receipt of certain legal opinions and certificates, absence of any
material adverse change in the Entertainment Group's business and satisfaction
by Chase that certain existing liens have been removed.
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COMPANY'S 6 1/2% CONVERTIBLE SUBORDINATED DEBENTURES
The 6 1/2% Convertible Subordinated Debentures are due on August 1, 2002.
Such debentures are convertible into the Company's Common Stock at a conversion
price of $41 5/8 per share at the holder's option and do not require annual
principal payments. At the Company's option, the 6 1/2% Convertible Debentures
may be redeemed at any time at a price equal to 100% of the principal amount
plus accrued interest to such date.
9 7/8% SENIOR SUBORDINATED DEBENTURES
The 9 7/8% Senior Subordinated Debentures were paid in full during March
1997.
9 1/2% SUBORDINATED DEBENTURES
The 9 1/2% Subordinated Debentures are due on August 1, 1998. These
debentures do not require annual principal payments.
10% SUBORDINATED DEBENTURES
The 10% Subordinated Debentures are due on October 1, 1999 and are
redeemable at the option of the Company, in whole or in part, at 100% of the
principal amount plus accrued interest. 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.
SNAPPER REVOLVER
On November 26, 1996, Snapper entered into the Snapper Revolver with AmSouth
Bank of Alabama ("AmSouth") for a period ending on January 1, 1999 (the "Snapper
Revolver Termination Date"). The Snapper Revolver is guaranteed by the Company.
At December 31, 1996, $46.4 million was outstanding under the Snapper Revolver.
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)
or prime plus 1.5% (from May 26, 1997 to the Snapper Revolver Termination Date)
or (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 Revolver) 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 Revolver immediately after giving effect to such payment, (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 Revolver 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 million cash collateral account,
which was initially funded by Snapper. Under the Snapper Revolver,
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<PAGE>
AmSouth may draw upon amounts in this cash collateral account to satisfy any
payment defaults by Snapper and Messrs. Kluge and Subotnick are obligated to
replenish such account any time amounts are so withdrawn, up to the entire
amount of the Snapper Revolver.
Under the Snapper Revolver, 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 Revolver, a "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 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 the
covenants set forth in the Snapper Revolver. The Company and AmSouth have
amended the Snapper Revolver 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 Revolver, 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
the amendment. In addition, the Company and AmSouth have agreed to the major
terms and conditions of an additional $10 million credit facility. The closing
of the credit facility shall remain subject to the delivery of satisfactory loan
documentation.
The $10 million working capital facility will (i) have a PARI PASSU
collateral interest in all of Snapper's assets and the cash collateral account
referred to above with the Snapper Revolver, (ii) accrue interest on borrowings
at AmSouth's prime rate, floating (same borrowing rate as the Snapper Revolver),
(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) an additional $10 million interest-bearing deposit
made by the Company at AmSouth (this deposit will not be specifically pledged to
secure the Snapper Revolver or to secure the Company's obligations thereunder,
but AmSouth shall have the right of offset against such deposit as granted by
law and set forth in the Snapper Revolver).
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
The following discussion of certain of the Federal income tax consequences
of the purchase, ownership, and disposition of the Preferred Stock and any
Common Stock received as dividends thereon is based upon the provisions of the
Internal Revenue Code of 1986, as amended (the "Code"), the final, temporary and
proposed Treasury Regulations promulgated thereunder, and administrative rulings
and judicial decisions now in effect, all of which are subject to change
(possibly with retroactive effect) or different interpretations. This summary
does not purport to deal with all aspects of Federal income taxation that may be
relevant to an investor's decision to purchase shares of Preferred Stock, nor
any tax consequences arising under the laws of any state, locality or foreign
jurisdiction. This summary is not intended to be applicable to all categories of
investors, such as dealers in securities, banks, insurance companies, tax-exempt
organizations, foreign persons, persons that hold the Preferred Stock or Common
Stock as part of a straddle or conversion transaction, or holders subject to the
alternative minimum tax,
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which may be subject to special rules. In addition, this discussion is limited
to persons who hold the Preferred Stock or Common Stock as "capital assets"
(generally, property held for investment) within the meaning of Section 1221 of
the Code. ALL PROSPECTIVE PURCHASERS OF PREFERRED STOCK ARE ADVISED TO CONSULT
THEIR OWN TAX ADVISERS REGARDING THE FEDERAL, STATE, LOCAL, AND FOREIGN TAX
CONSEQUENCES OF THE PURCHASE, OWNERSHIP, AND DISPOSITION OF PREFERRED STOCK AND
COMMON STOCK RECEIVED AS DIVIDENDS THEREON.
CONSEQUENCES TO HOLDERS OF PREFERRED STOCK
DISTRIBUTIONS
The amount of any distribution with respect to the Preferred Stock will be
equal to the amount of cash or the fair market value of the shares of Common
Stock distributed. A share of Common Stock distributed by the Company will be
equal to the fair market value of Common Stock on the date of distribution. A
stockholder's holding period for such shares of Common Stock will commence on
the day following the date of distribution and will not include such
stockholder's holding period for the shares of Preferred Stock with respect to
which the shares of Common Stock were distributed. The amount of any
distribution with respect to Preferred Stock, whether paid in cash or in shares
of Common Stock, and the amount of any distribution with respect to Common Stock
will be treated as a dividend, taxable as ordinary income to the recipient
thereof, to the extent of the Company's current or accumulated earnings and
profits ("earnings and profits") as determined under Federal income tax
principles. To the extent that the amount of such distribution exceeds the
current and accumulated earnings and profits of the Company, the excess will be
applied against and will reduce the holder's tax basis in the Preferred Stock or
Common Stock, as the case may be. Any amount by which such distribution exceeds
the amount treated as a dividend and the amount applied against basis will be
treated as short-term or long-term capital gain, as the case may be, depending
upon the holder's holding period for the Preferred Stock or Common Stock.
DIVIDENDS TO CORPORATE SHAREHOLDERS
In general, a distribution that is treated as a dividend for Federal income
tax purposes and that is made to a corporate shareholder with respect to the
Preferred Stock or Common Stock will qualify for the 70% dividends-received
deduction under Section 243 of the Code. Holders should note, however, that
there can be no assurance that distributions with respect to the Preferred Stock
or the Common Stock will not exceed the amount of current or accumulated
earnings and profits of the Company in the future. Accordingly, there can be no
assurance that the dividends-received deduction will apply to distributions on
the Preferred Stock or Common Stock.
In addition, there are many exceptions and restrictions relating to the
availability of such dividends-received deduction such as restrictions relating
to (i) the holding period of stock the dividends on which are sought to be
deducted (ii) debt-financed portfolio stock, (iii) dividends treated as
"extraordinary dividends" for purposes of Section 1059 of the Code, and (iv)
taxpayers that pay alternative minimum tax. Corporate shareholders should
consult their own tax advisors regarding the extent, if any, to which such
exceptions and restrictions may apply to their particular factual situation.
On February 6, 1997, as part of President Clinton's Fiscal 1998 Budget
Proposal, the United States Treasury Department proposed legislation that would,
among other things, reduce a corporation's dividend-received deduction from 70%
to 50% on any dividends received from a less than 20%-owned (by vote and value)
U.S. corporation. Such legislation, if enacted, would be effective for dividends
paid or accrued more than 30 days after the date of enactment.
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SALE OR REDEMPTION
Upon a sale or other disposition (other than a redemption or exchange of
Preferred Stock for Common Stock for Preferred Stock) of Preferred Stock or
Common Stock, a holder will generally recognize capital gain or loss equal to
the difference between the amount of cash and the fair market value of property
received by the holder in such sale or other disposition and such holder's
adjusted tax basis in such shares. Such gain or loss will be short-term or
long-term gain or loss, as the case may be, depending on the holder's holding
period for such Preferred Stock or Common Stock.
Any gain or loss recognized by a holder upon redemption of the Preferred
Stock or Common Stock will be treated as gain or loss from the sale or exchange
of Preferred Stock or Common Stock, if, taking into account stock that is
actually or constructively owned as determined under Section 318 of the Code,
(i) such holder's interest in the Company's Common and Preferred Stock is
completely terminated as a result of the redemption; (ii) such holder's
percentage ownership in the Company's voting stock immediately after the
redemption is less than 80% of such percentage ownership immediately before such
redemption; or (iii) the redemption is "not essentially equivalent to a
dividend" (within the meaning of Section 302 of the Code).
If a redemption of the Preferred Stock or Common Stock is treated as a
distribution that is taxable as a dividend, the holder will be taxed on the
payment received in the same manner as described above under "--Distributions,"
and the holder's adjusted tax basis in the redeemed Preferred Stock or Common
Stock will be transferred to any remaining shares held by such holder in the
Company. If the holder does not retain any stock ownership in the Company
following the redemption, then such holder may lose such basis completely.
CONVERSION OR EXCHANGE OF PREFERRED STOCK
A holder of Preferred Stock will generally not recognize gain or loss by
reason of receiving Common Stock in exchange for Preferred Stock upon the
redemption or conversion of the Preferred Stock, except that gain or loss will
be recognized with respect to any cash received in lieu of fractional shares and
the fair market value of any shares of Common Stock attributable to dividend
arrearages will be treated as a constructive distribution as described above
under "--Distributions." The adjusted tax basis of the Common Stock (including
fractional share interests) so acquired will be equal to the tax basis of the
shares of Preferred Stock exchanged therefor and the holding period of the
Common Stock received upon conversion will include the holding period of the
shares of Preferred Stock exchanged. The tax basis of any Common Stock treated
as a constructive distribution taxable as a dividend will be equal to its fair
market value on the date of the exchange.
ADJUSTMENT OF CONVERSION PRICE
If at any time the Company makes a distribution of property to holders of
Preferred Stock that would be taxable to such stockholders as a dividend for
U.S. Federal income tax purposes and, in accordance with the antidilution
provisions, the Conversion Price of the Preferred Stock is decreased, the amount
of such decrease may be deemed to be the payment of a taxable dividend to
holders of Preferred Stock. For example, a decrease in the Conversion Price in
the event of distributions of indebtedness or assets of the Company will
generally result in deemed dividend treatment to holders of the Preferred Stock,
but generally, a decrease in the event of stock dividends or the distribution of
rights to subscribe for the Common Stock will not.
BACKUP WITHHOLDING
Under the backup withholding provisions of the Code and applicable Treasury
Regulations, a holder of Preferred Stock or Common Stock may be subject to
backup withholding at the rate of 31% with respect to dividends paid on, or the
proceeds of a sale, exchange or redemption of, Preferred Stock or Common
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Stock unless such holder (a) is a corporation or comes within certain other
exempt categories and when required demonstrates this fact or (b) provides a
taxpayer identification number, certifies as to no loss of exemption from backup
withholding, and otherwise complies with applicable requirements of the backup
withholding rules. The amount of any backup withholding from a payment to a
holder will be allowed as a credit against the holder's Federal income tax
liability and may entitle such holder to a refund, provided that the required
information is furnished to the Internal Revenue Service.
CONSEQUENCES TO THE COMPANY
LIMITATION ON USE OF NET OPERATING LOSSES
Under Section 382 of the Code, if the percentage of stock (by value) of a
corporation (the "Loss Corporation") that is owned by one or more "five-percent
shareholders" has increased by more than 50 percentage points over the lowest
percentage of stock owned by the same shareholders during a three year testing
period (an "Ownership Change"), the use of pre-Ownership Change net operating
losses of the Loss Corporation following such Ownership Change will be limited
based on the value of the Loss Corporation on the date the Ownership Change
occurs (a "Section 382 Limitation"). As of the end of its most recent taxable
year, the Company and various corporations comprising the Entertainment Group
and the Communications Group have net operating losses that are currently
subject to Section 382 Limitations. Although the Company believes that the
issuance of the Preferred Stock should not result in an Ownership Change, future
equity issuances or transactions among shareholders may trigger an Ownership
Change. If such an Ownership Change occurs, the Company's use of its net
operating losses (or those of corporations comprising the Entertainment Group
and the Communications Group) will be subject to a Section 382 Limitation based
on the value of the Company on the date of such an Ownership Change.
In light of the current Section 382 Limitations, and other current
limitations on the use of net operating losses by the Company and such
corporations comprising the Entertainment Group and the Communications Group,
the Company has reflected these net operating losses on its financial statements
as a deferred tax asset, but has taken a full valuation allowance against (and
has thereby fully eliminated) the deferred tax asset under generally accepted
accounting principles.
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UNDERWRITING
Subject to the terms and conditions set forth in the Underwriting Agreement
(the "Underwriting Agreement"), the underwriters named below (the
"Underwriters"), for whom Donaldson, Lufkin & Jenrette Securities Corporation is
acting as representative (the "Representative"), have severally agreed to
purchase from the Company, the shares of Preferred Stock set forth opposite the
name of such Underwriter below:
<TABLE>
<CAPTION>
NUMBER OF SHARES
UNDERWRITERS OF PREFERRED STOCK
- ---------------------------------------------------------------------------------------------- ------------------
<S> <C>
Donaldson, Lufkin & Jenrette Securities Corporation...........................................
Goldman, Sachs & Co...........................................................................
BT Securities Corporation.....................................................................
----------
Total................................................................................... 2,500,000
----------
----------
</TABLE>
The Underwriting Agreement provides that the obligations of the several
Underwriters to pay for and accept delivery of the shares of Preferred Stock
offered hereby are subject to approval of certain legal matters by counsel and
to certain other conditions. The Underwriters are obligated to take and pay for
all the shares of Preferred Stock offered hereby (other than in connection with
the over-allotment option described below) if any are taken.
The Representative has advised the Company that the Underwriters propose to
offer the shares of Preferred Stock directly to the public initially at the
public offering price set forth on the cover page of this Prospectus and to
certain dealers at such price less a concession not in excess of $ per
share. Any Underwriter may allow, and such dealers may reallow, a discount not
in excess of $ per share to any other Underwriter and to certain other
dealers. After the initial public offering of the shares of Preferred Stock, the
public offering price and other selling terms may be changed by the
Representative.
Pursuant to the Underwriting Agreement, the Company has granted to the
Underwriters an option, exercisable for 30 days from the date hereof, to
purchase up to an additional 375,000 shares of Preferred Stock at the public
offering price less the underwriting discounts and commissions set forth on the
cover page hereof. The Underwriters may exercise such option to purchase
additional shares solely for the purpose of covering over-allotments, if any,
made in connection with the sale of the shares of Preferred Stock offered
hereby. To the extent such over-allotment option is exercised, each Underwriter
will become obligated, subject to certain conditions, to purchase the same
percentage of such additional shares as the number set forth next to such
Underwriter's name in the preceding table bears to the total number of shares
set forth on the cover page hereof.
The Company, certain stockholders and the directors and executive officers
of the Company will agree with the Underwriters not to offer, sell, grant any
other option to purchase or otherwise dispose of, directly or indirectly, any
shares of Common Stock or any securities convertible into or exercisable or
exchangeable for, or warrants, rights or options to acquire, Common Stock, or
enter into any agreement to do any of the foregoing for a period of 180 days
after the date of this Prospectus, without the prior written consent of the
Representative.
The Company and its direct and indirect subsidiaries have agreed to
indemnify the Underwriters against certain liabilities, including liabilities
under the Securities Act, or to contribute to payments the Underwriters may be
required to make in respect thereof.
In connection with this Offering, the Underwriters may engage in
transactions that stabilize, maintain or otherwise affect the price of the
Preferred Stock. Specifically, the Underwriters may overallot this Offering,
creating a syndicate short position. In addition, the Underwriters may bid for,
and purchase,
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shares of the Preferred Stock in the open market to cover syndicate shorts or to
stabilize the price of the Preferred Stock. Finally, the underwriting syndicate
may reclaim selling concessions allowed for distributed Preferred Stock (in
syndicate covering transactions, in stabilization transactions or otherwise. Any
of these activities may stabilize or maintain the market price of the Preferred
Stock above independent market levels. The underwriters are not required to
engage in these activities, and may end any of these activities at any time.
The Representative from time to time performs investment banking and other
financial services for the Company and its affiliates for which it receives
advisory or transaction fees, as applicable, of the nature and in amounts
customary in the industry for such services plus reimbursement for out-of-pocket
expenses. The Representative and its affiliates collectively own approximately
600,000 shares of the Common Stock.
LEGAL MATTERS
Certain legal matters in connection with the offering of the Preferred Stock
will be passed upon for the Company by Paul, Weiss, Rifkind, Wharton & Garrison,
New York, New York. Certain legal matters in connection with the offering of the
Preferred Stock will be passed upon for the Underwriters by Skadden, Arps,
Slate, Meagher & Flom LLP, Los Angeles, California.
EXPERTS
The consolidated financial statements and related schedules for Metromedia
International Group, Inc. as of December 31, 1996 and December 31, 1995 and for
each of the years in the two-year period ended December 31, 1996, and for the
year ended February 28, 1995 have been included and incorporated by reference
herein in reliance upon the report of KPMG Peat Marwick LLP, independent
certified public accountants included and incorporated by reference herein, and
upon the authority of said firm as experts in accounting and auditing.
The consolidated financial statements and related schedules of The Actava
Group Inc. appearing in The Actava Group Inc. Annual Report on Form 10-K for the
year ended December 31, 1994, as amended, have been audited by Ernst & Young
LLP, independent auditors, as set forth in their report thereon included therein
and incorporated herein by reference. Such consolidated financial statements and
related schedules are incorporated by reference in reliance upon such report
given upon the authority of such firm as experts in accounting and auditing.
The consolidated financial statements and related schedules of The Samuel
Goldwyn Company as of March 31, 1996 and 1995 and for the three years ended
March 31, 1996, appearing in The Samuel Goldwyn Company Annual Report on Form
10-K for the year ended March 31, 1996 have been incorporated herein in reliance
upon the report of Price Waterhouse LLP, independent public accountants,
included therein and upon the authority of such firm as experts in accounting
and auditing.
The report of Price Waterhouse LLP on the consolidated financial statements
of The Samuel Goldwyn Company as of March 31, 1996 and 1995 and for the three
years ended March 31, 1996 contains an explanatory paragraph stating that the
possibility that The Samuel Goldwyn Company's credit facility and loan terms may
not be extended beyond the June 28, 1996 maturity date raises substantial doubt
about its ability to continue as a going concern.
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
Certain statements in the Summary and under the captions "Management's
Discussion and Analysis of Financial Condition" and "Business" and elsewhere in
this Prospectus constitute "forward-looking statements" within the meaning of
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,
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performance or achievements expressed or implied by such forward-looking
statements. Such factors included, 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 selected 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 selected 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 this Prospectus, including the
"Risk Factors." See "Risk Factors."
AVAILABLE INFORMATION
The Company is subject to the informational requirements of the Exchange
Act, and in accordance therewith files reports, proxy statements and other
information with the Commission. Such reports, proxy statements and other
information may be inspected without charge at, and copies thereof may be
obtained at prescribed rates from, the public reference facilities of the
Commission's principal office at 450 Fifth Street, N.W., Washington, D.C. 20549
and at the Commission's regional offices at 500 West Madison Street, Suite 1400,
Chicago, Illinois 60661 and 7 World Trade Center, Suite 1300, New York, New York
10048. The Commission maintains a Web site that contains reports, proxy and
information statements and other information regarding registrants (such as the
Company) that file electronically with the Commission. The address of such site
is: http://www.sec.gov. In addition, the Common Stock is traded on the AMEX, and
copies of reports, proxy statements and other information can be inspected at
the offices of the AMEX, 86 Trinity Place, New York, New York 10006.
The Company has filed with the Commission a Registration Statement on Form
S-3 under the Securities Act, with respect to the Preferred Stock offered hereby
and the Common Stock issuable upon conversion thereof or in redemption therefor
or as a dividend thereon (the "Registration Statement"). This Prospectus does
not contain all of the information set forth in the Registration Statement and
the exhibits and schedules thereto. For further information with respect to the
Company and the securities offered hereby, reference is made to the Registration
Statement, including the exhibits and schedules thereto, which may be inspected
at, and copies thereof may be obtained at prescribed rates from, the public
reference facilities of the Commission at the address set forth above.
INFORMATION INCORPORATED BY REFERENCE
The following documents have been filed with the Commission (File No.
1-5706) and are hereby incorporated in this Prospectus by reference and made a
part hereof:
1. The Company's Annual Report on Form 10-K for the year ended December
31, 1996.
2. The Company's Current Report on Form 8-K dated February 11, 1997.
3. The Consolidated Financial Statements and related schedules of The
Actava Group Inc. (now known as the Company) included in the Annual Report
on Form 10-K for the fiscal year ended December 31, 1994 of The Actava Group
Inc. (now known as the Company), as amended by Form
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10-K/A Amendment No. 1 filed on April 20, 1995 and Form 10-K/A Amendment No.
2 filed on July 13, 1995.
4. The Consolidated Financial Statements and related schedules of The
Samuel Goldwyn Company included in the Annual Report on Form 10-K for the
year ended March 31, 1996 of The Samuel Goldwyn Company.
5. The description of the Common Stock contained in the Company's
registration statement on Form 8-A, as filed with the Commission on November
1, 1995, including any amendment or report filed for the purpose of amending
such description (File No. 1-5706).
6. All documents filed by the Company pursuant to Section 13(a), 13(c),
14 or 15(d) of the Exchange Act subsequent to the date of this Prospectus
and prior to the termination of the Offering.
Any statement contained herein or in a document incorporated or deemed to be
incorporated by reference herein shall be deemed to be modified or superseded
for purposes of this Prospectus to the extent that a statement contained herein
or in any other subsequently filed document which also is or is deemed to be
incorporated by reference herein modifies or supersedes such statement. Any
statement so modified or superseded shall not be deemed, except as so modified
or superseded, to constitute a part of this Prospectus.
The Company will provide without charge to each person to whom this
Prospectus is delivered, upon such person's written or oral request, a copy of
any and all of the documents incorporated by reference herein (not including
exhibits to such information unless such exhibits are specifically incorporated
by reference in such documents). Any such request should be directed to:
Secretary, Metromedia International Group, Inc., One Meadowlands Plaza, East
Rutherford, New Jersey 07073-2137, telephone (201) 531-8000.
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METROMEDIA INTERNATIONAL GROUP, INC. AND SUBSIDIARIES
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
Report of Independent Auditors............................................................................. F-2
Consolidated Statements of Operations for the years ended December 31, 1996, December 31, 1995 and February
28, 1995................................................................................................. F-3
Consolidated Balance Sheets as of December 31, 1996 and December 31, 1995.................................. F-4
Consolidated Statements of Cash Flows for the years ended December 31, 1996, December 31, 1995 and February
28, 1995................................................................................................. F-5
Consolidated Statements of Stockholders' Equity for the years ended December 31, 1996, December 31, 1995
and February 28, 1995.................................................................................... F-6
Notes to Consolidated Financial Statements................................................................. F-7
</TABLE>
F-1
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders
Metromedia International Group, Inc.:
We have audited the accompanying 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. These consolidated financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these consolidated financial statements based on our
audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of 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.
KPMG Peat Marwick LLP
New York, New York
March 27, 1997
F-2
<PAGE>
METROMEDIA INTERNATIONAL GROUP, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
YEARS ENDED
----------------------------------------
<S> <C> <C> <C>
DECEMBER 31, DECEMBER 31, FEBRUARY 28,
1996 1995 1995
------------ ------------ ------------
<CAPTION>
(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-3
<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-4
<PAGE>
METROMEDIA INTERNATIONAL GROUP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEARS ENDED
----------------------------------------
<S> <C> <C> <C>
DECEMBER 31, DECEMBER 31, FEBRUARY 28,
1996 1995 1995
------------ ------------ ------------
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-5
<PAGE>
METROMEDIA INTERNATIONAL GROUP, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
YEARS ENDED
-------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
COMMON STOCK
-----------------------
<CAPTION>
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 currency 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-6
<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, 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 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-7
<PAGE>
METROMEDIA INTERNATIONAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1. BASIS OF PRESENTATION, DESCRIPTION OF THE BUSINESS, LIQUIDITY AND SUMMARY OF
SIGNIFICANT
ACCOUNTING POLICIES (CONTINUED)
In addition, the Company manufacturers Snapper-Registered Trademark- 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. The Company also manufactures a line of commercial lawn and
turf equipment under the Snapper-Registered Trademark- 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 (as defined below) 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. (formerly known as Roadmaster Industries, Inc.) ("RDM") (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 during
1997. The carrying value of the Company's investment in RDM 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 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 in a timely fashion and on favorable
terms. Any delay in the sale of RDM 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
F-8
<PAGE>
METROMEDIA INTERNATIONAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1. BASIS OF PRESENTATION, DESCRIPTION OF THE BUSINESS, LIQUIDITY AND SUMMARY OF
SIGNIFICANT
ACCOUNTING POLICIES (CONTINUED)
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.
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, 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 is 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
F-9
<PAGE>
METROMEDIA INTERNATIONAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1. BASIS OF PRESENTATION, DESCRIPTION OF THE BUSINESS, LIQUIDITY AND SUMMARY OF
SIGNIFICANT
ACCOUNTING POLICIES (CONTINUED)
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.
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's Joint Ventures' wireless cable television, 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's 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
F-10
<PAGE>
METROMEDIA INTERNATIONAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1. BASIS OF PRESENTATION, DESCRIPTION OF THE BUSINESS, LIQUIDITY AND SUMMARY OF
SIGNIFICANT
ACCOUNTING POLICIES (CONTINUED)
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.
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):
<TABLE>
<CAPTION>
1996 1995
--------- ---------
<S> <C> <C>
Lawn and garden equipment:
Raw materials............................................................ $ 18,733 $ --
Finished goods........................................................... 34,822 --
--------- ---------
53,555 --
Telecommunications:
Pagers................................................................... 849 224
--------- ---------
$ 54,404 $ 224
--------- ---------
--------- ---------
</TABLE>
F-11
<PAGE>
METROMEDIA INTERNATIONAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1. BASIS OF PRESENTATION, DESCRIPTION OF THE BUSINESS, LIQUIDITY AND SUMMARY OF
SIGNIFICANT
ACCOUNTING POLICIES (CONTINUED)
PROPERTY PLANT AND EQUIPMENT
Property, plant and equipment at December 31, 1996 and 1995 consists of the
following (in thousands):
<TABLE>
<CAPTION>
1996 1995
--------- ---------
<S> <C> <C>
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
--------- ---------
--------- ---------
</TABLE>
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. Theater 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.
F-12
<PAGE>
METROMEDIA INTERNATIONAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1. BASIS OF PRESENTATION, DESCRIPTION OF THE BUSINESS, LIQUIDITY AND SUMMARY OF
SIGNIFICANT
ACCOUNTING POLICIES (CONTINUED)
Adoption of SFAS 121 did not have any impact on the Company's financial
position, results of operations, or liquidity.
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.
F-13
<PAGE>
METROMEDIA INTERNATIONAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1. BASIS OF PRESENTATION, DESCRIPTION OF THE BUSINESS, LIQUIDITY AND SUMMARY OF
SIGNIFICANT
ACCOUNTING POLICIES (CONTINUED)
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.
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.
F-14
<PAGE>
METROMEDIA INTERNATIONAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1. BASIS OF PRESENTATION, DESCRIPTION OF THE BUSINESS, LIQUIDITY AND SUMMARY OF
SIGNIFICANT
ACCOUNTING POLICIES (CONTINUED)
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.
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 adjusted to
U.S. generally accepted accounting principles and translated into 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.
F-15
<PAGE>
METROMEDIA INTERNATIONAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1. BASIS OF PRESENTATION, DESCRIPTION OF THE BUSINESS, LIQUIDITY AND SUMMARY OF
SIGNIFICANT
ACCOUNTING POLICIES (CONTINUED)
ACCRUED EXPENSES
Accrued expenses at December 31, 1996 and 1995 consist of the following (in
thousands):
<TABLE>
<CAPTION>
1996 1995
---------- ---------
<S> <C> <C>
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
---------- ---------
---------- ---------
</TABLE>
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 consist 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):
<TABLE>
<CAPTION>
CALENDAR CALENDAR FISCAL
1996 1995 1995
--------- --------- ---------
<S> <C> <C> <C>
Cash paid during the year for:
Interest................................................... $ 32,015 $ 12,270 $ 13,108
--------- --------- ---------
--------- --------- ---------
Taxes...................................................... $ 728 $ 996 $ 1,804
--------- --------- ---------
--------- --------- ---------
</TABLE>
F-16
<PAGE>
METROMEDIA INTERNATIONAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1. BASIS OF PRESENTATION, DESCRIPTION OF THE BUSINESS, LIQUIDITY AND SUMMARY OF
SIGNIFICANT
ACCOUNTING POLICIES (CONTINUED)
Supplemental schedule of non-cash investing and financing activities (in
thousands):
<TABLE>
<CAPTION>
CALENDAR CALENDAR FISCAL
1996 1995 1995
---------- ---------- -----------
<S> <C> <C> <C>
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 $ --
---------- ---------- -----
---------- ---------- -----
</TABLE>
In connection with acquisition of Motion Picture Corporation of America
("MPCA") 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.
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.
F-17
<PAGE>
METROMEDIA INTERNATIONAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. THE NOVEMBER 1 MERGER (CONTINUED)
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.
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 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
$404.0 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.
F-18
<PAGE>
METROMEDIA INTERNATIONAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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.
Also on July 2, 1996, the Entertainment Group consummated the acquisition of
MPCA (the "MPCA Merger," and, together with the Goldwyn Merger, the "July 2
Mergers") 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 prices 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):
<TABLE>
<CAPTION>
1996 1995
----------- -----------
<S> <C> <C>
(UNAUDITED) (UNAUDITED)
Revenues........................................................... $ 397,410 $ 401,132
Loss from continuing operations.................................... (134,097) (185,865)
Net loss........................................................... (154,907) (511,817)
Net loss per share................................................. $ (2.73) $ (10.76)
</TABLE>
F-19
<PAGE>
METROMEDIA INTERNATIONAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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):
<TABLE>
<S> <C>
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
---------
---------
</TABLE>
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):
<TABLE>
<CAPTION>
1996 1995
---------- ----------
<S> <C> <C>
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)
---------- ----------
---------- ----------
</TABLE>
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
F-20
<PAGE>
METROMEDIA INTERNATIONAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
4. SNAPPER, INC. (CONTINUED)
(and/or credited to the account of canceled distributors) under such
arrangements amounted to (in thousands):
<TABLE>
<CAPTION>
TEN-MONTHS
TWO-MONTHS ENDED TWO-MONTHS
ENDED OCTOBER 31, ENDED
DECEMBER 31, 1996 1996 DECEMBER 31, 1995
----------------- --------------- -----------------
<S> <C> <C> <C>
Inventories............................................... $ 2,438 $ 15,550 $ 4,596
Decrease in gross profit.................................. 2,106 5,967 1,245
</TABLE>
5. RDM SPORTS GROUP, INC.
The Company has identified its investment in 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):
<TABLE>
<CAPTION>
AS OF, AND FOR
THE AS OF, AND FOR
NINE MONTHS THE
ENDED YEAR ENDED
SEPTEMBER 28, DECEMBER 31,
1996 1995
---------------- ----------------
<S> <C> <C>
(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
</TABLE>
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
F-21
<PAGE>
METROMEDIA INTERNATIONAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
6. FILM ACCOUNTS RECEIVABLE AND DEFERRED REVENUES (CONTINUED)
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.
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):
<TABLE>
<CAPTION>
1996 1995
---------- ----------
<S> <C> <C>
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
---------- ----------
---------- ----------
</TABLE>
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.
F-22
<PAGE>
METROMEDIA INTERNATIONAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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.
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 DATE
VENTURE OPERATIONS
JOINT VENTURE (BY SERVICE TYPE) 1996 1995 OWNERSHIP % FORMED COMMENCED
- --------------------------------------------- --------- --------- ----------------- ----------- ------------------
<S> <C> <C> <C> <C> <C>
WIRELESS CABLE TELEVISION
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, 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
--------- ---------
</TABLE>
F-23
<PAGE>
METROMEDIA INTERNATIONAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
8. INVESTMENTS IN AND ADVANCES TO JOINT VENTURES (CONTINUED)
<TABLE>
<CAPTION>
YEAR DATE
VENTURE OPERATIONS
JOINT VENTURE (BY SERVICE TYPE) 1996 1995 OWNERSHIP % FORMED COMMENCED
- --------------------------------------------- --------- --------- ----------------- ----------- ------------------
<S> <C> <C> <C> <C> <C>
TELEPHONY
Telecom Georgia, Tbilisi, Georgia............ 2,704 2,078 30% 1994 1994
Trunked 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,
increasing the ownership percentage to 83% and acquiring control of its
business. Accordingly, this investment is now accounted for on a
consolidated basis.
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 Eastern Europe, the
republics of the former Soviet Union, the PRC and other selected emerging
markets. 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
F-24
<PAGE>
METROMEDIA INTERNATIONAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
8. INVESTMENTS IN AND ADVANCES TO JOINT VENTURES (CONTINUED)
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):
<TABLE>
<CAPTION>
COMBINED BALANCE SHEETS 1996 1995
- ------------------------------------------------------------------------------ ---------- ----------
<S> <C> <C> <C>
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
---------- ----------
---------- ----------
</TABLE>
<TABLE>
<CAPTION>
COMBINED STATEMENT OF OPERATIONS 1996 1995 1994
- ------------------------------------------------------------------------------ ---------- ---------- ----------
<S> <C> <C> <C>
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)
---------- ---------- ----------
---------- ---------- ----------
</TABLE>
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-25
<PAGE>
METROMEDIA INTERNATIONAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
8. INVESTMENTS IN AND ADVANCES TO JOINT VENTURES (CONTINUED)
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-26
<PAGE>
METROMEDIA INTERNATIONAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
8. INVESTMENTS IN AND ADVANCES TO JOINT VENTURES (CONTINUED)
The following table represents information about the Communication Group's
operations in different geographic locations:
<TABLE>
<CAPTION>
REPUBLICS OF
FORMER
SOVIET UNION
UNITED AND OTHER
STATES EASTERN EUROPE PRC FOREIGN TOTAL
---------- -------------- --------- --------- ----------
<S> <C> <C> <C> <C> <C>
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
---------- ------- --------- --------- ----------
---------- ------- --------- --------- ----------
</TABLE>
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 located in Romania, with
approximately 37,000 connected subscribers, for approximately $2.8 million.
F-27
<PAGE>
METROMEDIA INTERNATIONAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
8. INVESTMENTS IN AND ADVANCES TO JOINT VENTURES (CONTINUED)
On March 18, 1996 Metromedia Asia Limited ("MAC," a/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-28
<PAGE>
METROMEDIA INTERNATIONAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
9. LONG-TERM DEBT
Long-term Debt at December 31, 1996 and 1995 consisted of the following (in
thousands):
<TABLE>
<CAPTION>
1996 1995
---------- ----------
<S> <C> <C>
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
---------- ----------
THE 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
---------- ----------
THE 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
---------- ----------
---------- ----------
</TABLE>
Aggregate annual repayments of long-term debt over the next five years and
thereafter are as follows (in thousands):
<TABLE>
<S> <C>
1997.............................................................. $ 56,138
1998.............................................................. 93,293
1999.............................................................. 83,464
2000.............................................................. 32,042
2001.............................................................. 130,530
Thereafter........................................................ 81,600
</TABLE>
F-29
<PAGE>
METROMEDIA INTERNATIONAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
9. LONG-TERM DEBT (CONTINUED)
MMG DEBT (EXCLUDING THE COMMUNICATIONS GROUP, THE 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 Debentures 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.
THE 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.
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
F-30
<PAGE>
METROMEDIA INTERNATIONAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
9. LONG-TERM DEBT (CONTINUED)
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 covenants
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.
THE 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.
F-31
<PAGE>
METROMEDIA INTERNATIONAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
9. LONG-TERM DEBT (CONTINUED)
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.
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
F-32
<PAGE>
METROMEDIA INTERNATIONAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
9. LONG-TERM DEBT (CONTINUED)
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.
F-33
<PAGE>
METROMEDIA INTERNATIONAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
10. STOCKHOLDERS' EQUITY (CONTINUED)
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:
<TABLE>
<S> <C>
Stock option plans.............................................. 10,067,603
6 1/2% Convertible Debentures................................... 1,801,802
Restricted stock plan........................................... 132,800
---------
12,002,205
---------
---------
</TABLE>
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
F-34
<PAGE>
METROMEDIA INTERNATIONAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
10. STOCKHOLDERS' EQUITY (CONTINUED)
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):
<TABLE>
<CAPTION>
1996
-----------
<S> <C> <C>
Net loss......................................................... As reported $ (115,243)
Pro forma $ (118,966)
Primary loss per common share.................................... As reported $ (2.12)
Pro forma $ (2.19)
</TABLE>
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.
Stock option activity during the periods indicated is as follows:
<TABLE>
<CAPTION>
WEIGHTED AVERAGE
NUMBER OF SHARES OPTION PRICE
----------------- -----------------
<S> <C> <C>
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
----------------- ------
----------------- ------
</TABLE>
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.
F-35
<PAGE>
METROMEDIA INTERNATIONAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
10. STOCKHOLDERS' EQUITY (CONTINUED)
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.
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):
<TABLE>
<CAPTION>
CALENDAR CALENDAR FISCAL
1996 1995 1995
----------- ----------- ---------
<S> <C> <C> <C>
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
----------- ----- ---------
----------- ----- ---------
</TABLE>
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-36
<PAGE>
METROMEDIA INTERNATIONAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
11. INCOME TAXES (CONTINUED)
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):
<TABLE>
<CAPTION>
1996 1995
---------- ----------
<S> <C> <C>
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............................................................................ $ -- $ --
---------- ----------
---------- ----------
</TABLE>
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):
<TABLE>
<CAPTION>
CALENDAR CALENDAR FISCAL
1996 1995 1995
---------- ---------- ----------
<S> <C> <C> <C>
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
---------- ---------- ----------
---------- ---------- ----------
</TABLE>
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
F-37
<PAGE>
METROMEDIA INTERNATIONAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
11. INCOME TAXES (CONTINUED)
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.
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
F-38
<PAGE>
METROMEDIA INTERNATIONAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
12. EMPLOYEE BENEFIT PLANS (CONTINUED)
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.
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.
13. BUSINESS SEGMENT DATA
The business activities of the Company constitute three business segments
(see Note 1) and are set forth in the following table (in thousands):
F-39
<PAGE>
METROMEDIA INTERNATIONAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
13. BUSINESS SEGMENT DATA (CONTINUED)
BUSINESS SEGMENT DATA
<TABLE>
<CAPTION>
CALENDAR CALENDAR FISCAL
1996 1995 1995
---------- ---------- ----------
<S> <C> <C> <C>
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 --
---------- ---------- ----------
---------- ---------- ----------
</TABLE>
F-40
<PAGE>
METROMEDIA INTERNATIONAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
13. BUSINESS SEGMENT DATA (CONTINUED)
<TABLE>
<CAPTION>
CALENDAR CALENDAR FISCAL
1996 1995 1995
---------- ---------- ----------
<S> <C> <C> <C>
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
---------- ---------- ----------
---------- ---------- ----------
</TABLE>
- ------------------------
(1) Represents operations from November 1, 1996 to December 31, 1996.
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):
<TABLE>
<CAPTION>
CALENDAR CALENDAR FISCAL
1996 1995 1995
--------- --------- ---------
CANADA........................................................... $ 1,995 $ 4,150 $ 3,862
<S> <C> <C> <C>
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
--------- --------- ---------
--------- --------- ---------
</TABLE>
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.
F-41
<PAGE>
METROMEDIA INTERNATIONAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
14. COMMITMENTS AND CONTINGENT LIABILITIES (CONTINUED)
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):
<TABLE>
<CAPTION>
CAPITAL OPERATING
YEAR LEASES LEASES
- --------------------------------------------------------------------- --------- -------------
<S> <C> <C>
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
---------
---------
</TABLE>
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 Company for certain general
and administrative services provided by Metromedia Company 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.
F-42
<PAGE>
METROMEDIA INTERNATIONAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
14. COMMITMENTS AND CONTINGENT LIABILITIES (CONTINUED)
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 collateralizes certain liabilities under the Company's
self-insurance program.
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.
F-43
<PAGE>
METROMEDIA INTERNATIONAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
14. COMMITMENTS AND CONTINGENT LIABILITIES (CONTINUED)
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.
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.
F-44
<PAGE>
METROMEDIA INTERNATIONAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
14. COMMITMENTS AND CONTINGENT LIABILITIES (CONTINUED)
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.
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 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
F-45
<PAGE>
METROMEDIA INTERNATIONAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
14. COMMITMENTS AND CONTINGENT LIABILITIES (CONTINUED)
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.
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):
<TABLE>
<CAPTION>
FIRST QUARTER OF SECOND QUARTER OF
---------------------- -----------------------
<S> <C> <C> <C> <C>
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>
F-46
<PAGE>
METROMEDIA INTERNATIONAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
15. SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED) (CONTINUED)
<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) Reflects the acquisition of Goldwyn and MPCA on 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 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-47
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
NO DEALER, SALESPERSON OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATION NOT CONTAINED IN THIS PROSPECTUS, AND,
IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS
HAVING BEEN AUTHORIZED BY THE COMPANY OR THE UNDERWRITERS. THIS PROSPECTUS DOES
NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY ANY
SECURITY OTHER THAN THE SECURITIES OFFERED HEREBY, NOR DOES IT CONSTITUTE AN
OFFER TO BUY OR A SOLICITATION OF AN OFFER TO BUY ANY SECURITIES OFFERED HEREBY
TO ANY PERSON IN ANY JURISDICTION WHERE SUCH AN OFFER OR SOLICITATION WOULD BE
UNLAWFUL. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER
SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THE INFORMATION
HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO THE DATE HEREOF.
--------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
<S> <C>
Prospectus Summary.............................. 3
Risk Factors.................................... 14
Use of Proceeds................................. 23
Price Range of Common Stock and Dividend
Policy........................................ 23
Capitalization.................................. 24
Pro Forma Consolidated Condensed Financial
Information of the Company.................... 25
Selected Consolidated Financial Data............ 28
Management's Discussion and Analysis of
Financial Condition........................... 29
Business........................................ 46
Management...................................... 73
Principal Stockholders.......................... 76
Description of the Preferred Stock.............. 78
Description of the Common Stock................. 86
Description of Principal Indebtedness........... 88
Certain Federal Income Tax Consequences......... 91
Underwriting.................................... 95
Legal Matters................................... 96
Experts......................................... 96
Special Note Regarding Forward-Looking
Statements.................................... 96
Available Information........................... 97
Information Incorporated by Reference........... 97
Index to Financial Statements................... F-1
</TABLE>
2,500,000 SHARES
[LOGO]
% CUMULATIVE CONVERTIBLE
PREFERRED STOCK
--------------
PROSPECTUS
-----------------
DONALDSON, LUFKIN & JENRETTE
SECURITIES CORPORATION
GOLDMAN, SACHS & CO.
BT SECURITIES CORPORATION
, 1997
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 14. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following table sets forth the expenses (other than underwriting
discounts and commissions) expected to be incurred in connection with the
issuance and distribution of the securities registered hereby, all of which
expenses, except for the Commission registration fee and the National
Association of Securities Dealers, Inc. ("NASD") filing fee, are estimated:
<TABLE>
<S> <C>
Commission registration fee...................................... $ 43,561
NASD filing fee.................................................. 14,875
AMEX listing fees................................................ *
Printing expenses................................................ *
Legal fees and expenses (other than Blue Sky).................... *
Accounting fees and expenses..................................... *
Blue Sky fees and expenses (including legal fees)................ *
Miscellaneous.................................................... *
---------
Total...................................................... $ *
---------
---------
</TABLE>
- ------------------------
* To be completed by amendment
ITEM 15. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Section 145 of the General Corporation Law of the State of Delaware (the
"Delaware Law") empowers a Delaware corporation to indemnify any persons who
are, or are threatened to be made, parties to any threatened, pending or
completed legal action, suit or proceedings, whether civil, criminal,
administrative or investigative (other than an action by or in the right of such
corporation), by reason of the fact that such person was an officer, director,
employee or agent of such corporation, or is or was serving at the request of
such corporation as a director, officer, employee or agent of another
corporation or enterprise. The indemnity may include judgments, fines, amounts
paid in settlement and expenses (including attorneys' fees) actually and
reasonably incurred by such person in connection with such action, suit or
proceeding, provided that such officer or director acted in good faith and in a
manner he reasonably believed to be in or not opposed to the corporation's best
interests, and, with respect to criminal proceedings, had no reasonable cause to
believe his conduct was illegal. A Delaware corporation may indemnify its
officers and directors against expenses actually and reasonably incurred by them
in connection with an action by or in the right of the corporation under the
same conditions, except that no indemnification is permitted without judicial
approval if the officer or director is adjudged to be liable to the corporation
in the performance of his duty. Where an officer or director is successful on
the merits or otherwise in the defense of any action referred to above, the
corporation must indemnify him against the expenses which such officer or
director actually and reasonably incurred in connection therewith.
Section 102(b)(7) of the Delaware Law further provides that a corporation in
its certificate of incorporation may eliminate or limit the personal liability
of its directors to the corporation or its stockholders for breach of their
fiduciary duties in certain circumstances.
In accordance with Section 145 of the Delaware Law, the Company's Restated
Certificate of Incorporation provides that the Company shall 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.
II-1
<PAGE>
In addition, as permitted by Section 102(b)(7) of the Delaware Law, the
Company's Restated Certificate of Incorporation contains a provision limiting
the personal liability of the Company's directors for violations of their
fiduciary duties to the fullest extent permitted by the Delaware Law. This
provision eliminates each director's liability to the Company or its
stockholders for monetary damages except (i) for any breach of the director's
duty of loyalty to the Company or its stockholders, (ii) for acts or omissions
not in good faith or which involve intentional misconduct or a knowing violation
of law, (iii) under Section 174 of the Delaware Law, or (iv) for any transaction
from which a director derived an improper personal benefit. The general effect
of this provision is to eliminate a director's personal liability for monetary
damages for actions involving a breach of his or her fiduciary duty of care,
including any such actions involving gross negligence.
Also, in accordance with the Delaware Law and pursuant to the Company's
Restated Certificate of Incorporation, the Company is authorized to purchase and
maintain insurance on behalf of any person who is or was a director, officer,
employee or agent of the Company, is or was serving at the request of the
Company as a director, officer, employee or agent of another corporation,
partnership, joint venture, trust or other enterprise against any liability
asserted against such person and incurred by such person in any such capacity,
or arising out of such person's status as such, whether or not the Company would
have the power to indemnify such person against liability under the Delaware
Law.
The Company has entered into agreements (the "Indemnification Agreements")
with certain directors and officers of the Company (the "Indemnified Parties")
which require the Company to indemnify each Indemnified Party against, and to
advance expenses incurred by each Indemnified Party in the defense of, any claim
arising out of his or her employment to the fullest extent permitted under law.
The Indemnification Agreements also provide, among other things, for (i)
advancement by the Company of expenses incurred by the director or officer in
defending certain litigation, (ii) the appointment of an independent legal
counsel to determine whether the director or officer is entitled to indemnity
and (iii) the continued maintenance by the Company of directors' and officers'
liability insurance providing each director or officer who is a party to any
such agreement with $5 million of primary coverage and an excess policy
providing $5 million of additional coverage. These Indemnification Agreements
were approved by the stockholders at the Company's 1993 Annual Meeting of
Stockholders.
II-2
<PAGE>
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
A. EXHIBITS
The exhibits listed below are filed as part of or incorporated by reference
in this Registration Statement. Where such filing is made by incorporation by
reference to a previously filed report, such report is identified in
parentheses. See the Index of Exhibits included with the exhibits filed as part
of this Registration Statement.
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- --------- ---------------------------------------------------------------------------------------------------------
<C> <S>
1** Form of Underwriting Agreement.
4.1** Form of Certificate of Designation of the % Cumulative Convertible Preferred Stock of the Company.
5** Opinion of Paul, Weiss, Rifkind, Wharton & Garrison regarding the legality of the securities being
registered.
23.1* Consent of KPMG Peat Marwick LLP regarding the Registrant.
23.2* Consent of Ernst & Young LLP regarding the Registrant.
23.3* Consent of Price Waterhouse LLP regarding Goldwyn.
23.4** Consent of Paul, Weiss, Rifkind, Wharton & Garrison (included in the opinion filed as Exhibit 5 hereto).
24* Power of Attorney (included on page II-5 of this Registration Statement).
</TABLE>
- ------------------------
* Filed herewith.
** To be filed by amendment.
B. FINANCIAL STATEMENT SCHEDULES
Financial Statement Schedules have been omitted because they are not
applicable or not required or because the information has been incorporated by
reference.
ITEM 17. UNDERTAKINGS
The undersigned registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being made, a
post-effective amendment to this registration statement:
(i) To include any prospectus required by Section 10(a)(3) of the
Securities Act of 1933;
(ii) To reflect in the prospectus any facts or events arising after the
effective date of the registration statement (or the most recent
post-effective amendment thereof) which, individually or in the aggregate,
represent a fundamental change in the information set forth in the
registration statement. Notwithstanding the foregoing, any increase or
decrease in volume of securities offered (if the total dollar value of
securities offered would not exceed that which was registered) and any
deviation from the low or high end of the estimated maximum offering range
may be reflected in the form of prospectus filed with the Commission
pursuant to Rule 424(b) if, in the aggregate, the changes in volume and
price represent no more than a 20% change in the maximum aggregate offering
price set forth in the "Calculation of Registration Fee" table in the
effective registration statement;
(iii) To include any material information with respect to the plan of
distribution not previously disclosed in the registration statement or any
material change to such information in the registration statement;
II-3
<PAGE>
PROVIDED, HOWEVER, that paragraphs (1)(i) and (1)(ii) do not apply if the
registration statement is on Form S-3 or Form S-8, and the information required
to be included in a post-effective amendment by those paragraphs is contained in
periodic reports filed by the registrant pursuant to Section 13 or Section 15(d)
of the Securities Exchange Act of 1934 that are incorporated by reference in the
registration statement.
(2) That, for the purpose of determining any liability under the Securities
Act of 1933, each such post-effective amendment shall be deemed to be a new
registration statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be the initial bona
fide offering thereof.
(3) To remove from registration by means of a post-effective amendment any
of the securities being registered which remain unsold at the termination of the
offering.
The undersigned Registrant hereby undertakes that, for purposes of
determining any liability under the Securities Act, each filing of the
Registrant's annual report pursuant to section 13(a) or section 15(d) of the
Exchange Act (and, where applicable, each filing of an employee benefit plan's
annual report pursuant to section 15(d) of the Exchange Act) that is
incorporated by reference in the registration statement shall be deemed to be a
new registration statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be the initial bona
fide offering thereof.
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the foregoing provisions, or otherwise, the Registrant
has been advised that in the opinion of the Commission such indemnification is
against public policy as expressed in the Securities Act and is, therefore,
unenforceable. In the event that a claim for indemnification against such
liabilities (other than the payment by the Registrant of expenses incurred or
paid by a director, officer or controlling person of the Registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the Registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Securities Act and will be governed by the final
adjudication of such issue.
The Registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act,
the information omitted from the form of Prospectus filed as part of this
registration statement in reliance upon Rule 430A and contained in a form of
Prospectus filed by the Registrant pursuant to Rule 424(b)(1) or (4) or
497(h) under the Securities Act shall be deemed to be part of this
Registration Statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Securities
Act, each post-effective amendment that contains a form of Prospectus shall
be deemed to be a new Registration Statement relating to the securities
offered therein, and the offering of such securities at that time shall be
deemed to the initial bona fide offering thereof.
II-4
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act, the Registrant certifies
that it has reasonable grounds to believe that it meets the requirements for
filing on Form S-3 and has duly caused this Registration Statement to be signed
on its behalf by the undersigned, thereunto duly authorized, in the City of New
York, State of New York.
METROMEDIA INTERNATIONAL GROUP, INC.
By: /s/ STUART SUBOTNICK
-----------------------------------------
Stuart Subotnick
PRESIDENT AND CHIEF EXECUTIVE OFFICER
Date: April 4 , 1997
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature to this
Registration Statement appears below hereby constitutes and appoints Silvia
Kessel, Arnold L. Wadler and Robert A. Maresca, such person's true and lawful
attorney-in-fact and agent with full power of substitution for such person and
in such person's name, place and stead, in any and all capacities, to sign and
to file with the Commission any and all amendments and post-effective amendments
to this Registration Statement and any Registration Statement filed pursuant to
Rule 462(b) under the Securities Act, with exhibits thereto and other documents
in connection therewith, granting unto said attorney-in-fact and agent full
power and authority to do and perform each and every act and thing requisite and
necessary to be done in and about the premises, as fully to all intents and
purposes as such person might or could do in person, hereby ratifying and
confirming all that said attorney-in-fact and agent, or any substitute therefor,
may lawfully do or cause to be done by virtue thereof.
Pursuant to the requirements of the Securities Act, this Registration
Statement has been signed below by the following persons on behalf of the
Registrant and in the capacities indicated on the 4th day of April, 1997.
SIGNATURE TITLE
- ------------------------------ ---------------------------
/s/ JOHN W. KLUGE Chairman of the Board
- ------------------------------
John W. Kluge
Vice Chairman of the Board,
/s/ STUART SUBOTNICK President and Chief
- ------------------------------ Executive Officer
Stuart Subotnick (Principal Executive
Officer)
Executive Vice President,
/s/ SILVIA KESSEL Chief Financial Officer
- ------------------------------ and Director (Principal
Silvia Kessel Financial Officer)
/s/ ARNOLD L. WADLER Executive Vice President,
- ------------------------------ General Counsel and
Arnold L. Wadler Director
II-5
<PAGE>
SIGNATURE TITLE
- ------------------------------ ---------------------------
/s/ ROBERT A. MARESCA Senior Vice President
- ------------------------------ (Principal Accounting
Robert A. Maresca Officer)
/s/ JOHN P. IMLAY, JR. Director
- ------------------------------
John P. Imlay, Jr.
/s/ CLARK A. JOHNSON Director
- ------------------------------
Clark A. Johnson
/s/ RICHARD J. SHERWIN Director
- ------------------------------
Richard J. Sherwin
/s/ LEONARD WHITE Director
- ------------------------------
Leonard White
/s/ CARL E. SANDERS Director
- ------------------------------
Carl E. Sanders
II-6
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NO. DOCUMENT
- ----------- ------------------------------------------
<C> <S> <C>
23.1 Consent of KPMG Peat Marwick LLP
23.2 Consent of Ernst & Young LLP
23.3 Consent of Price Waterhouse LLP
</TABLE>
<PAGE>
EXHIBIT 23.1
The Board of Directors
Metromedia International Group, Inc.:
We consent to the use of our reports included herein and incorporated herein by
reference and to the references to our firm under the headings "Selected
Consolidated Financial Data" and "Experts" in the Prospectus.
KPMG Peat Marwick LLP
New York, New York
April 4, 1997
<PAGE>
EXHIBIT 23.2
CONSENT OF INDEPENDENT AUDITORS
We consent to the reference to our firm under the caption "Experts" and to
the use of our reports dated March 10, 1995, with respect to the consolidated
financial statements and schedule of The Actava Group Inc. Included in Form 10-K
of The Actava Group, Inc. for the year ended December 31, 1994 as amended by
Amendment No. 1 on Form 10K/A on April 28, 1995 and Amendment No. 2 on Form
10K/A on July 13, 1995, incorporated by reference in the Registration Statement
(Form S-3) and the related Prospectus of Metromedia International Group, Inc.
for the registration of shares of convertible preferred stock.
ERNST & YOUNG LLP
Atlanta, Georgia
April 4, 1997
<PAGE>
EXHIBIT 23.3
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in the Prospectus
constituting part of this Registration Statement on Form S-3 of Metromedia
International Group, Inc. of our report dated May 3, 1996 appearing on page F-2
of The Samuel Goldwyn Company's Annual Report on Form 10-K for the year ended
March 31, 1996. We also consent to the incorporation by reference of our report
on the Financial Statement Schedule which appears on page F-21 of The Samuel
Goldwyn Company's Form 10-K. We also consent to the reference to us under the
heading "Experts" in such Prospectus.
Price Waterhouse LLP
April 4, 1997
