<PAGE>
As filed with the Securities and Exchange Commission on June 18, 1997
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SCHEDULE 14A INFORMATION
PROXY STATEMENT PURSUANT TO SECTION 14(A)
OF THE SECURITIES EXCHANGE ACT OF 1934
------------------------
/X/ Filed by the Registrant
/ / Filed by a Party other than the Registrant
Check the appropriate box:
/ / Preliminary Proxy Statement
/X/ Definitive Proxy Statement
/ / Definitive Additional Materials
/ / Soliciting Material Pursuant to 240.14a-11(c) or 240.14a-12
------------------------
METROMEDIA INTERNATIONAL GROUP, INC.
(Name of Registrant as Specified in its Charter)
------------------------------
Payment of Filing Fee (Check the appropriate box):
/ / No fee required.
/ / Fee computed on table below per Exchange Act Rules 14a-6(i)(1) and 0-11
1) Title of each class of securities to which transaction applies: n/a
2) Aggregate number of securities to which transaction applies: n/a
3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11: $573,000,000
4) Proposed maximum aggregate value of transaction: $573,000,000
5) Total fee paid: $114,600
/X/ Fee paid previously with preliminary materials.
Check box if any part of the fee is offset as provided by Exchange Act Rule 0-
11(a)(2) and identify the filing for which the offsetting fee was paid
previously. Identify the previous filing by registration statement number, or
the Form or Schedule and the date of its filing.
1) Amount Previously Paid:
2) Form, Schedule or Registration No.:
3) Filing Party:
4) Date Filed:
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
[LOGO]
One Meadowlands Plaza
East Rutherford, New Jersey 07073-2137
June 18, 1997
Dear Stockholder:
On behalf of the Board of Directors, I wish to extend to you a cordial
invitation to attend the Annual Meeting of Stockholders of Metromedia
International Group, Inc. ("MMG"), which will be held in the Orion Pictures
Corporation Screening Room at 1888 Century Park East, Los Angeles, California
90067 at 9:00 a.m., Los Angeles time, on July 10, 1997 (the "Annual Meeting"). I
look forward to greeting as many stockholders as possible at the Annual Meeting.
At the Annual Meeting, you will be asked to consider and approve, among
other things, the Stock Purchase Agreement, dated as of May 2, 1997 (the "Stock
Purchase Agreement"), by and among MMG, Orion Pictures Corporation, a Delaware
corporation and a wholly-owned subsidiary of MMG ("Orion"), and P&F Acquisition
Corp., a Delaware corporation ("P&F"), and the parent company of Metro-
Goldwyn-Mayer Inc., pursuant to which MMG will sell, and P&F will purchase,
certain of MMG's entertainment assets (the "Proposed Transaction"), including
all of the outstanding shares of capital stock of Orion and its direct and
indirect subsidiaries (other than Landmark Theatre Group and its subsidiaries).
In connection with the Proposed Transaction, MMG will receive $573 million in
cash, less amounts used to repay the existing Orion credit facility and other
outstanding debt of Orion and its subsidiaries. Details regarding the terms and
conditions of the Proposed Transaction are included in the enclosed Proxy
Statement.
AT THE DIRECTORS' MEETING HELD TO CONSIDER THE PROPOSED TRANSACTION, THE
DIRECTORS OF MMG CAREFULLY CONSIDERED AND UNANIMOUSLY APPROVED THE TERMS OF THE
PROPOSED TRANSACTION AS BEING IN THE BEST INTERESTS OF MMG AND ITS STOCKHOLDERS.
THE MMG BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS THAT THE STOCKHOLDERS VOTE
"FOR" PROPOSAL NO. 1 TO APPROVE THE PROPOSED TRANSACTION.
In addition, at the Annual Meeting, you will be asked to vote on three other
proposals: (i) to elect two Class II Directors for three year terms ending in
the year 2000; (ii) to ratify the selection of KPMG Peat Marwick LLP as MMG's
independent accountants for the year ending December 31, 1997; and (iii) to
consider and vote upon a proposal submitted by a stockholder of MMG to amend the
Company's certificate of incorporation to allow stockholders of MMG to take
action by written consent and to call special meetings, and any other matters
that may properly come before the Annual Meeting.
It is important that your shares be represented at the Annual Meeting,
whether or not you are able to attend. Accordingly, you are urged to sign, date
and mail the enclosed proxy promptly. If you later decide to attend the Annual
Meeting, you may revoke your proxy and vote in person. As indicated in the
notice previously mailed to you, this Proxy Statement supersedes in all respects
the proxy statement previously mailed to you on or about April 14, 1997, and the
meeting previously scheduled for May 14, 1997 has been canceled. Any proxy cards
received in connection therewith will be destroyed by MMG and you are asked to
submit the proxy cards enclosed herewith.
Thank you for your time and consideration.
Sincerely,
Stuart Subotnick
PRESIDENT AND
CHIEF EXECUTIVE OFFICER
<PAGE>
METROMEDIA INTERNATIONAL GROUP, INC.
------------------------
ONE MEADOWLANDS PLAZA
EAST RUTHERFORD, NEW JERSEY 07073-2137
------------------------
NOTICE OF ANNUAL MEETING OF STOCKHOLDERS
TO BE HELD ON JULY 10, 1997
------------------------
TO THE STOCKHOLDERS OF
METROMEDIA INTERNATIONAL GROUP, INC.:
NOTICE IS HEREBY GIVEN that an Annual Meeting of Stockholders (the "Annual
Meeting") of Metromedia International Group, Inc., a Delaware corporation
("MMG"), will be held on July 10, 1997, at 9:00 a.m., local time, in the Orion
Pictures Corporation Screening Room, 1888 Century Park East, Los Angeles,
California 90067, for the purpose of considering and acting upon the following:
1. The proposal to consider and approve the Stock Purchase Agreement,
dated as of May 2, 1997 (the "Stock Purchase Agreement"), by and among MMG,
Orion Pictures Corporation, a Delaware corporation ("Orion"), and P & F
Acquisition Corp., a Delaware corporation ("P&F"), and the consummation of
the transactions contemplated thereby, including the sale of all of the
outstanding capital stock of Orion and all of its subsidiaries (other than
Landmark Theatre Group and its subsidiaries) to P&F (the "Proposed
Transaction");
2. The election of two members to MMG's Board of Directors to serve
three-year terms as Class II Directors;
3. The ratification of the selection of KPMG Peat Marwick LLP as MMG's
independent accountants for the year ending December 31, 1997;
4. The proposal submitted by a stockholder of the Company to amend the
Company's certificate of incorporation to allow stockholders of MMG to take
action by written consent and to call special meetings; and
5. The transaction of such other business as may properly come before
the Annual Meeting or any adjournment thereof. The Board of Directors is not
aware of any other business that will be presented for consideration at the
Annual Meeting.
THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS THAT THE STOCKHOLDERS VOTE
"FOR" PROPOSALS NO. 1, NO. 2 AND NO. 3 AND "AGAINST" PROPOSAL NO. 4 TO BE
PRESENTED TO MMG STOCKHOLDERS AT THE MMG ANNUAL MEETING.
<PAGE>
Only stockholders of record at the close of business on June 13, 1997 will
be entitled to notice of and to vote at the Annual Meeting or any adjournment
thereof. The Annual Meeting may be adjourned from time to time without notice
other than by announcement at the Annual Meeting. A list of stockholders
entitled to vote at the Annual Meeting will be available for inspection by any
stockholder, for any reason germane to the Annual Meeting, during ordinary
business hours during the ten days prior to the Annual Meeting at One
Meadowlands Plaza, East Rutherford, New Jersey 07073-2137.
By Order of the Board of Directors.
Arnold L. Wadler
SECRETARY
East Rutherford, New Jersey
June 18, 1997
IT IS IMPORTANT THAT YOUR SHARES BE REPRESENTED AT THE MEETING REGARDLESS OF
THE NUMBER OF SHARES YOU HOLD IN ORDER THAT A QUORUM MAY BE ASSURED, WHETHER OR
NOT YOU PLAN TO BE PRESENT AT THE MEETING IN PERSON. PLEASE COMPLETE, SIGN, DATE
AND MAIL THE ENCLOSED PROXY IN THE ACCOMPANYING RETURN ENVELOPE (TO WHICH NO
POSTAGE NEED BE AFFIXED BY THE SENDER IF MAILED WITHIN THE UNITED STATES). IF
YOU RECEIVE MORE THAN ONE PROXY BECAUSE YOUR SHARES ARE REGISTERED IN DIFFERENT
NAMES OR ADDRESSES, EACH SUCH PROXY SHOULD BE SIGNED AND RETURNED TO ASSURE THAT
ALL OF YOUR SHARES WILL BE VOTED. THE PROXY SHOULD BE SIGNED BY ALL REGISTERED
HOLDERS EXACTLY AS THE STOCK IS REGISTERED.
<PAGE>
METROMEDIA INTERNATIONAL GROUP, INC.
------------------------
PROXY STATEMENT
FOR AN ANNUAL MEETING OF STOCKHOLDERS
TO BE HELD ON JULY 10, 1997
------------------------
This Proxy Statement (the "Proxy Statement") is being furnished to the
holders of shares of common stock, par value $1.00 per share (the "Common
Stock"), of Metromedia International Group, Inc., a Delaware corporation ("MMG"
or the "Company"), in connection with the solicitation of proxies by the Board
of Directors of MMG for use at the Annual Meeting of the Stockholders of MMG to
be held at 9:00 a.m., Los Angeles time, on July 10, 1997 in the Orion Pictures
Corporation Screening Room at 1888 Century Park East, Los Angeles, California
90067 (the "Annual Meeting"), and any adjournments thereof. As indicated in the
notice previously mailed to you, this Proxy Statement supersedes in all respects
the proxy statement previously mailed to you on or about April 14, 1997 and the
meeting previously scheduled for May 14, 1997 has been canceled. Any proxy cards
received in connection therewith have been destroyed by the Company and you are
asked to submit the proxy cards enclosed herewith.
At the Annual Meeting, the holders of MMG's Common Stock ("MMG
Stockholders") will be asked to (i) consider and approve the Stock Purchase
Agreement, a copy of which is attached hereto as Appendix A, dated as of May 2,
1997 (the "Stock Purchase Agreement"), by and among MMG, Orion Pictures
Corporation, a Delaware corporation and a wholly-owned subsidiary of MMG
("Orion"), and P & F Acquisition Corp., a Delaware corporation ("P&F") and the
parent company of Metro-Goldwyn-Mayer Inc. ("MGM"), and the consummation of the
transactions contemplated thereby, including the sale of all the outstanding
capital stock of Orion and its direct and indirect subsidiaries (other than
Landmark Theatre Group and its subsidiaries ("Landmark")), to P&F (the "Proposed
Transaction") (Orion, together with such subsidiaries, excluding Landmark, are
collectively referred to herein as the "Entertainment Companies"); (ii) elect
two members to MMG's Board of Directors to serve a three-year term as Class II
Directors; (iii) ratify the selection of KPMG Peat Marwick LLP as MMG's
independent accountants for the year ending December 31, 1997; (iv) vote upon a
proposal submitted by a stockholder of the Company to amend the Company's
certificate of incorporation to allow stockholders of MMG to take action by
written consent and to call special meetings; and (v) vote upon the transaction
of such other matters as may properly come before the Meeting.
Included among the matters described in this Proxy Statement are matters
that relate to approval by the MMG Stockholders of the Proposed Transaction.
Upon the terms and subject to the conditions of the Stock Purchase Agreement, on
the closing date under the Stock Purchase Agreement (the "Closing Date"), P&F
will purchase from MMG all of the outstanding shares of capital stock of Orion
(the "Shares"), for cash in an amount equal to $573 million, less indebtedness
outstanding (approximately $271.8 million at May 31, 1997) under the existing
credit facility (the "Orion Credit Facility") between Orion and Chase Manhattan
Bank ("Chase") and less all outstanding debt of Orion other than the Orion
Credit Facility (approximately $13.5 million at May 31, 1997). See "INFORMATION
REGARDING MMG--Certain Relationships and Related Transactions." The consummation
of the Proposed Transaction is subject to the satisfaction or waiver of certain
conditions and may be terminated by either MMG or P&F upon the occurrence or
nonoccurrence of certain events. See "PROPOSAL NO. 1--THE PROPOSED
TRANSACTION--Terms and Conditions of the Stock Purchase Agreement." Pursuant to
the terms of a Stockholders Agreement (as attached hereto as Appendix B), dated
as of April 27, 1997 (the "Stockholders Agreement"), among John W. Kluge, Stuart
Subotnick, Metromedia Company, a Delaware general partnership ("Metromedia"),
Met Telcell, Inc., a Delaware corporation owned and controlled by Messrs. Kluge
and Subotnick ("Met Telcell" and, together with Messrs. Kluge and Subotnick and
Metromedia, the "Metromedia Holders"), and P&F, Messrs. Kluge and Subotnick, the
general partners of Metromedia, have agreed (i) to vote their shares of Common
Stock in favor of the Stock Purchase Agreement, (ii) to vote their shares
against another proposal (except if such vote would violate their fiduciary
duties) to sell all or substantially all of the Shares or any or all of the
assets of the Entertainment
<PAGE>
Companies and (iii) not to transfer their shares of Common Stock until the later
of September 30, 1997 or 90 days after an MMG Stockholders meeting held to
approve and adopt the Stock Purchase Agreement (as long as such meeting is held
by September 30, 1997). As of the Record Date (as defined below), the Metromedia
Holders owned approximately 26% of the outstanding Common Stock. In addition,
simultaneously with the consummation of the Proposed Transaction, (i) Mr. Kluge
and Metromedia will be released from their guarantees made in favor of Chase
under the $100 million revolving credit portion of the Orion Credit Facility
(approximately $94.3 million of which was outstanding at May 31, 1997) and (ii)
Metromedia will be released from its guarantee made in favor of Chase of payment
of a certain third party account receivable owed to Orion (approximately $11.4
million at May 31, 1997) so that the entire face amount of such account
receivable could be included in the borrowing base for the Orion Credit
Facility. See "PROPOSAL NO. 1--PROPOSED TRANSACTION--Interests of Certain
Persons."
This Proxy Statement is being furnished to holders of Common Stock in
connection with the solicitation of proxies by the Board of Directors of MMG for
use at the Annual Meeting, and any adjournments thereof. Each copy of this Proxy
Statement being mailed or delivered to MMG Stockholders is accompanied by a MMG
proxy card, the Notice of Annual Meeting of Stockholders of MMG and the
Exhibits.
All properly executed proxy cards delivered pursuant to this solicitation
and not revoked will be voted at the Annual Meeting in accordance with the
directions given. In voting by proxy with regard to the election of directors,
MMG Stockholders may vote in favor of all nominees, withhold their votes as to
all nominees or withhold their votes as to specific nominees. With regard to
other proposals, MMG Stockholders may vote in favor of each proposal or against
each proposal, or in favor of some proposals and against others, or may abstain
from voting on any or all proposals. Stockholders should specify their
respective choices on the accompanying proxy card. If no specific instructions
are given with regard to the matters to be voted upon, the shares of Common
Stock represented by a signed proxy card will be voted "FOR" Proposal Nos. 1, 2
and 3 and "AGAINST" Proposal No. 4 listed on the proxy card. If any other
matters properly come before the Annual Meeting, the persons named as proxies
will vote upon such matters according to their judgment.
The presence, in person or by proxy, of a majority of the outstanding shares
of Common Stock is necessary to constitute a quorum at the Annual Meeting. Each
of the proposals set forth in this Proxy Statement will be voted upon separately
at the Annual Meeting. Because the Proposed Transaction may constitute a sale of
"substantially all" of the assets of the Company under Delaware law, which would
require the approval of a majority of the outstanding shares of the Common Stock
before such a sale may be consummated, the Board of Directors of the Company is
seeking approval of the MMG Stockholders to complete the Proposed Transaction.
As noted above, the Metromedia Holders, who together own approximately 26% of
the outstanding shares of Common Stock as of the Record Date, have agreed to
vote their shares of Common Stock in favor of Proposal No. 1. The affirmative
vote of the holders of a majority of all of the issued and outstanding shares of
Common Stock (whether or not represented in person or by proxy at the Annual
Meeting) is also required to approve Proposal No. 4. The affirmative vote of the
holders of a plurality of shares of Common Stock present in person or
represented by proxy at the Annual Meeting will be required to elect each of the
Class II Directors to MMG's Board of Directors pursuant to Proposal No. 2. The
affirmative vote of the holders of a majority of shares of Common Stock present
in person or represented by proxy at the Annual Meeting will be required to
approve and adopt Proposal No. 3. For these reasons, it is important that all
shares are represented at the Annual Meeting, either in person or by proxy.
All proxy cards delivered pursuant to this solicitation are revocable at any
time prior to the Annual Meeting at the option of the persons executing them by
giving written notice to the Secretary of MMG, by delivering a later-dated proxy
card or by voting in person at the Annual Meeting. All written notices of
revocation and other communications with respect to revocations of proxies
should be addressed to:
2
<PAGE>
Metromedia International Group, Inc., One Meadowlands Plaza, East Rutherford, NJ
07073-2137, Attention: Arnold L. Wadler, Secretary.
Proxies will initially be solicited by MMG by mail, but directors, officers
and selected employees may solicit proxies from Stockholders personally or by
telephone, facsimile or other forms of communication. Such directors, officers
and employees will not receive any additional compensation for such
solicitation. In addition, the Company has retained MacKenzie Partners to
solicit proxies on its behalf for a fee of $7,500 plus reimbursement for all
out-of-pocket costs. MMG also will request brokerage houses, nominees,
fiduciaries and other custodians to forward soliciting materials to beneficial
owners, and MMG will reimburse such persons for their reasonable expenses
incurred in doing so. All expenses incurred in connection with the solicitation
of proxies will be borne by MMG.
AT THE DIRECTORS' MEETING HELD TO CONSIDER THE PROPOSED TRANSACTION, THE
DIRECTORS OF MMG CAREFULLY CONSIDERED AND UNANIMOUSLY APPROVED THE TERMS OF THE
PROPOSED TRANSACTION AS BEING IN THE BEST INTERESTS OF MMG AND ITS STOCKHOLDERS.
THE MMG BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS THAT THE STOCKHOLDERS VOTE
"FOR" PROPOSAL NO. 1 TO APPROVE THE PROPOSED TRANSACTION.
THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS THAT THE STOCKHOLDERS VOTE
"FOR" PROPOSALS NO. 2 AND NO. 3 AND "AGAINST" PROPOSAL NO. 4 TO BE PRESENTED TO
MMG STOCKHOLDERS AT THE MMG ANNUAL MEETING.
Stockholders of MMG are not entitled to dissenters' rights of appraisal or
other dissenters' rights under Delaware law with respect to the Proposed
Transaction or any other transactions contemplated by the Stock Purchase
Agreement.
MMG STOCKHOLDERS SHOULD
CONSIDER CAREFULLY THE FACTORS DESCRIBED UNDER THE
HEADING "CERTAIN CONSIDERATIONS" ON PAGE 14 IN THIS PROXY STATEMENT.
The Common Stock is listed on the American Stock Exchange ("AMEX") under the
symbol "MMG." On June 16, 1997, the closing sale price for the Common Stock as
reported by the AMEX was $11 3/4 per share.
This Proxy Statement and the accompanying proxy card are being mailed to the
stockholders of the Company on or about June 18, 1997.
The date of this Proxy Statement is June 18, 1997.
The Company is subject to the informational requirements of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), and in accordance
therewith files reports, proxy statements and other information with the
Securities and Exchange Commission (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.
3
<PAGE>
SPECIAL NOTE REGARDING FORWARD--LOOKING STATEMENTS
Certain statements in the Summary and elsewhere in this Proxy Statement
constitute "forward-looking statements" within the meaning of the Private
Securities Litigation Reform Act of 1995, as amended (the "Reform Act"). Such
forward-looking statements involve known and unknown risks, uncertainties and
other factors which may cause the actual results, performance or achievements of
the Company, or industry results, to be materially different from any future
results, performance or achievements expressed or implied by such
forward-looking statements. Such factors 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; 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 republics of the former Soviet
Union, the People's Republic of China (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 republics of the
former Soviet Union and the PRC; exchange rate fluctuations; license renewals
for the Company's communications investments in Eastern Europe, the republics of
the former Soviet Union 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 Proxy
Statement, including the factors described in "CERTAIN CONSIDERATIONS."
4
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
---------
<S> <C>
SUMMARY INFORMATION........................................................................................ 8
Business of MMG.......................................................................................... 8
Business of P&F.......................................................................................... 8
The Proposed Transaction................................................................................. 9
Reasons for the Proposed Transaction; Recommendation of MMG's Board of Directors......................... 9
Conditions to the Stock Purchase Agreement............................................................... 11
Accounting Treatment for the Proposed Transaction........................................................ 11
Dissenters' Rights....................................................................................... 11
Regulatory Filings and Approvals......................................................................... 11
Certain Federal Income Tax Consequences.................................................................. 11
Proxies; Change of Vote.................................................................................. 11
Equivalent Per Share Data................................................................................ 12
Summary Financial Data................................................................................... 12
SUMMARY CONSOLIDATED FINANCIAL DATA........................................................................ 13
CERTAIN CONSIDERATIONS..................................................................................... 14
CHANGE IN BUSINESS OF MMG.............................................................................. 14
FAILURE OF TRANSACTIONS TO CLOSE....................................................................... 14
CLASSIFICATION AS AN INVESTMENT COMPANY................................................................ 14
THE COMPANY'S 1996 STOCK PLAN.......................................................................... 15
MMG--Related and General Considerations.................................................................. 15
OPERATING LOSSES; NO ASSURANCE OF PROFITABILITY........................................................ 15
FUTURE FINANCING NEEDS................................................................................. 15
Communications Group Considerations...................................................................... 16
POLITICAL, SOCIAL AND ECONOMIC RISKS................................................................... 16
COMPETITIVE INDUSTRIES................................................................................. 16
GENERAL OPERATING RISKS................................................................................ 17
RISKS INHERENT IN FOREIGN INVESTMENT................................................................... 17
DEVELOPING LEGAL STRUCTURES IN TARGET MARKETS.......................................................... 18
RISK INHERENT IN GROWTH STRATEGY....................................................................... 19
APPROVALS AND UNCERTAINTY OF LICENSE RENEWALS.......................................................... 19
EXCHANGE RATE FLUCTUATIONS AND INFLATION RISKS IN TARGET MARKETS....................................... 20
POSSIBLE INABILITY TO CONTROL CERTAIN JOINT VENTURES................................................... 20
TECHNICAL APPROVAL OF TELEPHONY EQUIPMENT.............................................................. 21
TECHNOLOGICAL OBSOLESCENCE............................................................................. 21
INFORMATION REGARDING THE MEETING.......................................................................... 22
The Annual Meeting....................................................................................... 22
PROPOSAL NO. 1--THE PROPOSED TRANSACTION................................................................... 23
General.................................................................................................. 23
Use of Proceeds.......................................................................................... 24
Background of the Proposed Transaction................................................................... 24
Reasons for the Proposed Transaction..................................................................... 26
Recommendation of MMG's Board of Directors............................................................... 28
Opinion of Financial Advisor............................................................................. 28
</TABLE>
5
<PAGE>
<TABLE>
<CAPTION>
PAGE
---------
<S> <C>
ANALYSIS OF SELECTED PUBLIC COMPANIES.................................................................. 29
ANALYSIS OF SELECTED MERGERS AND ACQUISITIONS.......................................................... 30
LIBRARY TRANSFER ANALYSIS.............................................................................. 31
DISCOUNTED CASH FLOW ANALYSIS.......................................................................... 32
Interests of Certain Persons............................................................................. 33
Terms and Conditions of the Stock Purchase Agreement..................................................... 34
P&F CLOSING CONDITIONS................................................................................. 34
MMG CLOSING CONDITIONS................................................................................. 35
TERMINATION............................................................................................ 35
EXPENSES............................................................................................... 36
BREAK-UP FEE........................................................................................... 36
CONDUCT OF BUSINESS OF THE ENTERTAINMENT COMPANIES PRIOR TO THE CLOSING OF THE
PROPOSED TRANSACTION................................................................................. 37
AGREEMENT NOT TO SOLICIT OTHER OFFERS.................................................................. 38
RIGHT OF FIRST NEGOTIATION............................................................................. 38
INDEMNIFICATION; LIMITATION ON DAMAGES................................................................. 38
Accounting Treatment for the Proposed Transaction........................................................ 38
Dissenters' Rights....................................................................................... 38
Regulatory Filings and Approvals......................................................................... 38
SELECTED CONSOLIDATED FINANCIAL DATA....................................................................... 45
CERTAIN FEDERAL INCOME TAX CONSEQUENCES.................................................................... 46
Election to Treat Sale of the Shares as Sale of Assets................................................... 46
Limitations on Loss Carryforwards........................................................................ 46
INFORMATION REGARDING MMG.................................................................................. 48
Business of MMG.......................................................................................... 48
THE COMMUNICATIONS GROUP............................................................................... 48
THE ENTERTAINMENT GROUP................................................................................ 48
Security Ownership of Certain Beneficial Owners.......................................................... 50
Securities Beneficially Owned by Directors and Executive Officers........................................ 50
Directors of MMG......................................................................................... 52
Meetings and Certain Committees of the Board............................................................. 52
Compensation of Directors................................................................................ 53
Executive Compensation................................................................................... 54
Pension Plans............................................................................................ 55
Option/SAR Grants During the Year Ended December 31, 1996................................................ 57
Aggregated Option and SAR Exercises in 1996 and Fiscal Year-End Option and SAR Values.................... 58
Certain Relationships and Related Transactions........................................................... 59
MMG'S RELATIONSHIP WITH METROMEDIA COMPANY............................................................. 59
CERTAIN AGREEMENTS REGARDING EMPLOYMENT................................................................ 61
INDEMNIFICATION AGREEMENTS............................................................................. 62
Compliance with Section 16(a) of the Exchange Act........................................................ 62
Compensation Committee Interlocks and Insider Participation.............................................. 63
Compensation Committee Report on Compensation............................................................ 63
Performance Graph........................................................................................ 65
METROMEDIA INTERNATIONAL GROUP CUMULATIVE TOTAL SHAREHOLDER RETURN..................................... 65
INFORMATION REGARDING P&F.................................................................................. 66
</TABLE>
6
<PAGE>
<TABLE>
<CAPTION>
PAGE
---------
<S> <C>
Business of P&F.......................................................................................... 66
P&F Shareholders......................................................................................... 66
PROPOSAL NO. 2--ELECTION OF DIRECTORS...................................................................... 67
PROPOSAL NO. 3--RATIFICATION OF THE APPOINTMENT OF INDEPENDENT AUDITORS.................................... 69
PROPOSAL NO. 4--STOCKHOLDER PROPOSAL....................................................................... 70
ANNUAL REPORT; INCORPORATION BY REFERENCE.................................................................. 72
STOCKHOLDER PROPOSALS FOR 1998 ANNUAL MEETING.............................................................. 72
OTHER BUSINESS............................................................................................. 72
<CAPTION>
APPENDICES
- -----------------------------------------------------------------------------------------------------------
<S> <C>
Appendix A Stock Purchase Agreement..................................................................... A-1
Appendix B Stockholders Agreement....................................................................... B-1
Appendix C DLJ Fairness Opinion......................................................................... C-1
</TABLE>
<TABLE>
<CAPTION>
EXHIBITS
- ------------
<S> <C> <C>
Exhibit 1 MMG's Annual Report on Form 10-K, as amended, for the year ended December 31, 1996...........
Exhibit 2 MMG's Quarterly Report on Form 10-Q for the quarter ended March 31, 1997.....................
Exhibit 3 MMG's Current Report on Form 8-K dated February 11, 1997.....................................
Exhibit 4 MMG's Current Report on Form 8-K dated May 2, 1997...........................................
Exhibit 5 Consolidated Financial Statements and related schedules of The Actava Group Inc. included in
the Annual Report on Form 10-K, as amended, for the fiscal year ended December 31, 1994......
Exhibit 6 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.................
Exhibit 7 MMG's Form 8-A dated November 1, 1995........................................................
</TABLE>
7
<PAGE>
SUMMARY INFORMATION
THE FOLLOWING SUMMARY IS QUALIFIED BY THE DETAILED INFORMATION AND/OR
FINANCIAL STATEMENTS INCLUDED ELSEWHERE IN THIS PROXY STATEMENT, APPENDICES A, B
AND C AND THE EXHIBITS HERETO. 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
4 FOR ADDITIONAL FACTORS RELATING TO SUCH STATEMENTS. CERTAIN CAPITALIZED TERMS
USED IN THIS SUMMARY ARE DEFINED ELSEWHERE IN THIS PROXY STATEMENT. ALL
STOCKHOLDERS ARE URGED TO READ THIS PROXY STATEMENT, THE APPENDICES AND THE
EXHIBITS HERETO IN THEIR ENTIRETY.
BUSINESS OF MMG
MMG is a global communications, entertainment and media company currently
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
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").
If the Proposed Transaction is approved and consummated, substantially all of
the Entertainment Group's assets will be sold and as a result, the Company will
narrow its strategic focus to operating the Communications Group. Following
consummation of the Proposed Transaction, the Company will continue to own and
operate Landmark in order to maximize the value of these assets. The Company
believes that Landmark, which operated 50 theaters with 138 screens at December
31, 1996, is the largest exhibitor of specialized motion pictures and art films
in the United States. The Company also owns two non-core assets, Snapper, Inc.
("Snapper"), a premium lawn and garden equipment manufacturer and supplier, and
approximately 39% of RDM Sports Group, Inc. ("RDM"), a leading sporting goods
manufacturer listed on the New York Stock Exchange. The Company intends to
actively manage Snapper in order to maximize Snapper's long-term value. The
Company is continuing to pursue opportunities to sell its investment in RDM.
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 MCEG Sterling
Incorporated ("Sterling") with and into the Company (collectively, the "November
1 Merger"), the Company changed its name from "The Actava Group Inc." to
"Metromedia International Group, Inc." The Company is a holding company that
currently owns two strategic operating companies, Orion and MITI. Goldwyn and
MPCA are subsidiaries of Orion. The Company also owns Snapper and its interest
in RDM. Metromedia provides certain management services to the Company pursuant
to the Management Agreement described below and the Metromedia Holders are
currently the Company's largest stockholders, collectively owning approximately
26% of the outstanding shares of Common Stock. See "INFORMATION REGARDING
MMG--Certain Relationships and Related Transactions--MANAGEMENT AGREEMENT."
BUSINESS OF P&F
P&F is a holding company that owns all of the outstanding capital stock of
MGM. P&F is controlled (directly or indirectly) by two principal shareholders
(the "P&F Stockholders"), Seven Network Limited, a publicly traded Australian
corporation ("Seven"), and Tracinda Corporation, a Nevada corporation owned and
controlled by Mr. Kirk Kerkorian ("Tracinda"). MGM is actively engaged in the
worldwide production and distribution of entertainment products, including
motion pictures, television programming, home video, interactive media, music,
licensed merchandise, a current 1,600-title film library, a 4,500-title home
video library, and a significant television library. The company's operating
units include Metro-Goldwyn-Mayer Pictures, United Artists Pictures, MGM
Worldwide Television, MGM Telecommunications Group, MGM Distribution Co., MGM
Home Entertainment/Consumer Products, Metro-Goldwyn-Mayer Music and MGM
Interactive, among others.
8
<PAGE>
THE PROPOSED TRANSACTION
THE SALE OF THE ENTERTAINMENT COMPANIES. Pursuant to the terms of the Stock
Purchase Agreement, MMG proposes to sell substantially all of the Entertainment
Group's assets and liabilities (except Landmark and certain specified
liabilities) to P&F by selling the Shares for an aggregate purchase price of
$573 million, less amounts required to repay the Orion Credit Facility and other
Orion indebtedness (which amounts aggregated approximately $285.3 million at May
31, 1997) (the "Purchase Price"). The assets to be sold to P&F include MMG's
entire film and television library, consisting of approximately 2,200 titles,
the production and distribution activities of the Entertainment Group, which
include the operations of Orion, Goldwyn Entertainment Company ("Goldwyn") and
Motion Picture Corporation of America ("MPCA"), as well as 12 substantially
completed films and 5 direct-to-video features and substantially all of the
liabilities of these entities. MMG will retain and actively manage Landmark.
As a result of the sale of the Entertainment Companies, MMG's strategic
focus will be significantly altered. The Company will continue to operate the
businesses conducted by the Communications Group, and it will actively manage
Landmark and Snapper in order to maximize their value. See "CERTAIN
CONSIDERATIONS--Change in Business of MMG." On a pro forma basis, assuming the
Proposed Transaction had been consummated at December 31, 1996, the
Entertainment Companies constituted approximately 45.5% of the Company's total
assets as of December 31, 1996. The Company believes that the sale of the
Entertainment Companies will allow MMG to focus on expanding the business
currently conducted by the Communications Group, which will continue to seek to
capitalize upon the potential in the global telecommunications market.
FINANCING. Consummation of the Proposed Transaction is not subject to P&F
obtaining financing. Prior to the execution of the Stock Purchase Agreement, P&F
caused the delivery of (i) the Commitment Letter of Morgan Guaranty Trust
Company ("Morgan"), which provides that Morgan is committed, subject to
customary closing conditions and the consummation of the Proposed Transaction,
to provide a $250 million credit facility to MGM (the "Morgan Facility"),
secured by all of the assets of the Entertainment Companies and (ii) an
Investment Agreement, which provides that the P&F Stockholders are committed to
purchase an additional $360 million of the common stock of P&F to finance the
remainder of the Purchase Price.
REPAYMENT OF MMG DEBT. Because the Company has been advised by its regular
outside legal counsel, Paul, Weiss, Rifkind, Wharton & Garrison ("Paul Weiss")
that the Proposed Transaction constitutes a sale of MMG's assets "substantially
as an entirety," MMG will use approximately $140 million of the net cash
proceeds after repayment of the indebtedness of the Entertainment Companies to
repay the Company's outstanding subordinated debentures in accordance with the
indentures for such debentures.
USE OF PROCEEDS. Following the consummation of the Proposed Transaction,
and after repaying substantially all of the Company's outstanding indebtedness,
the Company intends to use the remaining net proceeds (approximately $147.7
million before taxes) to finance the Communication Group's activities, including
the continued build-out of the Communications Group's existing systems and the
completion of pre-operational systems, and to acquire interests in joint
ventures in new markets.
REASONS FOR THE PROPOSED TRANSACTION; RECOMMENDATION OF MMG'S BOARD OF DIRECTORS
In reaching their decision to approve the Stock Purchase Agreement, the
Board of Directors of MMG consulted with its management team and advisors, and
independently considered the material factors described elsewhere in this Proxy
Statement. See "PROPOSAL NO. 1--THE PROPOSED TRANSACTION--Reasons for the
Proposed Transaction." Based upon its independent review of such factors and the
other factors set forth herein, the Board of Directors of MMG approved the Stock
Purchase Agreement.
THE MMG BOARD OF DIRECTORS HAS UNANIMOUSLY APPROVED THE STOCK PURCHASE
AGREEMENT AND THE PROPOSED TRANSACTION AND RECOMMENDS THAT MMG STOCKHOLDERS VOTE
"FOR" APPROVAL AND ADOPTION OF THE STOCK PURCHASE AGREEMENT. For a discussion of
the factors considered by the Board of Directors of MMG in
9
<PAGE>
reaching their decision, see "PROPOSAL NO. 1--THE PROPOSED
TRANSACTION--Background of the Proposed Transaction" and "--Reasons for the
Proposed Transaction."
OPINION OF FINANCIAL ADVISOR
On May 2, 1997, Donaldson, Lufkin & Jenrette Securities Corporation ("DLJ"),
financial advisor to MMG in connection with the Proposed Transaction, delivered
its oral opinion (which it subsequently confirmed in writing) to the Board of
Directors of MMG to the effect that on and as of the date of such opinion, and
based upon the procedures and subject to the assumptions described in such
opinion, the consideration to be received by MMG in the Proposed Transaction is
fair to MMG from a financial point of view (the "DLJ Fairness Opinion"). The DLJ
Fairness Opinion is attached as Appendix C to this Proxy Statement and MMG
Stockholders are urged to read this opinion in its entirety. See "PROPOSAL NO.
1--THE PROPOSED TRANSACTION--Opinion of Financial Advisor."
INTERESTS OF CERTAIN PERSONS
In order to induce Chase to provide the $100 million revolving credit
portion of the Orion Credit Facility, Metromedia and Mr. Kluge, for no
additional consideration, agreed to guarantee to Chase the entire amount of such
revolving credit facility (approximately $94.3 million of which was outstanding
at May 31, 1997) and to guarantee the payment of a third party account
receivable owed to Orion (approximately $11.4 million at May 31, 1997). In
connection with the consummation of the Proposed Transaction, both of these
guarantees will be terminated and released. In considering the approval of the
Proposed Transaction, MMG Stockholders should be aware of these releases, and
that they may give rise to certain officers and directors of the Company having
interests in the Proposed Transaction that are in addition to the interests of
MMG or the MMG Stockholders generally. See "PROPOSAL NO. 1--THE PROPOSED
TRANSACTION--Interests of Certain Persons." In addition, on April 27, 1997, the
Metromedia Holders entered into the Stockholders Agreement pursuant to which the
Metromedia Holders have agreed (i) to vote their shares of Common Stock
(representing approximately 26% of the outstanding Common Stock as of the Record
Date) in favor of the Stock Purchase Agreement, (ii) to vote their shares of
Common Stock against any other proposal (except if such vote would violate their
fiduciary duties) to sell all or substantially all of the Shares or any or all
of the assets of the Entertainment Companies and (iii) not to sell any of their
shares of Common Stock until the later of September 30, 1997 and 90 days after
the date of the MMG Stockholders meeting to be held for the purpose of approving
the Proposed Transaction (as long as such meeting is held by September 30,
1997).
The Company believes that the Proposed Transaction will not trigger any
"change of control" provisions in any agreements or other contracts to which the
Company is a party except for (i) the Metromedia License Agreement (as defined
below), which provides Metromedia with a termination right upon a sale of
substantially all of the assets of the Company, which right Metromedia has
agreed to waive, and (ii) the Company's 1996 Incentive Stock Plan (the "1996
Stock Plan"), which provides that upon a sale of "substantially all" of the
Company's assets, all unvested outstanding options to acquire Common Stock under
such plan would vest and become immediately exercisable. The Company's
Compensation Committee is empowered under the 1996 Stock Plan to interpret the
provisions of such plan and the Compensation Committee has determined that,
although the issue is not free from doubt, the Proposed Transaction constitutes
a sale of "substantially all" of the Company's assets for purposes of the 1996
Stock Plan, thereby accelerating all options outstanding under such plan. As of
May 31, 1997, 4,304,656 options had been issued to the directors, officers and
certain employees of the Company, the Entertainment Companies, and the
Communications Group, and remain outstanding under the 1996 Stock Plan and
2,929,641 of such options had not vested. All such options are exercisable at a
price equal to $9.31 per share. In connection with the consummation of the
Proposed Transaction, all directors, officers and employees (other than officers
and employees of the Entertainment Companies) will be asked to waive the
acceleration of their unvested options (aggregating approximately 1,686,816
options). While all of the directors of the Company have agreed to waive the
accelerated vesting of their options, no assurance can be given that any officer
or employee will similarly agree. Based on a price equal to $11 3/4 per share of
Common Stock (the closing price per share of Common Stock reported by the AMEX
on June 16, 1997), the aggregate value of all accelerated options (assuming NO
optionee agrees to waive acceleration) is equal to $7,148,324.
10
<PAGE>
CONDITIONS TO THE STOCK PURCHASE AGREEMENT
Pursuant to the Stock Purchase Agreement, the obligation of each of MMG,
Orion and P&F to consummate the Proposed Transaction is subject to various
conditions, including, but not limited to (i) approval by a majority of the MMG
Stockholders; (ii) the release of MMG and its affiliates (including certain of
the Metromedia Holders) of all obligations under the Orion Credit Facility; and
(iii) the release of MMG of all obligations as guarantor under Orion's existing
lease (the "Orion Lease"), and certain other specified conditions. For a more
detailed description of the conditions to the consummation of the Proposed
Transaction, see "PROPOSAL NO. 1--THE PROPOSED TRANSACTION--Terms and Conditions
of the Stock Purchase Agreement."
ACCOUNTING TREATMENT FOR THE PROPOSED TRANSACTION
The Proposed Transaction will be accounted for as a sale of the
Entertainment Companies.
DISSENTERS' RIGHTS
The MMG Stockholders are not entitled to dissenters' rights of appraisal or
other dissenters' rights under Delaware law with respect to the Proposed
Transaction or any transactions contemplated by the Stock Purchase Agreement.
REGULATORY FILINGS AND APPROVALS
In accordance with the Stock Purchase Agreement, the parties have made the
appropriate filings required under the Hart-Scott-Rodino Antitrust Improvements
Act of 1976, as amended (the "Hart-Scott Act"), in connection with the
transactions contemplated by the Stock Purchase Agreement, and the consummation
of the Proposed Transaction is subject to the expiration or early termination of
the waiting period prescribed under such Act. The applicable waiting period
under the Hart-Scott-Rodino Act expired on June 12, 1997. See "PROPOSAL NO.
1--THE PROPOSED TRANSACTION--Regulatory Filings and Approvals."
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
The Company and P&F will elect to treat the sale of all of the Shares as a
sale of the assets of Orion and the other Entertainment Companies for Federal,
state, local and foreign income tax purposes. Orion and the other Entertainment
Companies will recognize gain or loss equal to the difference between (i) the
portion of the cash received by the Company and the liabilities of Orion
satisfied or assumed in connection with the sale of the Shares allocated to
particular assets of the Entertainment Companies and (ii) the tax basis with
respect to such assets. The Company intends, subject to the limitations
discussed herein, to use net operating loss carryforwards to offset any gain so
recognized by MMG as a result of the sale of the Entertainment Companies. MMG
has not completed its calculations of the gain which will be recognized as a
result of the sale of the Entertainment Companies. While MMG estimates that its
net operating loss carryforwards will be sufficient to offset most of any gain
so recognized for Federal income tax purposes, MMG currently believes that it
will be required to pay Federal, state, local and foreign taxes. At the present
time, however, it is not practicable to accurately quantify the amount of taxes
that will be payable upon consummation of the Proposed Transaction. The Company
does not believe that the taxes payable as a result of the consummation of the
Proposed Transaction will have a material adverse effect on the Company's
results of operations and financial condition. See "CERTAIN FEDERAL INCOME TAX
CONSEQUENCES."
PROXIES; CHANGE OF VOTE
MMG Stockholders who have delivered a proxy to MMG may revoke the proxy at
any time prior to its exercise at the MMG Annual Meeting by giving written
notice to the Secretary of MMG, by signing and
11
<PAGE>
returning a later dated proxy card or by voting in person at the MMG Annual
Meeting. All written notices of revocation and other communications with respect
to revocations of proxies should be addressed by MMG Stockholders to Metromedia
International Group, Inc., One Meadowlands Plaza, East Rutherford, New Jersey
07073-2173, Attention: Arnold L. Wadler, Secretary.
EQUIVALENT PER SHARE DATA
The following tables set forth certain data concerning the historical net
income (loss), dividends and book value per share for MMG and for MMG on a pro
forma basis after giving effect to the Proposed Transaction and the repayment of
the Orion Credit Facility, the Entertainment Companies' other long-term
indebtedness and MMG's 6 1/2% Convertible Debentures due 2002 (the "6 1/2%
Convertible Debentures"), 9 1/2% Debentures due 1998 (the "9 1/2% Debentures")
and 10% Debentures due 1999 (the "10% Debentures"), as if such repayments had
occurred at the beginning of the period presented. The information below should
be read in conjunction with the unaudited Pro Forma Financial Statements of MMG
and the historical financial statements of MMG contained elsewhere in this Proxy
Statement. The unaudited pro forma equivalent per share data shows, for each
share of Common Stock, the relevant information as if the Proposed Transaction
was consummated.
<TABLE>
<CAPTION>
THREE MONTHS YEAR ENDED
ENDED DECEMBER 31,
MMG -- HISTORICAL MARCH 31, 1997 1996
- ----------------------------------------------------------------------------------- --------------- -------------
<S> <C> <C>
Net income (loss) from continuing operations before discontinued operations and
extraordinary item per common share.............................................. $ (0.34) $ (1.74)
Cash dividends declared per share.................................................. -- --
Book value per common share at end of period....................................... $ 3.46 $ 4.05
</TABLE>
<TABLE>
<CAPTION>
THREE MONTHS YEAR ENDED
ENDED DECEMBER 31,
MMG -- PRO FORMA MARCH 31, 1997 1996
- ----------------------------------------------------------------------------------- --------------- -------------
<S> <C> <C>
Net income (loss) from continuing operations before discontinued operations and
extraordinary item per common stock.............................................. $ (0.17) $ (1.49)
Cash dividends declared per share.................................................. -- --
Book Value per common share at end of period....................................... $ 7.56 $ 8.86
</TABLE>
SUMMARY FINANCIAL DATA
The following tables present selected historical financial data of MMG which
are derived from the audited and unaudited financial statements of MMG and
selected unaudited pro forma financial data after giving effect to the Proposed
Transaction and the repayment of the Orion Credit Facility, Orion's other long
term indebtedness and MMG's 6 1/2% Convertible Debentures, 9 1/2% Debentures and
10% Debentures, as if they had occurred at the beginning of the periods
presented.
The pro forma data is not necessarily indicative of the results of
operations or the financial condition that would have been reported if the
aforementioned transactions had occurred during those periods, or as of those
dates, or that may be reported in the future.
This data should be read in conjunction with the consolidated financial
statements of MMG (and the related notes thereto) and the unaudited pro forma
financial information contained elsewhere in this Proxy Statement. See "PRO
FORMA CONSOLIDATED CONDENSED FINANCIAL INFORMATION OF THE COMPANY" and "ANNUAL
REPORT; INCORPORATION BY REFERENCE."
12
<PAGE>
SUMMARY CONSOLIDATED FINANCIAL DATA
MMG--HISTORICAL
The following table presents selected historical financial data of the
Company, which are derived from the consolidated 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" in the
Company's Annual Report on Form 10-K, as amended, for the year ended December
31, 1996, and in the Company's Quarterly Report on Form 10-Q for the quarter
ended March 31, 1997, each of which is contained elsewhere in this Proxy
Statement.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEARS ENDED
MARCH 31, DECEMBER 31, YEARS ENDED FEBRUARY 28,
-------------------- -------------------- -------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
(UNAUDITED)
<CAPTION>
1997 1996 1996(1) 1995(2) 1995 1994 1993
--------- --------- --------- --------- --------- --------- ---------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
Revenues...................................... $ 103,418 $ 30,805 $ 201,755 $ 138,970 $ 194,789 $ 175,713 $ 222,318
Equity in losses of joint ventures............ (1,598) (1,783) (11,079) (7,981) (2,257) (777) --
Loss from continuing operations before
discontinued operations and extraordinary
item........................................ (22,258) (19,141) (94,433) (87,024) (69,411) (132,530) (72,973)
Loss per common share from continuing
operations before discontinued operations
and extraordinary item...................... (0.34) (0.45) (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 Snapper 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 The Actava Group Inc. (an acquired company
for accounting purposes) and MCEG 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.
MMG--PRO FORMA
<TABLE>
<CAPTION>
THREE MONTHS
ENDED YEAR ENDED
MARCH 31, 1997 DECEMBER 31, 1996
---------------- -----------------
<S> <C> <C>
Revenues..................................................................... $ 75,998 $223,715
Loss from continuing operations.............................................. (11,070) (84,517)
Per share of Common Stock: Primary......................................... (0.17) (1.49)
Dividends per share of Common Stock.......................................... -- --
Total assets................................................................. 728,358 --
Total liabilities............................................................ 186,792 --
</TABLE>
13
<PAGE>
CERTAIN CONSIDERATIONS
IN ADDITION TO THE OTHER INFORMATION CONTAINED IN THIS PROXY STATEMENT, THE
FOLLOWING FACTORS SHOULD BE CONSIDERED CAREFULLY IN EVALUATING WHETHER TO
APPROVE THE PROPOSED TRANSACTION AND THE STOCK PURCHASE AGREEMENT. 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 4 FOR ADDITIONAL FACTORS RELATING TO SUCH
STATEMENTS.
TRANSACTION - RELATED CONSIDERATIONS
CHANGE IN BUSINESS OF MMG
The sale of the Entertainment Companies will result in a major change in the
strategic focus of MMG's business. For the fiscal year ended December 31, 1996
and the quarter ended March 31, 1997, the Entertainment Group reported $165.2
million and $44.4 million, respectively, in revenues or approximately 81.9% or
43.0% respectively of MMG's consolidated revenues. After consummation of the
Proposed
Transaction, the Company's sole remaining strategic asset will be the
Communications Group, which reported approximately $14 million and $5.2 million
of revenues in the year ended December 31, 1996 and the quarter ended March 31,
1997, respectively. The Company's remaining reported consolidated revenues were
generated by Snapper. MMG believes that the sale of the Shares and the resulting
divestiture of the Entertainment Companies will enable MMG to focus its cash
resources on the Communications Group. However, as a result of the consummation
of the Proposed Transaction, MMG will lose the revenues generated by the
Entertainment Companies. There can be no assurance that the Communications Group
will generate sufficient revenues in the future.
FAILURE OF TRANSACTIONS TO CLOSE
There can be no assurance that all of the conditions to the Proposed
Transaction will be satisfied or that the Proposed Transaction will be
consummated. In addition, the parties have the right to terminate the Stock
Purchase Agreement upon the occurrence or nonoccurrence of certain events.
Failure to consummate the Proposed Transaction will result in material expenses
to MMG which will not be reimbursed, including, under certain circumstances, the
payment by MMG of a break-up fee of $30 million (inclusive of actual
out-of-pocket expenses incurred by P&F of up to $10 million in connection with
or arising out of the Stock Purchase Agreement). In such event, there may be
other operational changes required to address the impact on the Company of the
recent adverse results reported by the Entertainment Group, including reducing
the Entertainment Group's production and distribution activities or directing
the Company's cash resources to the Entertainment Group. See "PROPOSAL NO.
1--THE PROPOSED TRANSACTION-- Terms and Conditions of Stock Purchase Agreement."
CLASSIFICATION AS AN INVESTMENT COMPANY
If MMG uses the cash available to it from the consummation of the Proposed
Transaction to acquire "investment securities" having a value exceeding 40% of
the value of its total assets on an unconsolidated basis, MMG could be deemed to
be an investment company subject to regulation under the Investment Company Act
of 1940, as amended. However, "government securities" or "cash" items are not
considered "investment securities." Accordingly, to the extent that MMG
purchases securities, it may have to invest its cash in government securities to
avoid the application of the Investment Company Act of 1940. "Government
securities" include any securities issued or guaranteed as to principal or
interest by the United States, or by a person controlled or supervised by and
acting as an instrumentality of the Government of the United States pursuant to
authority granted by the Congress of the United States, or any certificate of
deposit for any of the foregoing. Because of the limited risk of government
securities, the yields of Government securities are lower than yields obtainable
from investments with only somewhat more risk, such as investment grade
corporate securities.
14
<PAGE>
THE COMPANY'S 1996 STOCK PLAN
The 1996 Stock Plan provides that upon a sale of "substantially all" of the
Company's assets, all unvested outstanding options to acquire Common Stock under
such plan would vest and become immediately exercisable. The Company's
Compensation Committee is empowered under the 1996 Stock Plan to interpret the
provisions of such plan and the Compensation Committee has determined that,
although the issue is not free from doubt, the Proposed Transaction constitutes
a sale of "substantially all" of the Company's assets for purposes of the 1996
Stock Plan, thereby accelerating all options outstanding under such plan. As of
May 31, 1997, 4,304,656 options had been issued to the directors, officers and
certain employees of the Company, the Entertainment Companies, and the
Communications Group, and remain outstanding under the 1996 Stock Plan and
2,929,641 of such options had not vested. All such options are exercisable at a
price equal to $9.31 per share. In connection with the consummation of the
Proposed Transaction, directors, such officers and employees (other than
officers and employees of the Entertainment Companies) will be asked to waive
the acceleration of their unvested options (aggregating approximately 1,686,816
options). While all of the directors of the Company have agreed to waive the
accelerated vesting of their options, no assurance can be given that any officer
or employee will similarly agree. Based on a price equal to $11 3/4 per share of
Common Stock (the closing price per share of Common Stock reported by the AMEX
on June 16, 1997), the aggregate value of all accelerated options (assuming NO
optionee agrees to waive acceleration) is equal to $7,148,324.
MMG-RELATED AND GENERAL CONSIDERATIONS
OPERATING LOSSES; NO ASSURANCE OF PROFITABILITY
For the years ended December 31, 1996 and 1995, MMG reported a loss from
continuing operations of approximately $94.4 million and $87.0 million,
respectively, and a net loss of $115.2 million and $413 million, respectively.
For the quarters ended March 31, 1997 and 1996, respectively, MMG reported a
loss of $22.3 million and $19.1 million, respectively. On a pro forma basis,
assuming consummation of the Proposed Transaction had occurred at December 31,
1996, MMG's loss from continuing operations would have been $84.5 million. MMG
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 were consolidated and reported with MMG's consolidated results of
operations as of November 1, 1996. In addition, because the Communications Group
is in its early stages of development, MMG expects this group to continue to
generate significant losses as it continues to build out and market its
services. Without the revenues previously reported by the Entertainment
Companies, MMG's losses will likely continue. Accordingly, MMG expects to
generate consolidated losses for the foreseeable future.
FUTURE FINANCING NEEDS
Assuming that the Proposed Transaction is consummated, the Company's
remaining strategic business will be the business conducted by the
Communications Group. The Communications Group is engaged in businesses that
require the investment of significant amounts of capital in order to construct
and develop operational systems and market services. See "INFORMATION REGARDING
MMG--Business of MMG". In connection with the consummation of the Proposed
Transaction, the Company anticipates that it will receive approximately $287.7
million of net cash proceeds (assuming the Entertainment Companies had
approximately $285.3 million of outstanding debt outstanding at May 31, 1997).
Because the Company has been advised by Paul Weiss that the Proposed Transaction
constitutes a sale of MMG's assets "substantially as an entirety", MMG will use
approximately $140 million of such net proceeds to repay all of its outstanding
subordinated debentures, leaving MMG with approximately $147.7 million of net
cash proceeds (before taxes). As a result, although MMG will have no significant
long-term debt, MMG may require additional financing in order to satisfy the
Communication Group's on-going capital requirements and to achieve the
Communication Group's long-term business strategies. Such additional capital may
be
15
<PAGE>
provided through the public or private sale of debt or equity securities. On
April 4, 1997, MMG filed a Registration Statement with the Commission to
register $125 million of convertible preferred stock. No determination has been
made by MMG as to whether it will proceed with this offering. If MMG elects to
proceed, no assurance can be given that the Company will be able to consummate
this offering or that any additional financing will be available to MMG on
acceptable terms, if at all. If adequate additional funds are not available, MMG
may be required to curtail significantly its long term business objectives and
the Company's results from operations may be materially and adversely affected.
COMMUNICATIONS GROUP CONSIDERATIONS
Upon consummation of the Proposed Transaction, the Communications Group will
be MMG's sole remaining strategic operating business and, accordingly, the
following factors should be seriously considered by MMG Stockholders in deciding
whether to approve the Proposed Transaction.
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 presently 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 varying degrees 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 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 presently 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.
COMPETITIVE INDUSTRIES
The Communications Group operates in industries that are highly competitive
worldwide. MMG 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 infrastructure 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
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other selected emerging markets and compete directly with the Communications
Group's operations. In addition, MMG 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.
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 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 MMG and its operations.
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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. Unlike the Communications Group's joint ventures in Eastern Europe and
in the republics of the former Soviet Union, MMG's affiliated joint ventures in
China must structure 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 such joint ventures
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 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
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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
Company'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. The Hungarian 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 it 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 MMG 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 their respective markets and their 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. These joint ventures applied for renewals and expect new
licenses to be issued. Four other licenses held or used by Communications
Group's 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 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
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adverse effect on MMG. 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 MMG.
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 MMG. In
addition, the economies of certain of the Communications Group's target markets,
including but not limited to Russia, Romania, Hungary, Lithuania, Belarus,
Georgia, China and Kazakstan, 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 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.
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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.
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INFORMATION REGARDING THE MEETING
THE ANNUAL MEETING
The Annual Meeting is scheduled to be held in the Orion Pictures Corporation
Screening Room at 1888 Century Park East, Los Angeles, California 90067, on July
10, 1997, beginning at 9:00 a.m., Los Angeles time. MMG Stockholders will be
asked to vote upon (i) a proposal to consider and approve the Stock Purchase
Agreement and the consummation of the transactions contemplated thereby,
including the Proposed Transaction (Proposal No. 1); (ii) the election of two
persons to serve three-year terms as Class II Directors of MMG's Board of
Directors (Proposal No. 2), (iii) a proposal to ratify the selection of KPMG
Peat Marwick LLP as MMG's independent accountants for the year ending December
31, 1997 (Proposal No. 3), and (iv) a proposal submitted by a Stockholder of MMG
which requests that the Board of Directors take action to amend the Company's
Certificate of Incorporation to provide that Stockholders may call special
meetings and take action by written consent (Proposal No. 4).
The Board of Directors of MMG knows of no business that will be presented
for consideration at the Annual Meeting other than the matters described in this
Proxy Statement.
RECORD DATE; QUORUM. Only holders of record of Common Stock as of the close
of business on June 13, 1997 (the "Record Date") will be entitled to notice of
and to vote at the Annual Meeting. As of the Record Date, there were 66,157,971
shares of Common Stock outstanding and entitled to vote at the Annual Meeting,
held by approximately 7,732 stockholders of record, with each share entitled to
one vote. Except with respect to broker non-votes, the consequences of which are
described below, shares of Common Stock represented by proxies marked "ABSTAIN"
for any proposal presented at the Annual Meeting and shares of Common Stock held
by persons in attendance at the Annual Meeting who abstain from voting on any
such proposal will be counted for purposes of determining the presence of a
quorum but shall not be voted for or against such proposal. Because of the vote
required (see below) to approve the proposals presented at the Annual Meeting,
abstentions will have the effect of a vote against such proposal (other than
Proposal No. 2). Shares as to which a broker indicates it has no discretion to
vote and which are not voted will be considered not present at such meeting for
purposes presented at the Annual Meeting. Because of the vote required to
approve Proposals No. 1 and No. 4, broker non-votes with respect to such
proposals will have the effect of a vote against Proposals No. 1 and No. 4 and
because of the vote required to approve Proposals No. 2 and No. 3 at the Annual
Meeting, broker non-votes will have no effect on the outcome of the vote on
Proposals No. 2 and No. 3. With respect to the election of directors,
abstentions and broker non-votes will be disregarded and will have no effect on
the vote.
VOTE REQUIRED. Each of the Proposals contained in this Proxy Statement will
be voted upon separately at the Annual Meeting. Because the Company has been
advised by Paul Weiss that the Proposed Transaction constitutes a sale of
"substantially all" of the assets of the Company for purposes of the Delaware
General Corporation Law, consummation of the Proposed Transaction requires the
approval of a majority of the outstanding shares of Common Stock, and,
accordingly, the Company is soliciting proxies with respect thereto. Pursuant to
the Stockholders Agreement, the Metromedia Holders who collectively own, as of
the Record Date, approximately 26% of the outstanding shares of Common Stock,
have agreed to vote such shares in favor of Proposal No. 1. The affirmative vote
of the holders of a majority of all of the issued and outstanding shares of
Common Stock (whether or not represented in person or by proxy at the Annual
Meeting) is required to approve Proposals No. 1 and No. 4. The affirmative vote
of the holders of a plurality of shares of Common Stock present in person or
represented by proxy at the Annual Meeting will be required to elect each of the
Class II Directors to MMG's Board of Directors pursuant to Proposal No. 2. The
affirmative vote of the holders of a majority of shares of Common Stock present
in person or represented by proxy at the Annual Meeting will be required to
approve and adopt Proposal No. 3.
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PROPOSAL NO. 1--THE PROPOSED TRANSACTION
GENERAL
Pursuant to the Stock Purchase Agreement, MMG proposes to sell to P&F
substantially all of the Entertainment Group's assets and liabilities including
its entire film and television library consisting of approximately 2,200 titles,
the production and distribution activities of the Entertainment Group, including
the operations of Orion, Goldwyn and MPCA, as well as 12 substantially completed
films and 5 direct-to-video features and substantially all of the liabilities of
these entities. MMG will retain and actively manage Landmark. The Company
elected to proceed with the Proposed Transaction at this time because it is
currently engaged in two capital-intensive industries and in light of the
Entertainment Group's anticipated cash needs, continuing to manage the
Entertainment Group would have required MMG to either direct cash resources away
from the Communications Group or reduce the Entertainment Group's production and
distribution activities. Moreover, the Board of Directors determined, in its
business judgment, that the businesses of the Communications Group offered the
best long-term potential for growth and profitability relative to the prospects
of the Entertainment Companies. Consequently, the Company elected to enter into
the Proposed Transaction in order to focus its resources in a single strategic
business segment.
Subject to the terms and conditions set forth therein, the Stock Purchase
Agreement provides for the purchase by P&F from MMG of all such assets of the
Entertainment Companies for an aggregate purchase price of $573 million, less
the sum of (i) the greater of (A) all amounts outstanding on December 31, 1996
under the Orion Credit Facility, net of cash on hand of the Entertainment
Companies as of such date and (B) all amounts outstanding on the Closing Date
under the Orion Credit Facility, net of cash on hand of the Entertainment
Companies on the Closing Date (approximately $271.8 million at May 31, 1997)
plus (ii) accrued and unpaid interest on indebtedness under the Orion Credit
Facility accrued to the Closing Date, plus (iii) the greater of (A) $13 million
or (B) all other indebtedness (other than the Orion Credit Facility) of the
Entertainment Companies and interest thereon accrued to, but not including the
Closing Date (approximately $13.5 million at May 31, 1997) (the "Purchase
Price"). P&F is obligated to repay all amounts outstanding under the Orion
Credit Facility at closing and as a result, the Company anticipates that it will
receive approximately $287.7 million of net cash proceeds from P&F at the
closing of the Proposed Transaction (assuming the total indebtedness of the
Entertainment Companies does not exceed their indebtedness outstanding at May
31, 1997).
The consummation of the Proposed Transaction is subject to various
conditions, including (i) the approval of the Stock Purchase Agreement by the
holders of a majority of the outstanding shares of MMG Common Stock; (ii) the
release of MMG and its affiliates from all obligations under the Orion Credit
Facility; (iii) the release of MMG from all obligations under the Orion Lease;
(iv) no change in any Entertainment Company, its assets or the Shares that has
had or could be reasonably expected to have a material adverse effect; (v) the
expiration or early termination of the waiting period under the Hart-Scott-
Rodino Act; and (vi) the ownership of all of the outstanding stock of Landmark
shall have been transferred to an affiliate of MMG (other than any Entertainment
Company). See "PROPOSAL NO. 1--THE PROPOSED TRANSACTION--Terms and Conditions of
the Stock Purchase Agreement." As a result, following consummation of the
Proposed Transaction, MMG will continue to operate the Communications Group and
to own Landmark, Snapper and its interest in RDM and maximize their long-term
value to MMG Stockholders.
Consummation of the Proposed Transaction is not subject to P&F obtaining
financing. Prior to the execution of the Stock Purchase Agreement, P&F caused
the delivery of (i) the Commitment Letter of Morgan which provides that Morgan
is committed, subject to customary closing conditions and the consummation of
the Proposed Transaction, to provide the Morgan Facility and (ii) an Investment
Agreement that provides that the P&F Stockholders are committed to purchase an
additional $360 million of the common stock of P&F to finance the remainder of
the Purchase Price.
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The 1996 Stock Plan provides that upon a sale of "substantially all" of the
Company's assets, all unvested outstanding options to acquire Common Stock under
such plan would vest and become immediately exercisable. The Company's
Compensation Committee is empowered under the 1996 Stock Plan to interpret the
provisions of such plan and the Compensation Committee has determined that,
although the issue is not free from doubt, the Proposed Transaction constitutes
a sale of "substantially all" of the Company's assets for purposes of the 1996
Stock Plan, thereby accelerating all options outstanding under such plan. As of
May 31, 1997, 4,304,656 options had been issued to the directors, officers and
certain employees of the Company, the Entertainment Companies, and the
Communications Group, and remain outstanding under the 1996 Stock Plan and
2,929,641 of such options had not vested. All such options are exercisable at a
price equal to $9.31 per share. In connection with the consummation of the
Proposed Transaction, all directors, officers and employees (other than officers
and employees of the Entertainment Companies) will be asked to waive the
acceleration of their unvested options (aggregating approximately 1,686,816
options). While all of the directors of the Company have agreed to waive the
accelerated vesting of their options, no assurance can be given that any officer
or employee will similarly agree. Based on a price equal to $11 3/4 per share of
Common Stock (the closing price per share of Common Stock reported by the AMEX
on June 16, 1997), the aggregate value of all accelerated options (assuming NO
optionee agrees to waive acceleration) is equal to $7,148,324.
USE OF PROCEEDS
The Company has been advised by its regular outside legal counsel that the
indentures for the Company's subordinated debentures require MMG to use
approximately $140 million of such net cash proceeds from the sale of the
Entertainment Companies to repay all of its outstanding subordinated debentures.
After repaying the Company's outstanding subordinated debentures, the Company
intends to use the remaining net proceeds of approximately $147.7 million before
taxes to support the needs of the Communications Group's investments, including
financing the continued build-out of the Communications Group's existing systems
and the completion of pre-operational systems, and to acquire interests in joint
ventures in new markets.
BACKGROUND OF THE PROPOSED TRANSACTION
Periodically over the last several years, the Company's senior management
has received 15 to 20 inquiries from potential purchasers regarding the sale of
all or a portion of the Entertainment Group's assets. During this time, the
Company's senior management viewed the Entertainment Group as a strategic
business in their plan to build a global media, entertainment and communications
company, but believed that they had a fiduciary duty to the MMG Stockholders to
maximize the value of its various assets. In evaluating potential offers, the
Company's senior management focused on maximizing the aggregate consideration to
be paid by any potential purchaser, selling substantially all of the
Entertainment Group's assets and liabilities as opposed to solely its library of
film and television titles, and maximizing the cash portion of any offer. In
particular, due to the extensive capital requirements of the Communications
Group and the necessity to repay all of the Company's subordinated debentures
simultaneously with the closing of a transaction involving a sale of the
Entertainment Group, the Company's senior management was particularly interested
in receiving offers that consisted largely of cash or cash equivalents. In late
1996 and in early 1997, the Company's senior management received six inquiries
(covering seven companies) from companies interested in conducting a due
diligence investigation of the Entertainment Group. Senior management of the
Company consequently had contact with two likely strategic purchasers (including
P&F) to ascertain whether they would be interested in acquiring all or a
substantial portion of the Entertainment Group or whether the Entertainment
Companies could be merged with or establish a joint venture with any such
company. As a result, the Company entered into six confidentiality letters with
third parties and permitted each party to conduct a preliminary due diligence
investigation of the Entertainment Group. All such companies that began
preliminary due diligence reviews of the Entertainment Group,
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except P&F and another domestic entertainment company, expressed an interest in
acquiring only the Entertainment Group's film and television library, but not
any of the other assets or liabilities.
In early 1997, three potential purchasers intensified their due diligence
review of the Entertainment Group and commenced discussions with the Company's
senior management regarding the structure and terms of any potential transaction
and each of these potential purchasers provided the Company with an offer or
expression of interest, as described below. The Company received an oral offer
from an international entertainment company to acquire the Entertainment Group's
film and television library only for a cash purchase price that was lower than
the Purchase Price. The Company considered this offer inferior to the offer made
by P&F because it provided less consideration to the Company and excluded
significant portions of the assets and liabilities that the Company desired to
sell. The Company also received an offer to combine all of the Entertainment
Companies' assets and liabilities with another domestic entertainment company in
return for cash and an equity interest in the combined companies. Although the
valuation placed on the Entertainment Companies by such company was
approximately equivalent to the Purchase Price being paid by P&F, the Company
determined that this offer was also inferior because it was not an all-cash
offer and was subject to numerous contingencies. Except for the P&F offer, the
Company considered these proposals to be significant expressions of interest but
because they were either less than the Purchase Price and constituted only
select assets or consisted of a significant amount of non-cash consideration,
they were not considered by the Board of Directors of the Company to be firm
offers and the Board of Directors of the Company did not pursue extensive
negotiations with these parties. After receiving these initial expressions of
interest in the Entertainment Companies, the Company's senior management
contacted on an informal basis one well-known major entertainment company that
had the financial capability to pay for and may have had an interest in holding
assets of this type to determine if it was interested in acquiring the
Entertainment Companies. This inquiry did not produce an expression of interest
and the Company otherwise did not actively solicit any other persons.
In early April 1997, senior executives of the Company met with senior
executives of P&F and representatives of J.P. Morgan, P&F's financial advisor,
to begin a preliminary due diligence review of the Entertainment Group. At these
meetings the parties reviewed preliminary due diligence materials relating to
the Entertainment Companies and discussed the general terms of a possible
transaction pursuant to which P&F would acquire all of the assets and
liabilities of the Entertainment Group other than Landmark (subject to P&F's
satisfactory completion of its due diligence review). As the Company's senior
management believed that the discussions with P&F's senior management
contemplated an acquisition of all of the Entertainment Group's assets and
liabilities (other than Landmark) and were at valuations that the Company's
senior management believed were attractive, senior management permitted MGM and
P&F to undertake a more intensive due diligence review. The Company's management
believed that P&F's valuations were attractive based upon reviews of other
confidential valuations that had previously been conducted of the film and
television libraries of the Entertainment Companies in connection with
financings made available to the Company by its bank lenders, which were valued
at amounts lower than the Purchase Price and based upon its own views on the
value of the Entertainment Companies. As a result, during the week of April 14,
1997 discussions intensified between senior management of P&F and the Company
regarding the structure of the Proposed Transaction and the consideration to be
paid by P&F. The senior officers of the Company that negotiated with P&F were
primarily Stuart Subotnick, Vice Chairman, President and Chief Executive Officer
of MMG, Silvia Kessel, Executive Vice President and Chief Financial Officer of
MMG and Arnold L. Wadler, Executive Vice President and General Counsel of MMG.
As described below, Mr. Subotnick is a general partner of Metromedia and
Metromedia will be released of certain guarantee obligations in connection with
the consummation of the Proposed Transaction. See "--Interests of Certain
Persons in the Proposed Transaction." These interests were disclosed to the
Board of Directors of the Company at all meetings held to consider the Proposed
Transaction and have been consistently disclosed in appropriate MMG public
filings. The Board of Directors was notified that negotiations were taking place
and, because the Board of Directors was comfortable that (i) all interests of
certain directors of the Company had been fully disclosed to the Board of
Directors and would be fully
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disclosed to the Stockholders of the Company, (ii) that the interests of Mr.
Subotnick, a member of the Board of Directors and, together with the other
Metromedia Holders, the largest single stockholder of the Company, would be the
same as the other stockholders of the Company, and (iii) the Company is not
compelled to do so under Delaware law, the Board did not consider it necessary
to appoint a special committee of the Board of Directors to conduct such
negotiations. As senior management of the Company was confident that these
discussions had progressed well, on April 21, 1997, senior management of MGM
commenced a series of due diligence meetings in Los Angeles with senior
management of both the Company and Orion. These meetings lasted through April
25, 1997. Simultaneously, legal representatives of MGM, P&F and the Company
commenced negotiations of the terms and provisions of the Stock Purchase
Agreement. P&F's and MGM's legal representatives also began a more extensive
review of due diligence materials supplied by the Entertainment Group.
On April 25, 1997, senior management of MGM, P&F and the Company reached an
understanding on the structure of the transaction and the consideration to be
paid by P&F, subject to the satisfactory resolution of outstanding legal issues.
In addition, on April 25, the Company retained DLJ to evaluate the Proposed
Transaction and determine whether, in its opinion, the consideration to be
received by the Company in the Proposed Transaction was fair to the Company from
a financial point of view. Negotiations on the terms of a letter of intent and
the definitive Stock Purchase Agreement continued from April 25, 1997 through
April 27, 1997. On April 27, 1997, the parties reached an agreement in principle
on the terms of the Proposed Transaction and prepared a non-binding letter of
intent reflecting their agreement. The Company's Board of Directors held a
telephonic meeting on April 27, 1997, during which the letter of intent and the
Proposed Transaction were discussed in detail by senior management and the
Company's outside counsel. DLJ also participated in the April 27, 1997 meeting.
At this meeting, the release of Mr. Kluge, Metromedia and Mr. Subotnick (in his
capacity as a general partner of Metromedia) from their guarantee obligations to
Chase under the Orion Credit Facility were disclosed to and discussed by the
Company's entire Board of Directors. In addition, counsel to the Company
disclosed to the Board of Directors the terms and provisions of the Stockholders
Agreement and noted that the execution and delivery of this agreement was
essential to inducing P&F to execute and deliver the Stock Purchase Agreement.
Following a discussion, the Board of Directors approved the execution of the
letter of intent and as a result, the Company's senior management entered into
the letter of intent (to which the form of the Stock Purchase Agreement was
attached as an exhibit) to complete the Proposed Transaction, subject to the
approval of the definitive agreements by the Company's Board of Directors.
On May 2, 1997, the Company's Board of Directors held a second telephonic
meeting to consider the Proposed Transaction. At this meeting, the Board of
Directors received DLJ's oral opinion (subsequently confirmed in writing) that
the consideration to be paid in the Proposed Transaction was fair to the Company
from a financial point of view. Following a discussion and a disclosure of the
interests of Mr. Kluge, Metromedia and Mr. Subotnick in the Proposed
Transaction, the Board of Directors unanimously approved the Proposed
Transaction and agreed to recommend the same to the MMG Stockholders at the
Annual Meeting.
REASONS FOR THE PROPOSED TRANSACTION
In reaching its decision to recommend and approve the Stock Purchase
Agreement, the MMG Board of Directors consulted with its advisors and considered
the material factors described below. Based upon its review of such factors, the
Board of Directors of MMG approved the Stock Purchase Agreement.
The MMG Board of Directors considered the following factors in reaching the
conclusion to approve the Stock Purchase Agreement and the transactions
contemplated thereby:
- Both the Entertainment Group and the Communications Group currently are
engaged in extremely capital intensive businesses and the disposition of
the Entertainment Companies in accordance with the Proposed Transaction
will enable the Company to narrow its strategic focus and to redeploy its
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available resources into the Communications Group. Moreover, the Board of
Directors determined, in its business judgment, that the businesses of the
Communications Group offered the best long-term potential for growth and
profitability relative to the prospects of the Entertainment Companies.
- The consideration to be paid by P&F to the Company consists entirely of
cash thereby enabling the Company to repay substantially all of its
outstanding long-term indebtedness and providing funds for the operations
of the Communications Group.
- The offer by P&F was for all of the assets of the Entertainment Companies
instead of solely the film and television library and, therefore, enabled
the Company to maximize the purchase price for its entertainment assets.
- The Stock Purchase Agreement does not contain a financing condition for
P&F and, accordingly, the Company is not taking the risk that P&F will be
unable to obtain financing for the Proposed Transaction.
- P&F is assuming substantially all of the liabilities of the Entertainment
Group, except those related to Landmark and certain other specified
litigations and, therefore, the Company will benefit as it will not be
required to use its resources to satisfy such liabilities.
- The Company's financial advisor opined that the consideration to be
received by the Company in the Proposed Transaction is fair to the Company
from a financial point of view.
The MMG Board of Directors also considered the following risks and
uncertainties associated with consummation of the Proposed Transaction:
- Following consummation of the Proposed Transaction, the Company's sole
remaining strategic business will be the Communications Group, which is
capital intensive and in the early stages of development.
- The Company has been advised by Paul Weiss that the Proposed Transaction
would constitute a sale of the Company's assets "substantially as an
entirety" that would require the Company to use a portion of the net cash
proceeds from the Proposed Transaction to repay the Company's subordinated
debentures.
- The Company's Compensation Committee determined that, although not free
from doubt, the Proposed Transaction constitutes a sale of "substantially
all" of the Company's assets for purposes of the 1996 Stock Plan, and, as
a result, all unvested options to acquire shares of Common Stock under
such plan would vest and become immediately exercisable. However, the
Board of Directors of the Company did not consider the impact of the
acceleration of the Company's stock options as a material factor because
(i) the number of shares that could be acquired upon the exercise of
accelerated options represents less than 4% of the Common Stock (assuming
that no optionees agreed to waive acceleration); (ii) as a result of the
capital-intensive nature of the businesses transacted by the Company, the
Company does not report net income and does not anticipate reporting net
income for the foreseeable future and, accordingly, the acceleration of
options will not dilute the Company's reported earnings; and (iii) as the
optionees are required to tender cash upon exercise of an option, the
Company will generate substantial cash from the exercise of these options
over time.
In analyzing the Proposed Transaction and related transactions and in
its deliberations regarding the recommendation of the Stock Purchase
Agreement, the MMG Board of Directors also considered a number of other
factors, including (i) its knowledge of the business, operations,
properties, assets, financial condition and operating results of the
Entertainment Group; (ii) judgments as to MMG's future prospects with and
without the Entertainment Companies; (iii) the terms of the Stock Purchase
Agreement, which were the product of extensive arm's length negotiations;
and (iv) the potential for
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enhanced stockholder value due to the resulting cash infusion and reduction
of debt of the Company. The MMG Board of Directors did not find it practical
to and did not quantify or attempt to attach relative weight to any of the
specific factors considered by it. The MMG Board of Directors concluded that
the opportunities for the Company to streamline its operations by narrowing
the focus of its business were compelling.
Notwithstanding expectations of MMG's senior management regarding the
benefits to be realized from the Proposed Transaction, no assurance can be
given that MMG will be able to realize such benefits or compete effectively
against certain other competitors that possess significantly greater
resources and marketing capabilities than it. See "CERTAIN CONSIDERATIONS."
RECOMMENDATION OF MMG'S BOARD OF DIRECTORS
At the meeting of MMG's Board of Directors held to consider the Stock
Purchase Agreement, the Board of Directors unanimously approved the Proposed
Transaction as being in the best interests of the Company and MMG's
Stockholders. FOR THE REASONS DISCUSSED ABOVE, THE BOARD OF DIRECTORS OF MMG
UNANIMOUSLY APPROVED THE PROPOSED TRANSACTION AND RECOMMENDS THAT MMG
STOCKHOLDERS VOTE "FOR" THE APPROVAL OF THE PROPOSED TRANSACTION AND ALL OTHER
MATTERS RELATING TO THE PROPOSED TRANSACTION TO BE PRESENTED FOR THE
CONSIDERATION AND VOTE OF THE MMG STOCKHOLDERS.
OPINION OF FINANCIAL ADVISOR
MMG engaged DLJ to act as its financial advisor in connection with the Stock
Purchase Agreement and the Proposed Transaction contemplated thereby based upon
DLJ's qualifications, expertise and reputation, as well as DLJ's prior
investment banking relationship and familiarity with MMG. DLJ was not requested
to recommend the amount of consideration to be received by MMG; it was requested
to evaluate, from a financial point of view, the fairness of the consideration
to be received by MMG, which was determined by negotiation between MMG and P&F.
On May 2, 1997, DLJ rendered an oral opinion to the MMG Board, which was
confirmed by delivery of its written opinion dated May 5, 1997 (the "DLJ
Fairness Opinion"), to the effect that, as of such date, and based upon and
subject to the assumptions, limitations and qualifications set forth in such
opinion, the Purchase Price was fair to MMG from a financial point of view.
THE FULL TEXT OF THE DLJ FAIRNESS OPINION IS SET FORTH AS APPENDIX C TO THIS
PROXY STATEMENT AND SHOULD BE READ CAREFULLY IN ITS ENTIRETY FOR ASSUMPTIONS
MADE, PROCEDURES FOLLOWED, OTHER MATTERS CONSIDERED AND LIMITATIONS OF THE
REVIEW BY DLJ. THE DLJ FAIRNESS OPINION WAS PREPARED FOR THE MMG BOARD OF
DIRECTORS AND ADDRESSES ONLY THE FAIRNESS OF THE PURCHASE PRICE TO MMG FROM A
FINANCIAL POINT OF VIEW AND DOES NOT CONSTITUTE A RECOMMENDATION TO ANY MMG
STOCKHOLDER AS TO HOW SUCH STOCKHOLDER SHOULD VOTE AT THE ANNUAL MEETING. THE
SUMMARY OF THE DLJ FAIRNESS OPINION SET FORTH IN THIS PROXY STATEMENT IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO THE FULL TEXT OF SUCH OPINION.
In arriving at its opinion, DLJ, among other things, (i) reviewed the April
27, 1997 draft of the Stock Purchase Agreement; (ii) reviewed certain
publicly-available financial information concerning the Entertainment Companies
as well as certain non-public information, including financial forecasts,
concerning the Entertainment Companies; (iii) compared the financial data of the
Entertainment Companies with that of various other companies whose securities
are traded in public markets; (iv) reviewed the financial terms of certain
recent business combinations that DLJ deemed comparable in whole or in part; (v)
met with management of the Entertainment Companies to discuss their respective
businesses and prospects; and (vi) considered such other information and other
factors that DLJ deemed appropriate.
In rendering its opinion, DLJ did not independently verify the information
provided to it and assumed the accuracy, completeness and fairness of all such
information. With respect to financial forecasts and
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other information relating to the prospects of the Entertainment Companies, DLJ
assumed that such forecasts and other information were reasonably prepared and
reflected the best currently available estimates and good faith judgment of the
Entertainment Companies as to the likely future financial performance of the
Entertainment Companies. DLJ did not conduct a physical inspection of the
properties or facilities, or make an independent evaluation or appraisal of the
assets, of any of the Entertainment Companies, nor was DLJ furnished with any
such evaluation or appraisal. DLJ did not make any independent investigation of
any legal matters affecting any of the Entertainment Companies, and assumed the
correctness of all legal advice given to each of them and to the MMG Board of
Directors, including advice as to the tax consequences of the Proposed
Transaction to the Company. DLJ was not requested to, nor did it, solicit the
interest of any other party in purchasing the Entertainment Companies. While DLJ
believes that its review as described herein is an adequate basis for the DLJ
Fairness Opinion it has expressed, the opinion is necessarily based upon
financial, economic, monetary, political, market and other conditions that
existed and could be evaluated as of the date of the opinion, and any
significant change in such conditions thereafter would require a reevaluation of
the opinion.
DLJ did not express any opinion as to the price at which the Common Stock
will trade subsequent to the Proposed Transaction. In addition, DLJ did not
participate in negotiating the terms of the Proposed Transaction or any other
aspect of the Proposed Transaction contemplated thereby, and received no
instruction to and did not, seek or solicit alternative transactions.
In preparing the DLJ Fairness Opinion, DLJ performed a variety of analyses,
and considered a variety of factors, of which the material analyses and factors
are described below. The following summary of such analyses and factors
considered does not purport to be a complete description of the analyses and
factors underlying the DLJ Fairness Opinion. Preparation of a fairness opinion
is a complex process involving various determinations as to the most appropriate
analyses and factors to consider, and the application of those analyses and
factors under the particular circumstances. As a result, the process involved in
preparing such opinion is not readily summarized. No public company utilized for
reference purposes is identical to the Entertainment Companies, and none of the
acquisitions or other business combinations considered in connection with the
DLJ Fairness Opinion is identical to the Proposed Transaction.
In arriving at its opinion, DLJ did not attribute any particular weight to
any one analysis or factor considered by it, but rather, in reaching its
conclusion, DLJ considered the results of the analyses in light of each other.
DLJ did not consider any one analysis or factor to the exclusion of any other
analyses or factors. Further, DLJ's conclusions involved significant elements of
subjective judgment and qualitative analyses as well as the financial and
quantitative analyses. Accordingly, DLJ believes that its analyses and opinion
must be considered as a whole and that selecting portions of its analyses and
factors, without considering all such analyses and factors, could create a
misleading or incomplete view of the processes underlying the preparation of the
DLJ Fairness Opinion. In its analyses, DLJ necessarily made numerous assumptions
with respect to the Entertainment Companies, industry performance, general
business, regulatory, economic, political, market and financial conditions and
other matters, many of which are beyond the Entertainment Companies' control. In
addition, analyses relating to the value of businesses or securities do not
purport to be appraisals, or to reflect the prices at which such businesses or
securities can actually be sold. Accordingly, because such estimates are
inherently subject to substantial uncertainty, DLJ does not assume
responsibility for their accuracy.
ANALYSIS OF SELECTED PUBLIC COMPANIES
To provide contextual data and comparative market information, DLJ compared
the operating performance of the Entertainment Companies to selected companies
whose securities are publicly traded. As there are no publicly traded companies
that are primarily comprised of significant film libraries and movie production
operations, DLJ analyzed companies primarily engaged in the production and
distribution of television programming or film distribution without significant
library content. The selected
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companies included: Film Roman, Inc., Spelling Entertainment Group, All-American
Communications, Dick Clark Productions and King World Productions (the
"Comparable Companies").
DLJ computed enterprise value (defined as market value of common equity plus
book value of total debt plus liquidation value of preferred stock less cash) as
a multiple of latest twelve months ("LTM") revenue, EBITDA, and EBIT, and equity
value as a multiple of LTM earnings, and projected 1997 and 1998 earnings and
book equity value for the Comparable Companies. Because the Entertainment
Companies had negative EBITDA, EBIT and Net Income in the year ended December
31, 1996 ("Fiscal 1996") as well as negative book value at December 31, 1996,
DLJ believes that the implied enterprise value of the Entertainment Companies
based on multiples of revenues was the most relevant comparison. The enterprise
value as a multiple of revenues for the Comparable Companies ranged from 0.1x to
1.7x, with a mean (excluding high and low values) of 1.2x. This analysis
indicated an enterprise value range, based on the Entertainment Companies' pro
forma (to give effect to the exclusion of Landmark from the assets to be sold
and the estimated full year impact of the acquisitions of Goldwyn and MPCA
completed on July 2, 1996) estimated Fiscal 1996 revenue, of approximately $19.1
million to $324.9 million, and an enterprise value of $229.3 million based on
the mean multiple. DLJ compared this range of enterprise values to the aggregate
consideration of $573 million to be received by the Company in the Proposed
Transaction.
Because the Entertainment Companies only recently resumed the acquisition
and production of new film product, the Entertainment Companies are currently
experiencing high cash expenses for new film product. These expenses, while
expected to generate revenues and EBITDA, have contributed to the Entertainment
Companies' negative 1996 EBITDA. Accordingly, DLJ also analyzed the
Entertainment Companies' Fiscal 1996 Net Operating Cash Flow excluding new
production ("Library Net Cash Flow"). The range of enterprise values of the
Comparable Companies as a multiple of EBITDA (which DLJ believes reasonably
approximates Net Operating Cash Flow) ranged from 4.3x to 25.7x, with a mean
(again excluding high and low values) of 7.0x. This analysis indicated an
enterprise value range, based on the Entertainment Companies' Fiscal 1996
Library Net Cash Flow of approximately $179.3 million to $1,071.7 million, and
an enterprise value of $291.0 million based on the mean multiple. DLJ compared
this range of enterprise values to the aggregate consideration of $573 million
to be received by the Company in the Proposed Transaction.
No company utilized in the comparable company analysis is identical to the
Entertainment Companies. Accordingly, an analysis of the results of the
foregoing necessarily involves complex considerations and judgments concerning
differences in financial and operating characteristics of the Entertainment
Companies and other factors that could affect the public trading value of the
selected companies or company to which they are being compared. Mathematical
analysis such as determining the mean is not in itself a meaningful method of
using comparable company data.
ANALYSIS OF SELECTED MERGERS AND ACQUISITIONS
Utilizing publicly available information, DLJ also evaluated a series of
transactions involving companies in the film and television production and
distribution industries. The transactions considered included
Hanna-Barbera/Turner Broadcasting Systems, Spelling Entertainment Group/Charter
Financial, Imagine Films/Management Group, Spelling Entertainment
Group/Blockbuster Entertainment Corp., New Line Cinema Corp./Turner Broadcasting
Systems, Republic Pictures/Spelling Entertainment Group, Fremantle
International/All-American Communications, MCA/Seagram Cos., Mark Goodson
Productions/All-American Communications and The Samuel Goldwyn Company/MMG (the
"Selected Transactions").
DLJ computed enterprise value as a multiple of LTM revenues, EBITDA and
EBIT, and equity value as a multiple of LTM earnings and book equity value.
Because the Entertainment Companies had negative EBITDA, EBIT and Net Income in
Fiscal 1996 as well as negative book value at December 31, 1996, DLJ believes
that the implied enterprise value of the Entertainment Companies based on
multiples of revenues was the most relevant comparison. The enterprise value as
a multiple of revenues for the Selected
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Transactions ranged from 0.8x to 4.4x, with a mean (excluding high and low
values) of 1.9x. This analysis indicated an enterprise value range, based on the
Entertainment Companies' pro forma (to give effect to the exclusion of the
Landmark from the assets to be sold and the estimated full year impact of the
acquisitions of Goldwyn and MPCA completed on July 2, 1996) estimated Fiscal
1996 revenue, of approximately $152.9 million to $840.8 million, and an
enterprise value of $363.1 million based on the mean multiple. DLJ compared this
range of enterprise values to the aggregate consideration of $573 million to be
received by the Company in the Proposed Transaction.
Because the Entertainment Companies only recently resumed the acquisition
and production of new film product, the Entertainment Companies are currently
experiencing high cash expenses for new film product. These expenses, while
expected to generate revenues and EBITDA, have contributed to the Entertainment
Companies' negative 1996 EBITDA. Accordingly, DLJ also analyzed the
Entertainment Companies' Fiscal 1996 Library Net Cash Flow. The range of
enterprise values of the Selected Transactions as a multiple of EBITDA (which
DLJ believes reasonably approximates Net Operating Cash Flow) ranged from 4.7x
to 21.4x, with a mean (again excluding high and low values) of 15.3x. This
analysis indicated an enterprise value range, based on the Entertainment
Companies' Fiscal 1996 Library Net Cash Flow of approximately $192.6 million to
$892.4 million, and an enterprise value of $638.0 million based on the mean
multiple. DLJ compared this range of enterprise values to the aggregate
consideration of $573 million to be received by the Company in the Proposed
Transaction.
No transaction utilized in the comparable transaction analysis is identical
to the Proposed Transaction. Accordingly, an analysis of the results of the
foregoing necessarily involves complex considerations and judgments concerning
differences in financial and operating characteristics of the Entertainment
Companies and other factors that could affect the acquisition value of the
companies to which they are being compared. Mathematical analysis such as
determining the mean is not itself a meaningful method of using comparable
transactions data.
LIBRARY TRANSFER ANALYSIS
DLJ analyzed the Entertainment Companies' library, and examined certain
other library transfer transactions, to derive a value for the Entertainment
Companies based on its library. Because the valuation of motion picture feature
titles is different than those of made-for-TV movies or made-for-TV series, and
in turn those of made-for-video product, and the value of rights with respect to
a particular title is a function of the geographic, media and temporal
limitations of the Entertainment Companies' distribution rights, DLJ analyzed
the implied library value based on two different methodologies of counting the
number of titles to enable it to more accurately assess the value of the
Entertainment Companies' library compared to other transactions involving
transfers of significant motion picture title libraries (i) the raw number of
titles in the Entertainment Companies' library and (ii) the number of key titles
(as defined by Paul Kagan Associates) in the Entertainment Companies' library.
DLJ analyzed the library value and number of titles involved in the
transactions/library sales by The Samuel Goldwyn Company, MPCA, Orion, Carolco
Pictures, New Line Cinema Corp. and Weintraub, deriving multiples based on both
the number of titles and the number of key titles. DLJ compared this range of
enterprise values to the aggregate consideration of $573 million to be received
by the Company in the Proposed Transaction. DLJ applied these multiples to the
respective title counts to arrive at a total enterprise value. This indicated an
enterprise value based on the mean value per key title implied by the selected
sales of $617.2 million and an enterprise value based on the mean value per key
title implied by the selected sales of $740.9 million. DLJ also performed the
library transfer analysis using the mean value per title and value per key title
implied by the above selected transactions/library sales (excluding the Carolco
Pictures and New Line Cinema Corp. sales), which implied an enterprise value of
$391.4 million and $543.6 million, respectively. DLJ compared this range of
enterprise values to the aggregate consideration of $573 million to be received
by the Company in the Proposed Transaction. DLJ believes that mathematical
analyses such as determining the mean is not itself a useful analytical tool in
that it tends to overstate the importance of
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mathematical conclusions without giving due consideration to conclusions reached
based on the experience and judgment of DLJ. DLJ believes that the Carolco
Pictures and the New Line sales are less comparable to the Proposed Transaction
than the other transactions/library sales analyzed due to the substantially
higher content (as compared to the Entertainment Companies' library) of recent
and commercially successful film and television titles in their respective
libraries.
DISCOUNTED CASH FLOW ANALYSIS
DLJ performed a discounted cash flow ("DCF") analysis of the projected Net
Operating Cash Flow (defined as cash receipts less operating cash disbursements
before debt service, and not necessarily conforming to Generally Accepted
Accounting Principles) of the Entertainment Companies for the five-year period
ending with the 2001 fiscal year based upon a financial model provided by the
management of the Entertainment Companies. DLJ performed the DCF analysis using
two different methodologies (i) by calculating a range of values based on the
Entertainment Companies' combined library and new production Net Operating Cash
Flow using a range of multiples of Net Operating Cash Flow to estimate terminal
values and a range of discount rates to discount the interim cash flows and
terminal value to the present and (ii) by calculating a range of values on a
component basis for (a) the library operations alone and (b) the new production
operations alone. The methodology in (ii) above is based upon the assumption
that the expected Net Operating Cash Flow from the library is inherently less
risky than the expected Net Operating Cash Flow from the new production
operations. Thus, to value each of the library and new production on a component
basis, DLJ used a lower range of terminal value multiples and lower range of
discount rates to value the library as compared to the range of terminal value
multiples and discount rates used to value the new production operations. Based
on the methodology in (i) above and using a range of terminal value multiples of
10.0x to 15.0x and a range of discount rates of 12.0% to 18.0%, DLJ calculated a
range of enterprise values for the Entertainment Companies of $259.8 million to
$437.2 million. Based on the methodology in (ii) above, DLJ calculated the
following: (a) using a range of terminal value multiples of 10.0x to 15.0x and a
range of discount rates of 12.0% to 18.0% on the projected Net Operating Cash
Flow from the library, the range of enterprise values calculated for the library
was $183.0 million to $265.1 million; (b) using a range of terminal value
multiples of 12.0x to 17.0x and a range of discount rates of 15.0% to 21.0% on
the projected Net Operating Cash Flow from the new production operations, the
range of enterprise value multiples calculated for the new production operations
was $81.5 million to $169.7 million. On a combined basis, the range of
enterprise values calculated using the methodology in (ii) above was $264.5
million to $434.8 million.
Pursuant to a letter agreement between MMG and DLJ, dated May 2, 1997 (the
"DLJ Engagement Letter"), DLJ is entitled to a fee of $350,000 payable at the
time DLJ notifies the MMG Board that it is prepared to deliver its opinion to
the MMG Board. In addition, MMG has agreed to reimburse DLJ for its
out-of-pocket expenses, including reasonable fees and expenses of its counsel,
and to indemnify DLJ for certain liabilities and expenses arising out of the
Proposed Transaction, including liabilities under federal securities laws. The
terms of the fee arrangement with DLJ, which DLJ and MMG believe are customary
in transactions of this nature, were negotiated at arm's length between MMG and
DLJ and the MMG Board was aware of such arrangement.
DLJ was selected to render an opinion in connection with the Proposed
Transaction based upon DLJ's qualifications, expertise and reputation, including
the fact that DLJ, as part of its investment banking business, is regularly
engaged in the valuation of businesses and their securities in connection with
mergers and acquisitions, underwritings, sales and distributions of listed and
unlisted securities, private placements and valuations for corporate and other
purposes.
DLJ provides a full-range of financial, advisory and brokerage services and
in the course of its normal trading activities may from time to time effect
transactions and hold positions in the securities or options on the securities
of MMG for its own account and for the account of customers. DLJ has performed
investment banking and other services for the Company in the past and has been
compensated for such
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services. Over the past two years, DLJ has advised the Company with respect to
its merger with Orion, MCEG Sterling, Inc. and MITI in November 1995; advised
the Company with respect to its acquisitions of The Samuel Goldwyn Company and
MPCA in July 1996; and was lead-manager with respect to the Company's $202.4
million offering of the Common Stock in July 1996, for each of which DLJ
received usual and customary compensation. In addition, DLJ is currently acting
as lead-manager with respect to the Company's proposed $125 million convertible
preferred stock offering. No determination has been made as to whether the
Company will proceed with this offering. DLJ also owns 131,453 shares of the
Common Stock, of which 67,601 were purchased in 1993 and 63,852 shares (the "Fee
Shares") were received in 1995 as partial consideration for DLJ's services in
advising the Company in its formation. The Fee Shares have the benefit of a
make-whole arrangement pursuant to which the Company will provide DLJ with the
difference between $1.125 million and the proceeds from the sale of the Fee
Shares, either in cash or additional shares of Common Stock. If DLJ should sell
these shares for more than $1.125 million, DLJ is required to pay any such
excess to the Company.
INTERESTS OF CERTAIN PERSONS
In considering the Proposed Transaction, MMG Stockholders should be aware
that certain officers and directors of the Company have certain interests in the
transactions contemplated thereby that are in addition to the interests of the
MMG Stockholders generally.
Messrs. Kluge and Subotnick, the general partners of Metromedia, are
collectively MMG's largest stockholders, and together they beneficially own
approximately 26% of the outstanding shares of Common Stock. Mr. Kluge serves as
Chairman of the Board of Directors of MMG and Mr. Subotnick serves as Vice
Chairman of the Board of Directors, President and Chief Executive Officer of
MMG. Pursuant to the terms of the Stockholders Agreement, Metromedia and Messrs.
Kluge and Subotnick have agreed, among other things, (i) to vote their shares of
Common Stock in favor of the Proposed Transaction; (ii) to vote their shares of
Common Stock against another proposal (except if such vote would violate their
fiduciary duties) to sell all or substantially all of the Shares or any or all
of the assets of the Entertainment Companies; (iii) not to transfer any shares
of Common Stock held by them until the later of September 30, 1997 and 90 days
after the date of the MMG Stockholders meeting to be held for the purpose of
approving the Proposed Transaction (as long as such meeting is held by September
30, 1997); and (iv)(a) to discontinue any discussions or negotiations with
respect to any acquisition of all or any material portion of the assets of, or
any equity interest in, any Entertainment Company and (b) except as otherwise
permitted under the Stock Purchase Agreement, not to initiate, solicit or
knowingly encourage or take any other action to knowingly facilitate any
inquiries or the making of any proposals with respect to a possible transaction
of the type described in clause (a) above.
Furthermore, as a condition to the closing of the Stock Purchase Agreement,
there shall be a release of the guarantees given in favor of Chase by (i) Mr.
Kluge and Metromedia with respect to the $100 million revolving credit portion
of the Orion Credit Facility ($94.3 million of which was outstanding at May 31,
1997) and (ii) Metromedia with respect to the payment of a certain third party
accounts receivable owed to Orion (approximately $11.4 million of which was
outstanding at May 31, 1997) so that the entire face amount of such accounts
receivable could be included in the borrowing base for the Orion Credit
Facility. See "INFORMATION REGARDING MMG--Certain Relationships and Related
Transactions."
The Company believes that the Proposed Transaction will not trigger any
"change of control" provisions in any agreements or other contracts to which the
Company is a party except for (i) the Metromedia License Agreement, which
provides Metromedia with a termination right upon a sale of substantially all of
the assets of the Company, which right Metromedia has agreed to waive, and (ii)
the 1996 Stock Plan, which provides that upon a sale of "substantially all" of
the Company's assets, all unvested outstanding options to acquire Common Stock
under such plan would vest and become immediately exercisable. The Company's
Compensation Committee is empowered under the 1996 Stock Plan to interpret the
provisions of such plan and the Compensation Committee has determined that,
33
<PAGE>
although the issue is not free from doubt, the Proposed Transaction constitutes
a sale of "substantially all" of the Company's assets for purposes of the 1996
Stock Plan, thereby accelerating all options outstanding under such plan. As of
May 31, 1997, 4,304,656 options had been issued to the directors, officers and
certain employees of the Company, the Entertainment Companies, and the
Communications Group, and remain outstanding under the 1996 Stock Plan and
2,929,641 of such options had not vested. All such options are exercisable at a
price equal to $9.31 per share. In connection with the consummation of the
Proposed Transaction, all of such officers and employees (other than officers
and employees of the Entertainment Companies) will be asked to waive the
acceleration of their unvested options (aggregating approximately 1,686,816
options). While all of the directors of the Company have agreed to waive the
accelerated vesting of their options, no assurance can be given that any officer
or employee will similarly agree. Based on a price equal to $11 3/4 per share of
Common Stock (the closing price per share of Common Stock reported by the AMEX
on June 16, 1997), the aggregate value of all accelerated options (assuming NO
optionee agrees to waive acceleration) is equal to $7,148,324.
TERMS AND CONDITIONS OF THE STOCK PURCHASE AGREEMENT
Set forth below is a description of the material terms and conditions of the
Stock Purchase Agreement. The description is qualified in its entirety by
reference to the Stock Purchase Agreement.
P&F CLOSING CONDITIONS
P&F's obligation to consummate the Proposed Transaction is subject to the
satisfaction or waiver of certain conditions, including the following:
1. Each of MMG and Orion shall have performed its obligations under the
Stock Purchase Agreement, the representations and warranties of MMG
contained in the Stock Purchase Agreement shall be true and correct at and
as of the Closing Date except for breaches that could not reasonably be
expected to result in a material adverse effect, and P&F shall have received
an officer's certificate from MMG to that effect;
2. Since the date of the Stock Purchase Agreement, no change or event
shall have occurred which has had or could reasonably be expected to have a
material adverse effect with respect to the Entertainment Companies or the
Shares;
3. All required consents or approvals to be obtained by the Company or
the Entertainment Companies under applicable law or under certain specified
contracts by virtue of the Stock Purchase Agreement or the transactions
contemplated thereby shall have been obtained;
4. The transactions contemplated by the Stock Purchase Agreement shall
not violate any applicable law and no injunction, order, decree or other
legal restraint shall be in effect which restricts or prohibits the
consummation of the Proposed Transaction or which imposes materially
burdensome conditions on the Entertainment Companies, P&F or the Shares;
5. P&F shall have received a legal opinion from Paul Weiss in form and
substance reasonably satisfactory to P&F, which P&F expects to include
customary and standard terms concerning corporate law matters;
6. P&F and its subsidiaries shall have obtained all required consents
or approvals under the existing MGM credit facility to be obtained by any of
them by virtue of the Stock Purchase Agreement or the transactions
contemplated thereby;
7. All of the directors of any Entertainment Company whose principal
employment is not as an officer and/or employee of such Entertainment
Company shall have resigned such directorships; and
34
<PAGE>
8. P&F shall have received written evidence satisfactory to it that all
of the issued and outstanding stock of Landmark has been transferred to an
affiliate of MMG that is not an Entertainment Company.
MMG CLOSING CONDITIONS
MMG's obligation to consummate the Proposed Transaction is subject to the
satisfaction or waiver of certain conditions, including the following:
1. P&F shall have performed each of its obligations under the Stock
Purchase Agreement, the representations and warranties of P&F contained in
the Stock Purchase Agreement shall be true and correct at and as of the
Closing Date except for breaches that could not reasonably be expected to
result in a material adverse effect and MMG shall have received an officer's
certificate from P&F to that effect;
2. All required consents or approvals to be obtained by P&F under
applicable law or under certain specified contracts by virtue of the Stock
Purchase Agreement or the transactions contemplated thereby shall have been
obtained;
3. The transactions contemplated by the Stock Purchase Agreement shall
not violate any applicable law and no injunction, order, decree or other
legal restraint shall be in effect which restrains or prohibits the
consummation of the Proposed Transaction or which imposes materially
burdensome conditions on MMG or its Affiliates;
4. MMG shall have received a legal opinion from Gibson, Dunn & Crutcher
LLP, in form and substance reasonably satisfactory to MMG, which MMG expects
to include customary and standard terms concerning corporate law matters;
5. MMG shall have obtained the approval of the MMG Stockholders
required to be obtained by MMG by virtue of the execution and delivery of
the Stock Purchase Agreement and the consummation of the transactions
contemplated thereby;
6. MMG shall have been released of all obligations as guarantor of the
Orion Lease; and
7. MMG and its affiliates shall have been released from all obligations
thereof in connection with the Orion Credit Facility.
TERMINATION
The Stock Purchase Agreement may be terminated (subject to a break-up fee
under certain circumstances) at any time prior to the Closing Date (whether
before or after approval by the MMG Stockholders):
1. by mutual written agreement of the parties;
2. by either MMG or P&F, if a breach of any representation or warranty
has occurred that would cause a closing condition of either MMG or P&F,
respectively, to be unsatisfied (subject to a 15 day notice period in the
case of a breach that is not capable of being cured on or before the Closing
Date);
3. by either MMG or P&F, if either or MMG or any Entertainment Company
or P&F, as the case may be, fails to perform any of their respective
obligations under the Stock Purchase Agreement and if the aggregate of such
failures is material (subject to a 15 day notice period in the case of a
failure that is not capable of being cured on or before the Closing Date);
35
<PAGE>
4. by MMG or P&F, if the Proposed Transaction is not consummated before
September 30, 1997, unless the party wishing to terminate on such date, due
to its material failure to perform under the Stock Purchase Agreement, was
the cause of the failure to consummate the Proposed Transaction;
5. by any party thereto, if any Federal, state or foreign law would
make the Proposed Transaction illegal or if any order, judgment, injunction
or decree shall have been entered enjoining the consummation of the Proposed
Transaction and such order or such other action shall have become final and
non-appealable;
6. by or MMG or P&F, if MMG has convened a MMG Stockholder's meeting to
vote upon the Stock Purchase Agreement and the proper consent and approval
is not obtained;
7. by MMG, if the Proposed Transaction has been submitted to the MMG
Stockholders and the DLJ Fairness Opinion has been withdrawn (either before
or after such meeting) or if MMG's Board of Directors has withdrawn,
modified or amended in any material respect its approval or recommendation
of the Stock Purchase Agreement or the Proposed Transaction and MMG receives
a legal opinion that submission of this Agreement to the MMG Stockholders
would be unlawful under Delaware law; or
8. by MMG, if at any time prior to the MMG Stockholder's approval of
the Stock Purchase Agreement, MMG's Board of Directors determines in good
faith (on the basis of counsel's advice) that the approval and adoption of
the Stock Purchase Agreement and the Proposed Transaction would be
inconsistent with MMG's Board of Directors' fiduciary duties under
applicable law.
EXPENSES
The Stock Purchase Agreement provides that each party will bear their
respective expenses incurred in connection with the preparation, execution and
performance of the Stock Purchase Agreement and the transactions contemplated
thereby.
BREAK-UP FEE
MMG will pay to P&F a $30 million break-up fee, if the Stock Purchase
Agreement is terminated (i) by MMG because the DLJ Fairness Opinion has been
withdrawn or materially modified; (ii) by MMG because MMG's Board of Directors
shall have withdrawn or materially modified its approval or recommendation with
respect to the Stock Purchase Agreement; (iii) by MMG, prior to obtaining the
MMG's Stockholders' approval of the Stock Purchase Agreement; (iv) by MMG if
MMG's Board of Directors determines that the approval and adoption of the Stock
Purchase Agreement is inconsistent with MMG's Board of Directors' fiduciary
duties; (v) by MMG or P&F if prior to the Annual Meeting (A) MMG's Board of
Directors withdraws or materially modifies, or resolves to withdraw or
materially modify, its approval or recommendation of the Stock Purchase
Agreement, (B) MMG's Board of Directors recommends acceptance, or resolves to
recommend acceptance, of an alternative proposal for the sale of the stock or of
any substantial part of the assets of any Entertainment Company (other than
certain acquisitions of equity of MMG) (each, an "Alternative Proposal") or (C)
MMG or any of its affiliates shall have entered into an agreement providing for
an Alternative Proposal; (vi) by MMG or P&F if (A) prior to the Annual Meeting
an Alternative Proposal shall become publicly known or the DLJ Fairness Opinion
is withdrawn or materially modified, (B) MMG's Board of Directors has not
withdrawn or materially modified its recommendation with respect to the Stock
Purchase Agreement, MMG's Board of Directors shall not have recommended
acceptance of an Alternative Proposal, nor resolved to do so, and neither MMG
nor any of its Affiliates shall have entered into an agreement for an
Alternative Proposal with a party other than P&F, nor resolved to do so; and (C)
during the term of the Stock Purchase Agreement, or within one year after its
termination, MMG's Board of Directors recommends an Alternative Proposal with a
party other than P&F or MMG or any of its affiliates recommends or enters into
an Alternative Proposal with a party other than P&F in which the purchase price
of the Shares or the portion allocable
36
<PAGE>
thereto, including an adjustment for assets transferred to the Entertainment
Companies is higher than the Purchase Price set forth in the Stock Purchase
Agreement. The failure of MMG's Stockholders to approve the Proposed Transaction
at the Annual Meeting will not in itself trigger MMG's obligation to pay the $30
million break-up fee.
MMG agrees to reimburse P&F and its affiliates for actual out-of-pocket
expenses, not to exceed $10 million, if the Stock Purchase Agreement is
terminated for any of the reasons listed above; such reimbursed expenses will be
deducted from the $30 million break-up fee otherwise due.
Any payment required to be made pursuant to the foregoing shall be made
either at the time of termination of the Stock Purchase Agreement or on the next
business day thereafter, each as specified in the Stock Purchase Agreement.
CONDUCT OF BUSINESS OF THE ENTERTAINMENT COMPANIES PRIOR TO THE CLOSING OF THE
PROPOSED TRANSACTION
The Stock Purchase Agreement provides that each of the Entertainment
Companies shall carry on its business operations in the ordinary course of
business consistent with past practice, and that MMG and Orion will (i) cause
each Entertainment Company to maintain its assets; (ii) cause each Entertainment
Company to comply with all applicable laws; (iii) file all required tax returns;
(iv) use reasonable commercial efforts to obtain required consents; (v) cause
each Entertainment Company to maintain all permits; (vi) promptly notify P&F of
(a) any facts or circumstances likely to have a material adverse effect, (b) any
proceeding commenced against MMG or any Entertainment Company or (c) any breach
by MMG of any representation, warranty, covenant or agreement contained in the
Stock Purchase Agreement; and (vii) continue to make expenditures in accordance
with the budgets for all films in progress.
In addition, until the Closing Date, without P&F's consent, neither MMG nor
Orion will permit any Entertainment Company to (i) purchase, acquire, license,
sell or dispose of any assets other than in the ordinary course of business
consistent with past practice; (ii) make or commit to make any expenditures of
amounts in excess of the budgeted expenditures for any film in progress; (iii)
repay or accelerate any liabilities or the rendering of services by any
Entertainment Company outside the ordinary course of business; (iv) amend,
modify or terminate any material contracts; (v) take any action materially
impairing any of its rights (other than in the ordinary course); (vi) make or
commit to make any capital expenditure (other than certain scheduled capital
expenditures) exceeding $250,000; (vii) enter into any material contract; (viii)
create, incur or guarantee any additional debt in excess of $50,000 (other than
pursuant to the Orion Credit Facility or a negative pick-up loan with the Union
Bank of California); (ix) increase the compensation payable to any director,
officer or employee (other than in the ordinary course of business), or pay any
pension, retirement, bonus or incentive benefits or enter into any employment
agreements; (x) change its accounting methods; (xi) declare or pay any dividends
or make any distributions; (xii) amend its charter or by-laws; (xiii) organize
any new subsidiary or acquire equity securities of any corporation or business
entity; (xiv) pay or discharge any obligation (a) not reserved against in the
Company's 1996 balance sheet or not made in the ordinary course of business, (b)
to any Entertainment Company of MMG or any of MMG's non-Entertainment Company
affiliates or (c) owed to MMG or any of MMG's non-Entertainment Company
affiliates by any Entertainment Company; (xv) prepay any indebtedness (other
than payments of revolving loans under the Orion Credit Facility); (xvi) write
down or write-off any inventory or accounts receivable; (xvii) allow any
intellectual property right (not material to the business of the Entertainment
Company) to lapse or be disposed of; or (xviii) merge or consolidate with or
acquire control of any other corporation. In order to induce the employees of
the Entertainment Companies not to resign their positions, Orion has agreed to
pay each employee the greater of (x) six months of such employee's base salary
or (y) their existing severance benefits if their employment is terminated in
connection with the Proposed Transaction. P&F has agreed to indemnify the
Company for all such expenses in the event the Proposed Transaction is not
consummated.
37
<PAGE>
AGREEMENT NOT TO SOLICIT OTHER OFFERS
Neither MMG nor any of its subsidiaries shall solicit, initiate, encourage
(including by way of furnishing information) or take any other action to
facilitate, any inquiry or the making of any proposal which constitutes, or may
reasonably be expected to lead to an Alternative Proposal or agree to or endorse
any Alternative Proposal or propose, enter into or participate in any
discussions or negotiations regarding any of the foregoing unless MMG's Board of
Directors is required to consider such Alternative Proposal as a result of its
fiduciary obligations (upon advice of legal counsel) and in such case (i) MMG
must notify P&F of such Alternative Proposal within 48 hours of receipt thereof
and (ii) MMG may engage in discussions with such third party as long as such
offer is in writing, contains terms superior to the Proposed Transaction and
demonstrates required financing is in place.
RIGHT OF FIRST NEGOTIATION
For five years following the consummation of the Proposed Transaction, MMG
has a right of first negotiation to obtain from P&F the right to distribute by
wired or wireless cable on the Communications Group's systems in 9 territories,
all films owned by P&F and any of its subsidiaries (including the Entertainment
Companies), all library films and all films produced after the date of the Stock
Purchase Agreement by P&F or any of its subsidiaries including, without
limitation, the Entertainment Companies, to the extent that P&F owns such rights
in such specified territories and subject to any existing licenses. If P&F
elects to dispose of any distribution rights covered by the right of first
negotiation to any third party, P&F and MMG must negotiate in good faith for a
period of 15 days with respect to the terms under which the distribution rights
may be conveyed to MMG. If the parties are unable to reach an agreement within
15 days with respect to the conveyance of the distribution rights to MMG, P&F is
free to dispose of the distribution rights without any further obligation to
MMG.
INDEMNIFICATION; LIMITATION ON DAMAGES
MMG will indemnify P&F for damages incurred as a result of any (i) breach of
or failure to perform any representation, warranty, covenant, and/or agreement
of MMG contained in the Stock Purchase Agreement; provided, that no
indemnification shall be required unless and until the aggregate amount of the
damages so incurred exceed $15 million (and only to the extent of such excess,
except that such limit shall not apply to certain specified types of claims)
(with a maximum amount for such indemnification equal to the Purchase Price);
(ii) violation or infringement of any material applicable law, but only to the
extent such violation or infringement occurs prior to the Closing Date; and
(iii) liability arising out of or in connection with any existing shareholder
litigation. P&F will indemnify MMG and its affiliates for damages incurred as a
result of (a) any breach of or failure to perform any representation, warranty,
covenant, and/or agreement of P&F contained in the Stock Purchase Agreement and
(b) P&F's operation of the Entertainment Companies or ownership of the Shares
after the Closing Date. In addition, in any action brought by P&F against MMG
for a breach of any representation of warranty (other than certain specified
representations), MMG shall only be liable to the extent such damages exceed $15
million.
ACCOUNTING TREATMENT FOR THE PROPOSED TRANSACTION
The Proposed Transaction will be accounted for as a sale of the
Entertainment Companies.
DISSENTERS' RIGHTS
MMG Stockholders are not entitled to dissenter's rights of appraisal or
other dissenter's rights under Delaware law with respect to the Proposed
Transaction or any other transactions contemplated by the Stock Purchase
Agreement.
REGULATORY FILINGS AND APPROVALS
Pursuant to the Stock Purchase Agreement, the parties have made the
appropriate filings required under the Hart-Scott-Rodino Act in connection with
the transactions contemplated by the Stock Purchase Agreement and the
consummation of the Proposed Transaction is subject to the expiration or early
termination of the waiting period prescribed under such Act. The applicable
waiting period under the Hart-Scott-Rodino Act expired on June 12, 1997.
38
<PAGE>
PRO FORMA CONSOLIDATED CONDENSED FINANCIAL
INFORMATION OF THE COMPANY
The following unaudited Pro Forma Balance Sheet of MMG as of March 31, 1997
and unaudited Pro Forma Statement of Operations for the three months ended March
31, 1997 and year ended December 31, 1996 illustrate the effect of the sale of
the Entertainment Group, exclusive of Landmark and the repayment of the Orion
Credit Facility and its other long term indebtedness and the 6 1/2% Convertible
Debentures, 9 1/2% Debentures and 10% Debentures. In addition, the Pro Forma
Statement of Operations for the year ended December 31, 1996 reflects the
consolidation of Landmark and Snapper at the beginning of the period presented.
The unaudited Pro Forma Balance Sheet assumes that the Pro Forma Transactions
occurred on March 31, 1997 and the Unaudited Pro Forma Combining Statement of
Operations assumes that the foregoing transactions 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 audited Pro Forma Combining Financial Statements should be
read in conjunction with 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" contained in the Company's
Quarterly Report on Form 10-Q for the quarter ended March 31, 1997 and Annual
Report on Form 10-K, as amended, for the year ended December 31, 1996, each of
which is contained elsewhere in this Proxy Statement.
39
<PAGE>
METROMEDIA INTERNATIONAL GROUP, INC.
UNAUDITED PRO FORMA BALANCE SHEET
(IN THOUSANDS)
<TABLE>
<CAPTION>
MARCH 31, 1997
---------------------------------------------------------
<S> <C> <C> <C> <C>
PRO FORMA
SALE TRANSACTION
AND
REPAYMENT OF
METROMEDIA CERTAIN
ENTERTAINMENT ENTERTAINMENT GROUP
GROUP AND MMG DEBT
HISTORICAL PRO FORMA ADJUSTMENTS PRO FORMA
--------- ------------- ------------------- ----------
Cash and cash equivalents............................ $ 35,142 $ 2,620 $ 573,000(1) $ 189,881
(273,690)(1)
(2,000)(1)
(139,951)(2)
Accounts receivable.................................. 80,676 24,618 -- 56,058
Inventories.......................................... 59,457 -- -- 59,457
Film inventories..................................... 67,045 67,045 -- --
Other current assets................................. 8,639 3,446 -- 5,193
--------- ------------- ---------- ----------
Current assets....................................... 250,959 97,729 157,359 310,589
Film inventories..................................... 194,029 194,029 -- --
Property and equipment, net.......................... 73,865 3,115 -- 70,750
Intangibles.......................................... 323,081 108,400 -- 214,681
Other assets......................................... 156,844 24,506 -- 132,338
--------- ------------- ---------- ----------
Total assets....................................... $ 998,778 $ 427,779 $ 157,359 $ 728,358
--------- ------------- ---------- ----------
--------- ------------- ---------- ----------
Accounts payable and accrued expenses................ $ 141,171 $ 27,743 $ -- $ 113,428
Short-term debt...................................... 41,327 38,368 (38,368)(1) 2,412
(547)(2)
Other current liabilities............................ 62,238 62,238 -- --
--------- ------------- ---------- ----------
Current liabilities.................................. 244,736 128,349 (38,915) 115,840
Deferred revenues.................................... 48,008 48,008 -- --
Long-term debt....................................... 421,202 235,322 (235,322)(1) 61,125
(124,755)(2)
Other liabilities.................................... 14,876 5,049 -- 9,827
Due to Stockholder................................... -- 84,903 (84,903)(1) --
--------- ------------- ---------- ----------
Total liabilities.................................. 728,822 501,631 (483,895) 186,792
--------- ------------- ---------- ----------
--------- ------------- ---------- ----------
Minority interest.................................... 41,142 -- -- 41,142
Common stock......................................... 66,159 -- -- 66,159
Paid-in surplus...................................... 994,665 314,610 (314,610)(1) 994,665
Other................................................ (6,403) -- 2,381(9) (4,022)
Accumulated deficit.................................. (825,607) (388,462) 388,462(1) (556,378)
286,259(1)
(14,649)(2)
(2,381)(9)
--------- ------------- ---------- ----------
Total stockholders' equity........................... 228,814 (73,852) 345,462 500,424
--------- ------------- ---------- ----------
--------- ------------- ---------- ----------
Total liabilities and stockholders' equity........... $ 998,778 $ 427,779 $ (138,433) $ 728,358
--------- ------------- ---------- ----------
--------- ------------- ---------- ----------
</TABLE>
40
<PAGE>
METROMEDIA INTERNATIONAL GROUP, INC.
UNAUDITED METROMEDIA ENTERTAINMENT GROUP PRO FORMA BALANCE SHEET
(IN THOUSANDS)
<TABLE>
<CAPTION>
MARCH 31, 1997
-----------------------------------------------------
<S> <C> <C> <C>
METROMEDIA METROMEDIA
ENTERTAINMENT GROUP LANDMARK ENTERTAINMENT GROUP
HISTORICAL HISTORICAL PRO FORMA
------------------- ----------- -------------------
Cash and cash equivalents.................................. $ 2,620 $ -- $ 2,620
Accounts receivable........................................ 24,864 246 24,618
Film inventories........................................... 67,045 -- 67,045
Other current assets....................................... 4,183 737 3,446
-------- ----------- --------
Current assets............................................. 98,712 983 97,729
Film inventories........................................... 194,029 -- 194,029
Property and equipment, net................................ 37,994 34,879 3,115
Intangibles................................................ 130,788 22,388 108,400
Other assets............................................... 25,002 496 24,506
-------- ----------- --------
Total assets............................................... $ 486,525 $ 58,746 $ 427,779
-------- ----------- --------
-------- ----------- --------
Accounts payable and accrued expenses...................... 33,146 5,403 27,743
Short-term debt............................................ 40,274 1,906 38,368
Other current liabilities.................................. 62,238 -- 62,238
-------- ----------- --------
Current liabilities........................................ 135,658 7,309 128,349
Deferred revenues.......................................... 48,008 -- 48,008
Long-term debt............................................. 242,391 7,069 235,322
Due to Stockholder......................................... 84,903 -- 84,903
Other liabilities.......................................... 11,394 6,345 5,049
-------- ----------- --------
Total liabilities.......................................... 522,354 20,723 501,631
-------- ----------- --------
Stockholders equity (deficit).............................. (35,829) 38,023 (73,852)
-------- ----------- --------
Total liabilities and stockholders' equity................. $ 486,525 $ 58,746 $ 427,779
-------- ----------- --------
-------- ----------- --------
</TABLE>
41
<PAGE>
METROMEDIA INTERNATIONAL GROUP, INC.
UNAUDITED PRO FORMA COMBINING STATEMENT OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31, 1997
----------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
PRO FORMA
SALE TRANSACTION AND
METROMEDIA REPAYMENT OF CERTAIN
ENTERTAINMENT ENTERTAINMENT GROUP COMPANY
COMPANY GROUP LANDMARK AND MMG DEBT PRO FORMA
HISTORICAL HISTORICAL HISTORICAL ADJUSTMENTS AS ADJUSTED
---------- -------------- ------------- -------------------- -----------
<CAPTION>
(UNAUDITED)(6) (UNAUDITED)(7)
<S> <C> <C> <C> <C> <C>
Revenues............................... $ 103,418 $ 44,443 $ 17,023 $ $ 75,998
Cost and expenses:
Cost of rentals and operating
expenses........................... (75,284) (37,289) (13,070) -- (51,065)
Selling, general and administrative.. (35,335) (8,050) (1,211) (2,381)(9) (30,877)
Depreciation and amortization........ (6,411) (2,552) (1,177) (5,036)
---------- ------- ------------- ------- -----------
Operating income (loss)................ (13,612) (3,448) 1,565 (2,381) (10,980)
Interest expense....................... (10,736) (5,144) (215) 3,466(3) (2,341)
Interest income........................ 2,746 39 -- -- 2,707
---------- ------- ------------- ------- -----------
Income (loss) before provision for
income taxes and equity in losses in
joint ventures....................... (21,602) (8,553) 1,350 1,085 (10,614)
Provision for income taxes............. (298) (200) -- (98)
Equity in losses of joint ventures..... (1,598) -- -- -- (1,598)
Minority interest...................... 1,240 -- -- -- 1,240
Income (loss) from continuing
operations........................... $ (22,258) $ (8,753) 1,350 $ 1,085 (11,070)
---------- ------- ------------- -----------
Number of shares issued and
outstanding.......................... 66,155 n/a n/a 66,155
---------- ------- ------------- -----------
Loss per share......................... $ (0.34) n/a n/a $ (0.17)
---------- ------- ------------- -----------
</TABLE>
42
<PAGE>
METROMEDIA INTERNATIONAL GROUP, INC.
UNAUDITED PRO FORMA COMBINING STATEMENT OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1996
--------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
PRO FORMA
SALE TRANSACTION AND
METROMEDIA REPAYMENT OF CERTAIN
ENTERTAINMENT ENTERTAINMENT GROUP COMPANY
COMPANY GROUP LANDMARK SNAPPER AND MMG DEBT PRO FORMA
HISTORICAL HISTORICAL HISTORICAL HISTORICAL ADJUSTMENTS AS ADJUSTED
----------- ------------- ------------- ------------- --------------------- -----------
<CAPTION>
(UNAUDITED)(6) (UNAUDITED)(7) (UNAUDITED)(5)
<S> <C> <C> <C> <C> <C> <C>
Revenues............ $ 201,755 $ 165,164 $ 56,501 $ 130,623 $ $ 223,715
Cost and expenses:
Cost of rentals
and operating
expenses........ (161,564) (139,307) (45,411) (102,687) -- (103,044)
Selling, general
and
administrative... (81,481) (24,709) (4,969) (38,658) (2,645)(9) (103,573)
Depreciation and
amortization.... (13,232) (5,555) (4,468) (6,001) (697)(4) (18,843)
----------- ------------- ------------- ------------- ------- -----------
Operating income
(loss)............ (54,522) (4,407) 1,653 (16,723) (3,342) (68,527)
Interest expense.... (36,256) (17,166) (1,024) (6,859) 13,924(3) (13,049)
Interest income..... 8,838 286 -- -- -- 8,552
----------- ------------- ------------- ------------- ------- -----------
Income (loss) before
provision for
income taxes and
equity in losses
in joint
ventures.......... (81,940) (21,287) 629 (23,582) 10,582 (73,024)
Provision for income
taxes............. (1,414) (1,000) (463) -- 463(8) (414)
Equity in losses of
joint ventures.... (11,079) -- -- -- -- (11,079)
----------- ------------- ------------- ------------- ------- -----------
Income (loss) from
continuing
operations........ $ (94,433) $ (22,287) 166 (23,582) 11,045 (84,517)
----------- ------------- ------------- ------------- ------- -----------
Number of shares
issued and
outstanding....... 54,293 n/a n/a n/a 56,812(10)
----------- ------------- ------------- ------------- -----------
Loss per share...... $ (1.74) n/a n/a n/a $ (1.49)
----------- ------------- ------------- ------------- -----------
</TABLE>
- ------------------------------
(1) Reflects the sale of the Entertainment Group, exclusive of Landmark, the
repayment of the Entertainment Group's long term debt and transaction costs
as follows (in thousands):
<TABLE>
<S> <C>
Gross sales proceeds.................................................................... $ 573,000
Repayment of the Entertainment Group's long term debt................................... 273,690
---------
Adjusted sales proceeds................................................................. 299,310
Due from Metromedia Entertainment Group................................................. (84,903)
Entertainment Group's net stockholder's equity.......................................... 73,852
Transaction costs....................................................................... (2,000)
---------
Gain from sale.......................................................................... $ 286,259
---------
---------
</TABLE>
The Company has made a preliminary calculation of the estimated gain on the
sale of the Entertainment Group, exclusive of Landmark. However there can be
no assurance that the actual gain will not differ significantly from the pro
forma adjustment. The foregoing does not account for any taxes that may be
payable upon consummation of the Proposed Transaction. The Company does not
believe that the taxes payable as a result of the consummation of the
Proposed Transaction will have a material adverse effect on the Company's
results of operations and financial condition.
(FOOTNOTES CONTINUED ON FOLLOWING PAGE)
43
<PAGE>
(2) Reflects the repayment of the Company's 6 1/2% Convertible Debentures,
9 1/2% Debentures and 10% Debentures at par value as follows (in thousands):
<TABLE>
<S> <C>
6 1/2% Convertible Debentures........................................................... $ 75,000
9 1/2% Debentures....................................................................... 59,484
10% Debentures.......................................................................... 5,467
---------
139,951
Debt balance at March 31, 1997.......................................................... 125,302
---------
Extraordinary loss on early extinguishment of debt...................................... $ 14,649
---------
---------
</TABLE>
(3) Reflects elimination of interest expense attributable to the Company's
6 1/2% Convertible Debentures, 9 1/2% Debentures and 10% Debentures.
(4) Reflects ten months of amortization of goodwill related to the
consolidation of Snapper.
(5) Reflects Snapper's results of operations for the period January 1, 1996
through October 31, 1996.
(6) Reflects the elimination of results of operations of the Entertainment
Group, including the results of operations of Goldwyn and MPCA for the
period July 2, 1996 to December 31, 1996.
(7) Reflects the results of operations of Landmark (formerly known as the
Samuel Goldwyn Theatre Group, acquired in July, 1996) for the year ended
December 31, 1996 adjusted for a full year of goodwill amortization.
(8) Reflects elimination of historical Landmark income tax expense.
(9) Reflects vesting of restricted stock issued in connection with the MPCA
acquisition due to the sales transaction.
(10) Reflects issuance of stock related to the acquisitions of Goldwyn and MPCA
as if outstanding for the entire period presented.
44
<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA
The following selected consolidated financial data presented below as of and
for the quarters ended March 31, 1997 and March 31, 1996 are derived from the
unaudited consolidated financial statements of the Company. The 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 unaudited consolidated financial statements as of March 31,
1997 and March 31, 1996 are included in the Company's Quarterly Report on Form
10-Q for the quarter ended March 31, 1997 and 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
included in the Company's Annual Report on Form 10-K, as amended, for the year
ended December 31, 1996, each of which are contained elsewhere in this Proxy
Statement.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
---------------------- YEAR ENDED
DECEMBER 31, YEARS ENDED FEBRUARY 28,
(UNAUDITED) ---------------------- ----------------------------------
1997 1996 1996(1) 1995(2) 1995 1994 1993
---------- ---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
(IN THOUSANDS, EXCEPT PER SHARE DATA)
STATEMENT OF OPERATIONS DATA:
Revenues........................... $ 103,418 $ 30,805 $ 201,755 $ 138,970 $ 194,789 $ 175,713 $ 222,318
Equity in losses of joint
ventures........................... (1,598) (1,783) (11,079) (7,981) (2,257) (777) --
Loss from continuing operations
before discontinued operations and
extraordinary item................. (22,258) (19,141) (94,433) (87,024) (69,411) (132,530) (72,973)
Net income (loss).................. (22,258) (19,141) (115,243) (412,976) (69,411) (132,530) 250,240
Loss per common share from
continuing operations before
discontinued operations and
extraordinary item................. (0.34) (0.45) (1.74) (3.54) (3.43) (7.71) (19.75)
Loss before extraordinary item per
common share....................... (0.34) (0.45) (2.04) (15.51) (3.43) (7.71) (19.75)
Net income (loss) per common
share.............................. (0.34) (0.45) (2.12) (16.83) (3.43) (7.71) 67.74
Weighted average common shares
outstanding........................ 66,155 42,615 54,293 24,541 20,246 17,188 3,694
Dividends per common share......... -- -- -- -- -- -- --
BALANCE SHEET DATA (AT END OF PERIOD):
Total assets....................... $ 998,778 $ 567,133 $ 944,740 $ 599,638 $ 391,870 $ 520,651 $ 704,356
Total debt......................... 462,529 304,932 459,059 304,643 237,027 284,500 325,158
</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 Snapper 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.
45
<PAGE>
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
ELECTION TO TREAT SALE OF THE SHARES AS SALE OF ASSETS
Pursuant to the Stock Purchase Agreement, the Company will join with P&F in
electing under Section 338(g) and Section 338(h)(10) of the Internal Revenue
Code of 1986, as amended (the "Code"), and any state, local and foreign
counterparts to treat the sale of all of the Shares as a sale of the assets of
Orion and the other Entertainment Companies for Federal, state, local and
foreign income tax purposes. Under Section 338(h)(10) of the Code, and under
most state and local tax laws, the sale of the Shares by the Company will be
ignored for tax purposes and treated as if Orion and the other Entertainment
Companies sold their assets to P&F and then liquidated into the Company in a
tax-free liquidation. Accordingly, no gain or loss will be recognized by the
Company upon the sale of the Shares or upon the consummation of the transfer of
the outstanding capital stock of Landmark (formerly a wholly-owned subsidiary of
Goldwyn) from Orion to the Company or an affiliate thereof. Similarly, no gain
or loss will be recognized by Goldwyn or Orion upon the transfer of the capital
stock of Landmark under Section 337 of the Code and under most state and local
tax laws. As a result of the Proposed Transaction, however, Orion and the other
Entertainment Companies will recognize gain or loss equal to the difference
between (i) the portion of the cash received by the Company and the liabilities
of Orion satisfied or assumed in connection with the sale of the Shares
allocated to particular assets of the Entertainment Companies and (ii) the tax
basis with respect to such assets. The Company intends, subject to the
limitations discussed in the following section, to use net operating loss
carryforwards to offset any gain so recognized by the Entertainment Companies.
LIMITATIONS ON LOSS CARRYFORWARDS
In addition to the November 1 Merger, on July 2, 1996, wholly-owned
subsidiaries of the Company merged with and into Goldwyn and MPCA (the "July 2
Merger"). For their taxable years ending on or before the November 1 Merger or
the July 2 Merger, respectively, Orion, Actava, MITI and Sterling and Goldwyn
and MPCA, respectively, and the subsidiaries included in their respective
affiliated groups of corporations which filed consolidated Federal income tax
returns with Orion, Actava, MITI, Sterling, Goldwyn and MPCA as the parent
corporation (such Orion, Actava, MITI, Sterling, Goldwyn and MPCA affiliated
groups hereinafter being referred to as the "Orion Group," the "Actava Group,"
the "MITI Group," the "Sterling Group," the "Goldwyn Group," and the "MPCA
Group," individually as a "Former Group" and, collectively, the "Former Groups")
reported, or will report net operating loss carryforwards. As a result of
November 1 Merger and the July 2 Merger, certain limitations apply to the use of
pre-merger net operating loss carryforwards of the Former Groups by the Company
and its subsidiaries included in the affiliated group of corporations which file
consolidated Federal income tax returns with the Company as the parent
corporation (the "MMG Group").
Under Section 382 of the Code, annual limitations generally apply to the use
of the pre-merger net operating loss carryforwards of the Former Groups by the
MMG Group. The amount of any such limitation with respect to a Former Group
would generally be increased by the amount of any recognized "built-in" gains of
corporations which were members of such Former Group. Finally, to the extent
pre-merger net operating loss carryforwards equal to the annual limitation with
respect to any Former Group are not used in any year, the unused amount would
generally be available to be carried forward and used to increase the limitation
with respect to such Former Group in the succeeding year.
Under Section 384 of the Code, the pre-merger net operating loss
carryforwards of a Former Group will also be separately limited to the income
and gains recognized by corporations which were members of such Former Group.
Thus, for example, the pre-merger net operating loss carryforwards of the Actava
Group or the MITI Group would not be available under such section to offset any
"built-in" gains of the corporations which were members of the Orion Group.
46
<PAGE>
Finally, the use of pre-merger net operating loss carryforwards of the Orion
Group, the MITI Group, the Sterling Group, the Goldwyn Group and the MPCA Group
will also be separately limited by the income and gains recognized by the
corporations that were members of each of the Orion Group, the MITI Group, the
Sterling Group, the Goldwyn Group and the MPCA Group, respectively. Under
proposed Treasury Regulations, such pre-merger net operating loss carryforwards
of any Former Group would be usable on an aggregate basis to the extent of any
income and gains recognized by the corporations that were members of such Former
Group on an aggregate basis.
Notwithstanding these limitations, the Company believes that electing to
treat the sale of the Shares Orion as a sale of assets pursuant to Section
338(h)(10) of the Code and any state, local and foreign counterparts will
maximize the use of net operating loss carryforwards by the Company and the
Entertainment Companies for Federal, state, local and foreign income tax
purposes. MMG has not completed its calculations of the gain which will be
recognized as a result of the sale of the Entertainment Companies. While MMG
estimates that its net operating loss carryforwards will be sufficient to offset
most of any gain so recognized for Federal income tax purposes, MMG currently
believes that it will be required to pay Federal, state, local and foreign
taxes. At the present time, however, it is not practicable to accurately
quantify the amount of taxes that will be payable upon consummation of the
Proposed Transaction. The Company does not believe that the taxes payable as a
result of the consummation of the Proposed Transaction will have a material
adverse effect on the Company's results of operations and financial condition.
47
<PAGE>
INFORMATION REGARDING MMG
BUSINESS OF MMG
MMG is a global communications, entertainment and media company currently
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
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 and the exploitation of
its library of over 2,200 feature film and television titles, through its
Entertainment Group. If the Proposed Transaction is approved and consummated,
substantially all of the Entertainment Group's assets will be sold and the
Company will narrow its strategic focus to operating the Communications Group.
Following consummation of the Proposed Transaction, the Company will continue to
own and operate Landmark in order to maximize the value of these assets. The
Company believes that Landmark, which operated 50 theaters with 138 screens at
December 31, 1996, is the largest exhibitor of specialized motion pictures and
art films in the United States. The Company also owns two non-core assets,
Snapper and an interest in RDM. The Company intends to actively manage Snapper
in order to maximize Snapper's long-term value. The Company is continuing to
pursue opportunities for a sale of its investment in RDM.
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 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 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 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 demand for its services in its license areas.
While the Communications Group's operating systems
48
<PAGE>
have experienced significant 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 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 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.
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 and 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 facsimile and data transmission, including Internet access. In
February 1997, the Communications Group, through Metromedia Asia Corporation, a
Delaware corporation that is controlled by MITI ("MAC"), acquired Asian American
Telecommunications Corporation ("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 United
Telecommunications Corporation 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.
THE ENTERTAINMENT GROUP
Currently, the 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. The
Entertainment Group currently distributes feature films produced or acquired by
it to domestic theaters and distributes motion pictures and television
entertainment product in the domestic home video and television markets through
its in-house distribution divisions and subsidiaries. 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 also owns Landmark, which management believes is the
leading specialty theater circuit in the United States, consisting of, as of
December 31, 1996, 50 theaters with a total of 138 screens. After the
consummation of the Proposed Transaction, Landmark will constitute the sole
business of the Entertainment Group. The Company intends to actively manage
Landmark after the consummation of the Proposed Transaction in order to maximize
its value to MMG Stockholders.
The Company and its Board of Directors, consistent with their fiduciary duty
to Stockholders, continually evaluates opportunities as they arise to determine
whether Stockholder value would be maximized by disposing of its assets.
49
<PAGE>
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
The following table sets forth, as of the Record Date, certain information
regarding each person (including any "group" as that term is used in Section
13(d)(3) of the Exchange Act) known (based solely upon filings with the
Commission prior to such date pursuant to Sections 13(d) or 13(g) of the
Exchange Act) to own beneficially (as such term is defined in Rule 13d-3 under
the Exchange Act) more than 5% of the outstanding Common Stock. In accordance
with the rules promulgated by the Commission, such ownership includes shares
currently owned as well as shares which the named person has the right to
acquire beneficial ownership of within 60 days, including, but not limited to,
shares which the named person has the right to acquire through the exercise of
any option, warrant or right, or through the conversion of a security.
Accordingly, more than one person may be deemed to be a beneficial owner of the
same securities.
<TABLE>
<CAPTION>
NUMBER OF SHARE OF
COMMON STOCK PERCENTAGE OF
BENEFICIALLY OUTSTANDING
NAME AND ADDRESS OF BENEFICIAL OWNER OWNED(1) COMMON STOCK
- ------------------------------------------------------------------------------ -------------------- ---------------
<S> <C> <C>
John W. Kluge, Stuart Subotnick, Metromedia
Company and
Met Telcell................................................................. 17,219,737(2) 26%
One Meadowlands Plaza
East Rutherford, NJ 07073-2137
Dietche & Field Advisers, Inc................................................. 3,160,000 5.02%
437 Madison Avenue
New York, N.Y. 10022
</TABLE>
- ------------------------
(1) Unless otherwise indicated by footnote, the named persons have sole voting
and investment power with respect to the share of Common Stock beneficially
owned.
(2) Metromedia is a Delaware general partnership owned and controlled by John W.
Kluge and Stuart Subotnick, each of whom is a director of MMG. The amount
set forth in the table above includes 12,415,455 shares owned by Mr. Kluge
and Mr. Subotnick beneficially through Metromedia Company (7,989,206 shares)
and Met Telcell (4,426,249 shares), and 4,353,057 and 451,225 shares of
Common Stock, respectively, owned directly by a trust affiliated with Mr.
Kluge and by Mr. Subotnick, respectively. The amount also includes options
to acquire 440,000 shares of Common Stock exercisable within 60 days of the
date hereof.
The foregoing information is based on a review, as of the Record Date, by
MMG of statements filed with the Commission under Sections 13(d) and 13(g) of
the Exchange Act. To the best knowledge of MMG, except as set forth above, no
person owns beneficially more than 5% of the outstanding Common Stock.
SECURITIES BENEFICIALLY OWNED BY DIRECTORS AND EXECUTIVE OFFICERS
The following table sets forth the beneficial ownership of Common Stock as
of the Record Date with respect to (i) each director and director nominee of
MMG; (ii) each executive officer named in the
50
<PAGE>
Summary Compensation Table under "Executive Compensation;" and (iii) all
directors and executive officers of MMG as a group.
<TABLE>
<CAPTION>
NUMBER OF SHARES OF
COMMON STOCK PERCENTAGE OF
NAME OF BENEFICIAL OWNER BENEFICIALLY OWNED(1) COMMON STOCK
- -------------------------------------------------------------------------------- --------------------- -------------
<S> <C> <C>
John P. Imlay, Jr............................................................... 20,000(2) *
Clark A. Johnson................................................................ 38,000(2)(3) *
John W. Kluge................................................................... 16,768,512(4)(5) 25.3%
Silvia Kessel................................................................... 103,085(6) *
Robert A. Maresca............................................................... 30,000(7) *
Carl E. Sanders................................................................. 62,097(2)(3)(8) *
Richard J. Sherwin.............................................................. 912,605(9) 1.4%
Stuart Subotnick................................................................ 12,866,680(5)(10) 19.4%
Arnold L. Wadler................................................................ 115,415(6) *
Leonard White................................................................... 100,000(6) *
All Directors and Officers as a group (10 persons).............................. 18,600,939 27.5%
</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 options to acquire 20,000 shares of Common Stock issued under the
1996 Stock Plan exercisable within 60 days of the date hereof. The 1996
Stock Plan was approved by the Company's stockholders at the 1996 Annual
Meeting of Stockholders of the Company.
(3) Includes 10,000 shares subject to purchase within 60 days of the date hereof
under the Company's 1991 Non-Employee Director Stock Option Plan.
(4) Represents 12,415,455 shares beneficially owned through Metromedia Company
and Met Telcell, and 4,353,057 shares of Common Stock owned directly by a
trust affiliated with Mr. Kluge.
(5) Includes options to acquire 220,000 shares of Common Stock exercisable
within 60 days of the date hereof.
(6) Includes 100,000 options issued under the 1996 Stock Plan, exercisable
within 60 days of the date hereof.
(7) Includes 30,000 options issued under the 1996 Stock Plan, exercisable within
60 days of the date hereof.
(8) Includes 600 shares subject to purchase by Mr. Sanders within 60 days of the
date hereof pursuant to the conversion of the $25,000 face amount (less than
1%) of the Company's 6 1/2% Convertible Debentures beneficially owned by Mr.
Sanders, which are convertible into Common Stock at a conversion price of
$41 5/8 per share.
(9) Includes options to purchase 657,917 shares of Common Stock, exercisable
within 60 days of the date hereof at an exercise price equal to $1.08.
(10) Represents 12,415,455 shares beneficially owned through Metromedia Company
and Met Telcell and 451,225 shares owned directly by Mr. Subotnick.
51
<PAGE>
DIRECTORS OF MMG
The Board of Directors of MMG, which presently consists of nine members, is
divided into three classes. The Class I Directors were elected for a term
expiring at the annual meeting of stockholders to be held in 1999, the Class II
Directors were elected for a term expiring at the Annual Meeting, and the Class
III Directors were elected for a term expiring at the annual meeting of
stockholders to be held in 1998. Members of each class will hold office until
their successors are elected and qualified. At each succeeding annual meeting of
the stockholders of MMG, the successors of the class of directors whose terms
expire at that meeting shall be elected by a plurality vote of all votes cast at
such meeting and will hold office for three-year terms. The Class I Directors,
whose terms expire at the annual meeting of stockholders to be held in 1999, are
John W. Kluge, Stuart Subotnick and John P. Imlay, Jr. The Class II Directors,
whose terms expire at the Annual Meeting are Richard J. Sherwin and Leonard
White. The Class III Directors, whose term expires at the annual meeting of
stockholders to be held in 2000, are Silvia Kessel, Carl E. Sanders, Arnold L.
Wadler and Clark A. Johnson.
For more information regarding each of MMG's directors, including
biographical information, See "PROPOSAL NO. 2--ELECTION OF DIRECTORS."
MEETINGS AND CERTAIN COMMITTEES OF THE BOARD
The Board of Directors held one regular meeting and three special meetings
during 1996. In addition, the Board of Directors took action by unanimous
written consent one time in 1996. On December 4, 1996, John D. Phillips resigned
as President and Chief Executive Officer and as a Director of the Company. All
directors attended at least 75% of the aggregate total number of meetings of the
Board of Directors and all committees of the Board of Directors on which they
served.
The Board of Directors has delegated certain functions to the following
standing committees:
THE EXECUTIVE COMMITTEE. The Executive Committee is authorized to exercise,
to the extent permitted by law, all of the powers of the Board of Directors in
the management and affairs of the Company. The Executive Committee held thirteen
meetings in 1996. The members of the Executive Committee are Messrs. Kluge and
Subotnick.
THE AUDIT COMMITTEE. The Audit Committee is responsible for (a) reviewing
the professional services and independence of MMG's independent auditors and the
scope of the annual external audit recommended by the independent auditors, (b)
ensuring that the scope of the annual external audit is sufficiently
comprehensive, (c) reviewing, in consultation with MMG's independent auditors
and MMG's internal auditors, the plan and results of the annual external audit,
the adequacy of MMG's internal control systems and the results of MMG's internal
audit and (d) reviewing with management and MMG's independent auditors MMG's
annual financial statements, financial reporting practices and the results of
such external audit. The Audit Committee met once during 1996. The current
members of the Audit Committee are Messrs. Subotnick, Imlay and Johnson.
THE COMPENSATION COMMITTEE. The Compensation Committee's functions are to
review, approve, recommend and report to the Board of Directors on matters
specifically relating to the compensation of MMG's executive officers and other
key executives and to administer MMG's stock option plans. The Compensation
Committee held one meeting during 1996. The current members of the Compensation
Committee are Messrs. Sanders, Imlay and Johnson.
THE NOMINATING COMMITTEE. The Nominating Committee's principal function is
to identify candidates and recommend to the Board of Directors nominees for
membership on the Board of Directors. The Nominating Committee expects normally
to be able to identify from its own resources the names of qualified nominees,
but it will accept from stockholders recommendations of individuals to be
considered as nominees, provided MMG Stockholders follow the procedures
specified in MMG's By-laws. These
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procedures provide that, in order to nominate an individual to the Board of
Directors, a MMG Stockholder must provide timely notice of such nomination in
writing to the Secretary of MMG 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. To be timely, notice must be received by MMG not less than
60 days nor more than 90 days prior to the first anniversary of the date of
MMG's annual meeting for the preceding year; provided, however, that in the
event the date of such 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 10 days following public disclosure by MMG of the date
of the annual or special meeting at which directors are to be elected. 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 MMG with the Commission pursuant to Sections 13, 14 or
15(d) of the Exchange Act. Any such nominations should be submitted in writing
to MMG, One Meadowlands Plaza, East Rutherford, New Jersey 07073-2137,
Attention: Secretary. The Nominating Committee did not hold any formal meetings
in 1996. The current members of the Nominating Committee are Messrs. Subotnick
and Wadler and Ms. Kessel.
COMPENSATION OF DIRECTORS
During 1996, each director of the Company who was not employed by the
Company or affiliated with Metromedia Company (the "Non-Employee Directors")
received a $2,000 monthly retainer plus a separate attendance fee for each
meeting of the Board of Directors or committee of the Board of Directors in
which such director participated. During 1996, the attendance fees were $1,200
for each meeting of the Board of Directors attended by a Non-Employee Director
in person and $500 for each meeting of the Board of Directors in which a
Non-Employee Director participated by conference telephone call. Members of
committees of the Board of Directors are paid $500 for each meeting attended.
Prior to December 13, 1995, Non-Employee Directors were entitled to receive
options to purchase shares of Common Stock under the Company's 1991 Non-Employee
Director Stock Option Plan (as amended, the "Director Plan"). Under the Director
Plan, each Non-Employee Director who was a director of the Company on August 3,
1992 was granted an option to purchase 10,000 shares of Common Stock at an
exercise price of $11.875, the closing price of the Common Stock on the trading
day immediately preceding the date of grant. Options granted to these
Non-Employee Directors became fully vested as to all 10,000 shares upon approval
of certain amendments to the Director Plan at the Company's 1993 Annual Meeting
of Stockholders.
The Director Plan further provided that each person who became a
Non-Employee Director of the Company after August 3, 1992 would receive an
option to purchase 10,000 shares of Common Stock on the day such director is
elected as a director, at an exercise price equal to the closing price of the
Common Stock on the trading day preceding such director's election. Options
granted to these Non-Employee Directors became fully vested and exercisable as
to all 10,000 shares on March 31 in the year after the date the Non-Employee
Director was elected, provided the Company had net income for the year in which
the Non-Employee Director was elected or earnings equal to or better than
budgeted results for such year.
All options granted under the Director Plan had a term of ten years. The
Director Plan had originally been scheduled to terminate on June 27, 2001.
However, at a meeting of the Board of Directors held on December 13, 1995, the
Board of Directors terminated the Director Plan. Options outstanding as of
December 13, 1995 are unaffected by the termination of the Director Plan.
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<PAGE>
On August 29, 1996, the MMG Stockholders adopted the 1996 Stock Plan.
Pursuant to the 1996 Stock Plan, at a Compensation Committee meeting held on
January 31, 1996, each director was granted options to purchase 50,000 shares of
Common Stock at an exercise price of $12.75, the closing price of the Common
Stock on the trading day immediately preceding the date of grant. Subsequent to
December 31, 1996, all such options were canceled and reissued. See Footnote 2
of "INFORMATION REGARDING MMG--Option/SAR Grants During the Year Ended December
31, 1996." On January 31, 1996, 10,000 shares vested, and the remainder of the
options are scheduled to vest ratably over a four year period beginning January
31, 1996.
EXECUTIVE COMPENSATION
The following Summary Compensation Table sets forth information on
compensation awarded to, earned by or paid to the Chief Executive Officer and
MMG's other most highly compensated executive officers during the fiscal years
ended December 31, 1996, December 31, 1995 and December 31, 1994 for services
rendered in all capacities to MMG and its subsidiaries. In addition, the Summary
Compensation Table sets forth similar information for such periods with respect
to John D. Phillips, who would have been among MMG's four most highly
compensated executive officers during 1996 but for the fact that he was not
serving as an executive officer of MMG at the end of 1996. The persons listed in
the table below are referred to as the "Named Executive Officers."
SUMMARY COMPENSATION. The following table sets forth compensation awarded
to, earned by or paid to the Named Executive Officers for services rendered to
MMG and its subsidiaries during the fiscal year ended December 31, 1996,
December 31, 1995 and December 31, 1994. During each year, Messrs. Subotnick,
Wadler, Maresca and Ms. Kessel, each of whom serves as an executive officer of
the Company, were employed and paid by Metromedia Company. The amounts shown
below as salary with respect to each of such Named Executive Officers reflect
the portion of their compensation paid by MMG to Metromedia Company in respect
of such executive's services to MMG and its subsidiaries, pursuant to the
Management Agreement (as described below). The compensation expended by the
Company and paid to Metromedia Company pursuant to the Management Agreement
includes payment for salary only and does not include any payment relating to
bonus or other compensation. No other amounts were paid by
54
<PAGE>
MMG to such Named Executive Officers during 1996. During 1996, Mr. Phillips was
paid directly by MMG.
<TABLE>
<CAPTION>
ANNUAL COMPENSATION LONG TERM COMPENSATION
------------------------------- -----------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
AWARDS
OTHER NUMBER OF
NAME AND ANNUAL SECURITIES ALL OTHER
PRINCIPAL COMPENSATION UNDERLYING COMPENS.
POSITION YEAR SALARY($) BONUS($) ($)(1) STOCK OPTIONS ($)(2)
- ------------------------------------------ --------- --------- --------- ------------------- ------------- -----------
John D. Phillips.......................... 1996 $ 604,454 -- 0 $ 300,121(5)
Former President and Chief 1995 $ 624,984 $ 700,000 -- 0 $ 15,096
Executive Officer(1)(3) 1994 $438,289 $438,289 -- -- 0 $13,336
Stuart Subotnick.......................... 1996 $ 55,328(4) -- --
President and Chief 1995 -- -- 50,000 --
Executive Officer (4) 1994 -- -- -- -- --
Silvia Kessel............................. 1996 $ 350,000 -- 250,000 --
Executive Vice President and 1995 -- -- -- -- --
Chief Financial Officer 1994 -- -- -- -- -- --
Arnold L. Wadler.......................... 1996 $ 350,000 -- 250,000 --
Executive Vice President, General 1995 -- -- -- -- --
Counsel and Secretary 1994 -- -- -- -- -- --
Robert A. Maresca......................... 1996 $ 200,000 -- 75,000 --
Senior Vice President and Chief 1995 -- -- -- -- --
Accounting Officer 1994 -- -- -- -- -- --
</TABLE>
- ------------------------
(1) John D. Phillips served as President and Chief Executive Officer of MMG from
January 1, 1996 through December 4, 1996, and during such period the Company
provided perquisites and other personal benefits to Mr. Phillips. The value
of the perquisites and benefits provided Mr. Phillips during 1994, 1995,
1996 did not exceed the lesser of $50,000 or 10% of such officer's salary
plus annual bonus.
(2) The amounts in this column include premiums paid by the Company on behalf of
Mr. Phillips under life insurance policies providing death benefits to the
designated beneficiaries of the Named Executive Officers, including premium
payments of (i) $13,336 made by the Company to Mr. Phillips in 1994; (ii)
$15,096 made by the Company to Mr. Phillips in 1995 in lieu of his
participation in the life insurance programs maintained by the Company for
its executive officers; and (iii) $15,721 made by the Company to Mr.
Phillips in 1996.
(3) The amounts shown for 1994 and 1996 reflect less than a full year of
compensation for Mr. Phillips who was employed by the Company from April 19,
1994 through December 4, 1996.
(4) Mr. Subotnick was appointed President and Chief Executive Officer of MMG on
December 4, 1996. The amounts shown for Mr. Subotnick reflect the portion of
the payment made by MMG to Metromedia Company for this period.
(5) Includes payments aggregating $284,400 made by the Company to JDP Aircraft
during the year ended 1996, a company owned and controlled by John D.
Phillips, which payments the Company believes were made on an arm's-length
basis and do not constitute payments of salary and/or bonus to the Named
Executive Officer.
PENSION PLANS
The Company maintains a qualified defined benefit pension plan and a
nonqualified supplemental pension plan for the benefit of eligible participants,
including certain of the Company's former executive
55
<PAGE>
officers. The Company's nonqualified supplemental pension plan provides benefits
that would otherwise be denied participants by reason of certain limitations
under the Internal Revenue Code on qualified plan benefits and provides certain
other supplemental pension benefits to certain of the Company's executive
officers and highly compensated employees. On December 13, 1995, the Board of
Directors of the Company amended the pension plan and the supplemental pension
plan to cease benefit accruals after December 31, 1995. Accordingly, the only
benefits that will be payable under these plans are those benefits that had
accrued as of December 31, 1995.
A participant's compensation covered by the Company's pension plan and
supplemental pension plan is his or her average annual compensation for the five
consecutive calendar plan years during the last ten years of the participant's
career for which such average is the highest or, in the case of a participant
who has been employed for less than five full calendar years, the period of his
or her employment with the Company and its subsidiaries ("covered
compensation"). A participant's covered compensation generally means the total
taxable compensation required to be reported on the participant's Form W-2 for
income tax purposes, except that this amount (excluding bonuses) is annualized
for periods covering less than a full calendar year. Generally, a participant
earns retirement benefits at the rate of 2% of such participant's covered
compensation for the first 20 years of service and 1% for each additional 20
years of service. Participants become vested in their retirement benefits after
completing at least five years of service or attaining age 50 or upon retirement
after age 62 with at least one year of service. The estimated years of service
for each Named Executive Officer as of December 31, 1996 was as follows: Mr.
Phillips: 2 2/3 years. Based on these provisions and the number of years of
service completed, the annual vested retirement benefits as of December 31, 1996
were $45,015 for Mr. Phillips. Mr. Phillip's covered compensation for purposes
of the pension plan differs from compensation reported in the Summary
Compensation Table (the "Table") in that (i) covered compensation includes
certain taxable employee benefits not required to be reported in the Table and
(ii) covered compensation includes all compensation received by the executive
during the year (regardless of when it was earned), whereas the Table includes
only compensation earned during the year.
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<PAGE>
OPTION/SAR GRANTS DURING THE YEAR ENDED DECEMBER 31, 1996
The following table sets forth individual grants of stock options or limited
stock appreciation rights ("SARs") by MMG pursuant to the 1996 Stock Plan to the
Named Executive Officers during the fiscal year ended December 31, 1996.
<TABLE>
<CAPTION>
SECURITIES
OPTIONS/ SARS % OF TOTAL
UNDER GRANTED TO
OPTIONS/SARS EMPLOYEES IN EXERCISE EXPIRATION GRANT-DATE
NAME GRANTED (#)(1) FISCAL YEAR PRICE(2) DATE(3) VALUATION(4)
- ------------------------------------- ----------------- ----------------- ----------- ----------------- -----------
<S> <C> <C> <C> <C> <C>
Stuart Subotnick..................... * * * * *
Silvia Kessel........................ 250,000 9.6% $ 12.75 January 31, 2006 $1,240,250
Arnold L. Wadler..................... 250,000 9.6% $ 12.75 January 31, 2006 $1,240,250
Robert A. Maresca.................... 75,000 2.9% $ 12.75 January 31, 2006 $ 368,250
</TABLE>
- ------------------------
(1) The date of grant for these options was January 31, 1996.
(2) The exercise price of the options granted during 1996 is equal to the fair
market value of shares of Common Stock on the date of grant of the options.
The exercise price may be paid in cash, or at the discretion of the
Compensation Committee, by tendering already owned shares of Common Stock,
or a combination thereof. On March 26, 1997, the Board of Directors approved
a cancellation and reissuance of the existing options issued under the 1996
Stock Plan at a price of $9.3125, the fair market value of the Common Stock
on such date.
(3) Options expire ten years from date of grant or, in case of retirement or
termination of employment, the date three months from such date of cessation
of employment. Options became 20% exercisable on the date of grant and then
vest ratably over a four year period. To the extent not already exercisable,
the options become fully exercisable in the event of a "change of control,"
as defined in the 1996 Stock Plan.
(4) As permitted by the Commission, the Black-Scholes method of option valuation
has been used to determine grant date present value. The assumptions used in
the Black-Scholes option valuation calculation are (i) estimated future
annual stock price volatility of 38.951%; (ii) a United States risk-free
rate of return of 5.228%; and (iii) no future dividend yield. MMG does not
advocate or necessarily agree that the Black-Scholes method or any other
method permitted by the Commission can properly determine the value of an
option. However, no gain to the optionees is possible without an increase in
the stock price. Thus a zero increase or decrease in stock price, compared
to the exercise price, will not produce any gain for the optionee.
* Mr. Subotnick was granted 50,000 options in his capacity as a Director of the
Company. During the year ended December 31, 1996, Mr. Subotnick did not
receive any stock option grants in his capacity as Chief Executive Officer.
Subsequent to December 31, 1996, Mr. Subotnick and Mr. Kluge each were
granted options to purchase 1,000,000 shares of Common Stock, 20% of such
options vested on the date of grant and an additional 20% will vest on each
annual anniversary thereafter. All such options are exercisable at the
closing sales price for the Common Stock on the AMEX on the date of the
grant.
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<PAGE>
AGGREGATED OPTION AND SAR EXERCISES IN 1996 AND FISCAL YEAR-END OPTION AND SAR
VALUES
The following table sets forth information concerning the exercise of
options or SARs by the Named Executive Officers during the 1996 fiscal year and
the number of unexercised options and SARs held by such officers at the end of
the 1996 fiscal year.
<TABLE>
<CAPTION>
VALUE REALIZED FISCAL YEAR
(MARKET END VALUE
SHARES PRICE AT $9.8750
ACQUIRED EXERCISE LESS -----------
NAME ON EXERCISE EXERCISE PRICE) EXERCISABLE UNEXERCISABLE EXERCISABLE
- ---------------------------------------- ----------------- ------------------- ----------- ------------- -----------
<S> <C> <C> <C> <C> <C>
VALUE OF
UNEXERCISED
IN THE
MONEY
NUMBER OF SECURITIES OPTIONS/SARS
UNDERLYING UNEXERCISED AT
OPTIONS/SAR'S FISCAL YEAR
AT FISCAL YEAR END(#) END ($)
-------------------------- -----------
John D. Phillips........................ -0- -0- 310,000 40,000 $ 1,050,000
Stuart Subotnick........................ -0- -0- 10,000 40,000 -0-
Arnold L. Wadler........................ -0- -0- 50,000 200,000 -0-
Silvia Kessel........................... -0- -0- 50,000 200,000 -0-
Robert A. Maresca....................... -0- -0- 15,000 60,000 -0-
<CAPTION>
NAME UNEXERCISABLE
- ---------------------------------------- -----------------
<S> <C>
John D. Phillips........................ -0-
Stuart Subotnick........................ -0-
Arnold L. Wadler........................ -0-
Silvia Kessel........................... -0-
Robert A. Maresca....................... -0-
</TABLE>
58
<PAGE>
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
MMG'S RELATIONSHIP WITH METROMEDIA COMPANY
The Metromedia Holders are collectively the largest single stockholder of
the Company, owning, as of the Record Date, approximately 26% of the issued and
outstanding shares of Common Stock. Prior to the November 1 Merger, Metromedia
and its affiliates were the principal stockholders of Orion and MITI.
Prior to the November 1 Merger, Orion, MITI and Sterling were party to a
number of material contracts and other arrangements with Metromedia and certain
affiliates of Metromedia pursuant to which Metromedia and certain of its
affiliates made loans or provided financing to, or paid obligations on behalf
of, each of Orion, MITI and Sterling (collectively, the "Metromedia
Obligations"). In connection with the consummation of the November 1 Merger, the
Metromedia Obligations were refinanced, repaid or converted into equity of the
Company.
MMG is a party to a number of agreements and arrangements with Metromedia
and its affiliates, the material terms of which are summarized below.
ORION CREDIT FACILITY. On June 27, 1996, Orion and Chase entered into the
Orion Credit Facility, a $300 million facility consisting of a $200 million term
loan and a $100 million revolving credit facility. Orion's obligations under the
Orion Credit Facility are guaranteed on a joint and several basis by all of
Orion's active subsidiaries. In addition, in order further to induce Chase and
the other lenders to provide the revolving portion of the Orion Credit Facility,
John W. Kluge and Metromedia each guaranteed the due and punctual payment of all
funds due under the revolving credit loan portion of such credit facility,
including all related costs and attorneys' fees, up to a maximum amount of the
lesser of (i) $100 million and (ii) the amount, if any, by which Orion's
outstanding obligations under the revolver exceed the amount by which the
borrowing base under the Orion Credit Facility exceeds the term loan portion of
such credit facility. As of May 31, 1997, Orion owed approximately $94.3 million
under the revolving portion of the Orion Credit Facility, none of which was
reserved for outstanding letters of credit and all of which will be repaid upon
consummation of the Proposed Transaction. See "PROPOSAL NO. 1--THE PROPOSED
TRANSACTION--General." Neither Mr. Kluge nor Metromedia received any
consideration for guaranteeing Orion's obligations under the Orion Credit
Facility. Their guarantees were, however, a condition to Chase's agreeing to
provide the revolving portion of such Facility. In addition, Metromedia has
guaranteed the payment by Orion to Chase of certain fees payable in connection
with the execution of the commitment letter with Chemical (the
predecessor-in-interest to Chase) for the Orion Credit Facility. All such fees
were paid by Orion on January 5, 1996. Furthermore, Metromedia guaranteed the
payment of certain third party accounts receivable owed to Orion so that the
entire face amount of such accounts could be included in the borrowing base for
the Orion Credit Facility. Neither Mr. Kluge nor Metromedia received any
consideration for providing such guarantees. As noted above, in connection with
the consummation of the Proposed Transaction, all such guarantees will be
terminated and released. See "PROPOSAL NO. 1-- THE PROPOSED TRANSACTION."
SNAPPER CREDIT FACILITY. 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 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. At March 31, 1997,
$51.7 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
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<PAGE>
Snapper Revolver Termination Date). 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 million cash collateral
account, which was initially funded by Snapper. Under the Snapper Credit
Agreement, 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.
At December 31, 1996, Snapper was not in compliance with certain financial
covenants under the Snapper Revolver. On April 30, 1997, 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.
The amendment replaces certain existing financial covenants with covenants
regarding minimum quarterly cash flow and equity requirements (as defined in the
amendment). In addition, on April 30, 1997, Snapper and AmSouth entered into an
additional a $10 million working credit facility. As additional consideration
for AmSouth making this new facility available, Snapper will 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 Snapper's obligations
thereunder, but AmSouth shall have the right to offset against such deposit as
granted by law and set forth in the Snapper Revolver.
MANAGEMENT AGREEMENT. The Company is a party to a management agreement with
Metromedia, dated November 1, 1995, as amended on January 1, 1997 (the
"Management Agreement"), pursuant to which Metromedia provides the Company with
management services, including legal, insurance, payroll and financial
accounting systems and cash management, tax and benefit plans. The Management
Agreement terminates on October 31, 1997, and is automatically renewed for
successive one year terms unless either party terminates upon 60 days prior
written notice. The management fee under the Management Agreement was $1.5
million until December 31, 1996. Pursuant to an amendment dated January 1, 1997,
the management fee under the Management Agreement was increased to $3.25 million
per year, payable monthly at a rate of $270,833.33 per month. The increase is a
function, in part, of a detailed analysis conducted by Metromedia concerning the
market value of the services provided by Metromedia Company to the Company,
including the compensation of the Company's executive officers. The Company is
also obligated to reimburse Metromedia for its out-of-pocket costs and expenses
incurred and advances paid by Metromedia in connection with the Management
Agreement. Pursuant to the Management Agreement, the Company has agreed to
indemnify and hold Metromedia harmless from and against any and all damages,
liabilities, losses, claims, actions, suits, proceedings, fees, costs or
expenses (including reasonable attorneys' fees and other costs and expenses
incident to any suit, proceeding or investigation of any kind) imposed on,
incurred by or asserted against Metromedia in connection with the Management
Agreement. In fiscal 1996 and to date in 1997, Metromedia received no money for
its out-of-pocket costs and expenses or for interest on advances extended by it
to the Company pursuant to the Management Agreement.
TRADEMARK LICENSE AGREEMENT. The Company is a party to a license agreement
with Metromedia (the "Metromedia License Agreement"), dated November 1, 1995, as
amended on June 13, 1996, pursuant to which Metromedia has granted the Company a
non-exclusive, non-transferable, non-assignable right and license, without the
right to grant sublicenses, to use the trade name, trademark and corporate name
"Metromedia" in the United States and, with respect to MITI, worldwide,
royalty-free for a term of 10 years. The Metromedia License Agreement can be
terminated by Metromedia upon one month's prior written notice in the event of
(i) the expiration or termination of the Management Agreement; (ii) a "change in
control" of the Company (as defined below); or (iii) any of the stock or all or
substantially all of the assets of any of the subsidiaries of the Company are
sold or transferred, in which case, the Metromedia License Agreement shall
terminate with respect to such subsidiary. A "change in control" of the Company
is defined as (a) a transaction in which a person or "group" (within the meaning
of Section 13(d)(3) of the Exchange Act) not in existence at the time of the
execution of the Metromedia License Agreement
60
<PAGE>
becomes the beneficial owner of stock entitling such person or group to exercise
50% or more of the combined voting power of all classes of stock of the Company;
(b) a change in the composition of the Company's Board of Directors whereby a
majority of the members thereof are not directors serving on the board at the
time of the Metromedia License Agreement or any person succeeding such director
who was recommended or elected by such directors; (c) a reorganization, merger
or consolidation whereby, following the consummation thereof, Metromedia would
hold less than 10% of the combined voting power of all classes of the Company's
stock; (d) a sale or other disposition of all or substantially all of the assets
of the Company; or (e) any transaction the result of which would be that the
Common Stock would not be required to be registered under the Exchange Act and
the holders of Common Stock would not receive common stock of the survivor of
the transaction which is required to be registered under the Exchange Act. In
connection with the consummation of the Proposed Transaction, Metromedia will
waive any right it may have to terminate the Metromedia License Agreement.
In addition, Metromedia has reserved the right to terminate the Metromedia
License Agreement in its entirety immediately upon written notice to the
Company, if, in Metromedia's sole judgment, the Company's continued use of
"Metromedia" as a trade name would jeopardize or be detrimental to the goodwill
and reputation of Metromedia.
Pursuant to the Metromedia License Agreement, the Company has agreed to
indemnify and hold Metromedia harmless against any and all losses, claims,
suits, actions, proceedings, investigations, judgments, deficiencies, damages,
settlements, liabilities and reasonable legal (and other expenses related
thereto) arising in connection with the Metromedia License Agreement.
IMAGE OUTPUT AGREEMENT. Mr. Kluge beneficially owns more than 10% of the
common stock of Image Investors Co., a Delaware corporation ("Image Investors").
Image Investors owns approximately 40% of the common stock of Image
Entertainment, Inc. ("Image"). Orion Home Entertainment Corporation, a
subsidiary of Orion ("OHEC"), was a party to an output license agreement with
Image (which terminated on December 31, 1995), pursuant to which OHEC granted to
Image the rights to manufacture, market and sell on laser discs for private
in-home use certain feature length programs released by Orion on videocassette
for a period of three years from the date of first release by Image on laserdisc
in consideration of a royalty payment payable with respect to each program.
Orion, OHEC and Image are currently negotiating the terms of a new output
agreement. Since December 31, 1996, the parties have been operating as if the
old output agreement is still in effect. For the year ended December 31, 1996,
Image paid to Orion approximately $565,404 under the agreement. In addition,
subsequent to December 31, 1996, Image reached an agreement in principle with
OHEC pursuant to which Image will manufacture, market and sell certain Orion
titles for the digital variable disc ("DVD") market for a period of years. Image
will pay Orion a $500,000 advance against royalties payable under the license.
The agreement is terminable on the first date that two million DVD players have
been sold in the United States.
The Company believes that the terms of each of the transactions described
above were no less favorable to the Company than could have been obtained from
non-affiliated parties.
CERTAIN AGREEMENTS REGARDING EMPLOYMENT
PHILLIPS EMPLOYMENT AGREEMENT. Mr. Phillips and the Company were parties to
an Employment Agreement, dated as of April 19, 1994, as amended on November 1,
1995 (the "Phillips Employment Agreement"), under which the Company employed Mr.
Phillips as its President and Chief Executive Officer. On December 4, 1996, Mr.
Phillip's resigned from the Company and the Phillip's Employment Agreement was
terminated. Pursuant to the Phillips Employment Agreement, Mr. Phillips is
entitled to receive payment in the amount of his base salary (at an annual rate
of $625,000 per year) for one year following the termination. He will also
continue to receive certain benefits, including health, medical and
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life insurance and an office and secretary designated by the Company and
clerical assistance during such one year period.
In connection with his employment, Mr. Phillips also received from the
Company an option (the "Phillips Option") to purchase 300,000 shares of Common
Stock at a price of $6.375 per share. The Phillips Option may be exercised at
any time through April 18, 2001. Mr. Phillips has the right to transfer the
Phillips Option in whole or in part at any time. The Company has also agreed to
register with the Commission any shares purchased upon the exercise of the
Phillips Option.
POST-EMPLOYMENT CONSULTING AGREEMENT--TOD CHMAR. On December 5, 1996, Mr.
Chmar resigned from the Company and executed a Release of Claims and a
Post-Employment Consulting Agreement (the ("Consulting Agreement"). Pursuant to
the Consulting Agreement, Mr. Chmar will receive consulting fees of $235,000
during the one year consulting term ending December 5, 1997.
MISCELLANEOUS. Mr. Phillips is the sole stockholder of JDP Aircraft II,
Inc., a Georgia corporation ("JDP Aircraft"). On October 21, 1994, the Company
and JDP Aircraft entered into a lease agreement under which JDP Aircraft
provides the Company with the use of a Citation Jet owned by JDP Aircraft. The
lease agreement terminated on December 4, 1996. The Company paid $248,400 to JDP
Aircraft under the lease agreement for services provided during 1996. The
Company believes that the arrangements with JDP Aircraft were conducted on an
arm's-length basis.
On April 19, 1994, Mr. Phillips was elected President and Chief Executive
Officer of the Company. He was elected to the Board of Directors of the Company
on the same date. At this time, Renaissance Partners, a company in which Mr.
Phillips serves as a general partner, purchased 700,000 shares of Common Stock
from the Company for $4,462,500, at a price of $6.375 per share. This price
represents the last sale price of the Common Stock on the New York Stock
Exchange (on which the Common Stock was traded prior to the November 1 Merger)
on April 11, 1994, the date before the Company announced that it had received an
investment proposal from Mr. Phillips. The Company also entered into a
Registration Rights Agreement with Renaissance Partners pursuant to which the
Company agreed to register with the Commission the 700,000 shares of Common
Stock purchased by Renaissance Partners. Such shares were registered with the
Commission in November, 1995.
INDEMNIFICATION AGREEMENTS
MMG has entered into indemnification agreements (the "Indemnification
Agreements") with certain officers and directors of MMG. The Indemnification
Agreements provide for indemnification of such directors and officers to the
fullest extent authorized or permitted by law. The Indemnification Agreements
also provide for (i) advancement by MMG of expenses incurred by the director or
officer in defending certain litigation; (ii) the appointment in certain
circumstances of an independent legal counsel to determine whether the director
or officer is entitled to indemnification; and (iii) the continued maintenance
by MMG of directors' and officers' liability insurance (which currently consists
of $15 million of primary coverage). These Indemnification Agreements were
approved by the MMG Stockholders at the 1993 Annual Meeting of Stockholders.
COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT
Section 16(a) of the Exchange Act requires MMG's directors and executive
officers, and persons who beneficially own more than 10% of the outstanding
Common Stock, to file with the Commission and the AMEX initial reports of
ownership and reports of changes in ownership of the Common Stock. Such
officers, directors and greater than 10% Stockholders are required by the
regulations of the Commission to furnish MMG with copies of all reports that
they file under Section 16(a). To MMG's knowledge, based solely on a review of
the copies of such reports furnished to MMG and written representations that no
other reports were required, all Section 16(a) filing requirements applicable to
MMG's officers, directors
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and greater than 10% beneficial owners were complied with by such persons during
fiscal year ended December 31, 1996.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The Compensation Committee of the Board of Directors (the "Compensation
Committee") consists of Messrs. Sanders, Imlay and Johnson.
COMPENSATION COMMITTEE REPORT ON COMPENSATION
The Compensation Committee is comprised entirely of independent directors
and is responsible for developing and making recommendations to the Board with
respect to MMG's executive compensation policies.
The following report of the Compensation Committee discusses MMG's executive
compensation policies generally and, specifically, the relationship of MMG's
performance in 1996 to the compensation of its executive officers:
With the exception of Mr. Phillips, the Company's executive officers are
employed and paid by Metromedia, and a portion of such compensation is expensed
by the Company and paid by the Company to Metromedia pursuant to the Management
Agreement. The amounts paid by the Company to Metromedia for the compensation of
the Company's executive officers consist of compensation only and not any bonus
or other compensation payments. No additional amounts are paid by the Company to
any of the executive officers employed by Metromedia.
In general, the Compensation Committee seeks to link the compensation
attributable to each executive officer to the performance of MMG and that of the
compensation attributable to each such executive officer. Within these
parameters, the executive compensation program attempts to provide an overall
level of executive compensation that is competitive with companies of comparable
size and with similar market and operating characteristics, including those
included in the Comparison Group (as defined below).
During 1996, the Compensation Committee reviewed total officer compensation
against a market comparison group of approximately 12 companies in the
communications industry (the "Comparison Group") to assess the current
competitiveness of the compensation of MMG's executive officers. The
Compensation Committee considered MMG's executive compensation in view of the
Company's size, the number of operating units, and the role and responsibilities
of MMG's executive officers. In comparing the compensation of its executives
with that of executives of companies in the Comparison Group, the Compensation
Committee considered the competitiveness of the aggregate amount paid to Mr.
Phillips and the amount expensed by MMG and paid to Metromedia pursuant to the
Management Agreement.
The companies included in the NASDAQ Telecommunications Index for purposes
of analyzing the performance of the Common Stock during 1996 (see "--Performance
Graph" below) are not identical to the 12 companies in the Comparison Group
whose compensation policies were reviewed by the Compensation Committee in 1996
in assessing the competitiveness of the base salaries of MMG's executive
officers. Nevertheless, MMG believes that the cross-section of companies
included in the NASDAQ Telecommunications Index and the Comparison Group are
sufficiently similar and provide a reasonable basis for the Compensation
Committee to develop justified compensation policies and for an investor to
evaluate the performance of the Common Stock.
CHIEF EXECUTIVE OFFICER COMPENSATION. Amounts earned during 1996 by MMG's
former President and Chief Executive Officer, John D. Phillips, and MMG's
President and Chief Executive Officer, Stuart Subotnick are shown in the Summary
Compensation Table. Mr. Phillips' base salary was established in April 1994, the
time at which he became the CEO, at the same amount earned by his predecessor.
This amount remained unchanged from February 1991 through December 4, 1996. Mr.
Phillips' compensation
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for 1996 consisted of a base salary and the right to participate in certain
benefit plans generally available to MMG employees, including MMG's health,
disability and life insurance programs. In addition, Mr. Phillips participated
in the Company's lifetime defined benefit pension plan and its nonqualified
supplemental pension. Benefit accruals under these plans ceased at December 31,
1995. See "INFORMATION REGARDING MMG--Pension Plans."
Mr. Subotnick's base salary was established in December 1996 upon the
resignation of Mr. Phillips. The Company expenses the amount of Mr. Subotnick's
base salary only and such amounts are included in the payments made by the
Company to Metromedia under the Management Agreement. Mr. Subotnick's base
salary was determined by analyzing the compensation of chief executive officers
in the Comparison Group, along with the amounts previously paid to Mr. Phillips.
The Company believes such analysis is reasonable.
COMPLIANCE WITH INTERNAL REVENUE CODE SECTION 162(M). One of the factors
the Compensation Committee considers in connection with compensation matters is
the anticipated tax treatment to the Company and to the executive officers of
the compensation arrangements. The deductibility of certain types of
compensation depends upon the timing of an executive officer's vesting in, or
exercise of, previously granted rights. Moreover, interpretation of, and changes
in, the tax laws and other factors beyond the Compensation Committee's control
also affect the deductibility of compensation. Accordingly, the Compensation
Committee will not necessarily limit executive compensation to that deductible
under Section 162(m) of the Code. The Compensation Committee will consider
various alternatives to preserving the deductibility of compensation payments
and benefits to the extent consistent with its other compensation objectives.
The foregoing report of the Compensation Committee shall not be deemed to be
incorporated by reference into any filing of MMG under the Securities Act of
1933, as amended, or the Exchange Act, except to the extent that the Company
specifically incorporates such information by reference, and shall not otherwise
be deemed filed under such Acts.
Submitted by the Compensation
Committee of MMG's Board of
Directors as of March 26, 1996
John P. Imlay, Jr.
Clark A. Johnson
Carl Sanders
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PERFORMANCE GRAPH
The following graph sets forth MMG's total stockholder return as compared to
the Standard & Poor's 500 Index, the Standard & Poor's Consumer Goods Index (the
"CONSUMER GOODS INDEX") and the NASDAQ Telecommunications Stock Index for the
five year period from January 1, 1991 through December 31, 1996 (with the
exception of the Consumer Goods Index for 1996 as that index was not published
for such period). The total stockholder return assumes $100 invested at the
beginning of the period in the Common Stock, the Standard & Poor's 500 Index,
the Consumer Goods Index, and the NASDAQ Telecommunications Index.
In 1995, the Company used the Consumer Goods Index for purposes of analyzing
the performance of the Common Stock. As a result of the Company's decision to
change its business focus to communications, media and entertainment, the
Compensation Committee has decided to analyze MMG's Common Stock relative to the
NASDAQ Telecommunications Stock Index. The Committee believes that the Consumer
Goods Index is no longer an appropriate gauge to measure performance.
Nonetheless, in accordance with the rules and regulations of the Commission, the
Company is required to include the Consumer Goods Index in its comparison for
1996. Since such index is no longer published, it is not included in this Proxy
Statement.
METROMEDIA INTERNATIONAL GROUP CUMULATIVE TOTAL SHAREHOLDER RETURN
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<CAPTION>
1991 1992 1993 1994 1995 1996
<S> <C> <C> <C> <C> <C> <C>
Metromedia International Group Inc. $100 $92 $58 $70 $107 $76
S&P 500 $100 $108 $118 $120 $165 $203
NASDAQ Telecommunications Stock Index $100 $123 $189 $158 $207 $212
S&P Consumer Goods Index $100 $107 $106 $106 $141 N/A
</TABLE>
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INFORMATION REGARDING P&F
BUSINESS OF P&F
P&F owns all of the outstanding capital stock of MGM, a major motion picture
studio engaged in the production and worldwide distribution of motion pictures
and television programming. MGM is actively engaged in the worldwide production
and distribution of entertainment products, including motion pictures,
television programming, home video, interactive media, music, licensed
merchandise, a current 1,600-title film library, a 4,500-title home video
library, and a significant television library. The company's operating units
include Metro-Goldwyn-Mayer Pictures, United Artists Pictures, MGM Worldwide
Television, MGM Telecommunications Group, MGM Distribution Co., MGM Home
Entertainment/Consumer Products, Metro-Goldwyn-Mayer Music and MGM Interactive,
among others.
P&F was incorporated in Delaware in 1996.
The principal executive offices of P&F are located at 2500 Broadway Street,
Fifth Floor, Santa Monica, California 90404, and its telephone number is (310)
449-3000.
P&F SHAREHOLDERS
P&F is controlled (directly or indirectly) by two principal stockholders,
Tracinda and Seven. Tracinda is a privately held corporation owned and
controlled by Mr. Kirk Kerkorian. Seven operates a leading television network in
Australia whose shares are publicly traded on the Australian Stock Exchange
Limited.
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PROPOSAL NO. 2--ELECTION OF DIRECTORS
The following table sets forth certain information with respect to the
members of MMG's Board of Directors, including the two incumbent Class II
Directors (Messrs. Sherwin and White) who have been nominated by the Board of
Directors for re-election as Class II Directors at the Annual Meeting.
The Board of Directors knows of no reason why any of its nominees will be
unable or will refuse to accept election. If any nominee becomes unable or
refuses to accept election, the Board of Directors will either reduce the number
of directors to be elected or select a substitute nominee. If a substitute
nominee is selected, proxies will be voted in favor of such nominee.
The affirmative vote of the holders of a plurality of shares of Common Stock
present in person or represented by proxy at the Annual Meeting will be required
to elect each of the three Class I Directors to MMG's Board.
<TABLE>
<CAPTION>
NAME, PRINCIPAL OCCUPATION FOR PAST CLASS OF DIRECTOR
FIVE YEARS AND CERTAIN DIRECTORSHIPS AGE DIRECTORS SINCE
----------------------------------------- --- ---------- -----------
<S> <C> <C> <C>
John P. Imlay, Jr..................................................................... 60 Class I 1993
Director of the Company since 1993. Served since 1990 as Chairman of Dun & Bradstreet
Software Services, Inc., an application software company located in Atlanta,
Georgia. Mr. Imlay is the former Chairman of Management Science America, a mainframe
applications software company. Management Science America was acquired by Dun &
Bradstreet Software Services, Inc. in 1990. Mr. Imlay is also a Director of the
Atlanta Falcons, a National Football League team, and The Gartner Group. Mr. Imlay
is a member of the Audit Committee and the Compensation Committee.
John W. Kluge......................................................................... 82 Class I 1995
Chairman of the Board of Directors of the Company since November 1, 1995. Chairman of
the Board and a director of Orion since 1992. Chairman and President of Metromedia
and its predecessor-in-interest, Metromedia, Inc., for over five years. Mr. Kluge is
also a Director of The Bear Stearns Companies, Inc., Conair Corporation and
Occidental Petroleum Corporation. Mr. Kluge is Chairman of the Executive Committee.
Stuart Subotnick...................................................................... 55 Class I 1995
President and Chief Executive Officer since December 4, 1996 and Vice Chairman of the
Board of Directors of the Company since November 1, 1995. Vice Chairman of the Board
and a director of Orion since 1992. Executive Vice President of Metromedia and its
predecessor-in-interest, Metromedia, Inc. for over five years. Mr. Subotnick is also
a Director of Carnival Cruise Lines, Inc., a cruise ship company and RDM. Mr.
Subotnick is Chairman of the Audit Committee and a member of the Executive and
Nominating Committees.
Richard J. Sherwin.................................................................... 53 Class II 1995
President of MITI. Mr. Sherwin has served as Co-President and Director of MITI and its
predecessor companies since October 1990. Prior to that, Mr. Sherwin served as the
Chief Operating Officer of Graphic Scanning Corp., a paging and wireless
telecommunications company.
</TABLE>
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<TABLE>
<CAPTION>
NAME, PRINCIPAL OCCUPATION FOR PAST CLASS OF DIRECTOR
FIVE YEARS AND CERTAIN DIRECTORSHIPS AGE DIRECTORS SINCE
----------------------------------------- --- ---------- -----------
<S> <C> <C> <C>
Leonard White......................................................................... 58 Class II 1995
President and Chief Executive Officer of Orion from March 1992 through November 1,
1995. Interim President and Chief Executive Officer of Orion from March 1992 until
November 1992. Chairman of the Board and Chief Executive Officer of OHEC from March
1991 until March 1992. President and Chief Operating Officer of Orion Home Video
division of Orion from March 1987 until March 1991.
Clark A. Johnson...................................................................... 65 Class III 1993
Director of the Company since April 27, 1990. Mr. Johnson has served as Chairman and
Chief Executive Officer of Pier One Imports, Inc., a specialty retailer of
decorative home furnishings, since August 1988. Mr. Johnson is also a Director of
Albertson's, Inc., Anacomp, Inc., Heritage Media Corporation, InterTAN, Inc. and
Pier One Imports, Inc. Mr. Johnson is a member of the Compensation and Audit
Committees.
Silvia Kessel......................................................................... 46 Class III 1995
Executive Vice President since August 29, 1996 and Senior Vice President, Chief
Financial Officer and Treasurer of the Company since the November 1, 1995. Executive
Vice President and a director of Orion since January 1993. Senior Vice President of
Orion from June 1991 to November 1992. Senior Vice President of Metromedia since
January 1994. President of Kluge & Company from January 1992 through the present.
Managing Director of Kluge & Company (and its predecessor) from April 1990 to
January 1994. Ms. Kessel is also a Director of RDM. Ms. Kessel is a member of the
Nominating Committee.
Carl E. Sanders....................................................................... 71 Class III 1967
Engaged in the private practice of law as Chairman of Troutman Sanders, a law firm
located in Atlanta, Georgia. Director of the Company since 1967, except for a
one-year period from April 1970 to April 1971. Former Governor of the State of
Georgia and a Director of Carmike Cinemas, Inc., Norrell Corporation, Healthdyne,
Inc., and RDM. Mr. Sanders is Chairman of the Compensation Committee.
Arnold L. Wadler...................................................................... 53 Class III 1995
Executive Vice President since August 29, 1996 and Senior Vice President, General
Counsel and Secretary of the Company since November 1, 1995. Senior Vice President,
Secretary and General Counsel of Metromedia and its predecessor-in-interest,
Metromedia, Inc., for over five years. Director of Orion since 1992. Mr. Wadler is
Chairman of the Nominating Committee.
</TABLE>
On December 11 and 12, 1991 (the "Filing Date"), Orion and certain of its
subsidiaries filed voluntary bankruptcy petitions under Chapter 11 of the United
State Bankruptcy Code. The United States Bankruptcy Court for the Southern
District of New York confirmed Orion's Modified Third Amended Joint Consolidated
Plan of Reorganization (the "Plan") on October 10, 1992 and the Plan was
consummated on November 5, 1992. Silvia Kessel and Leonard White, current
Directors of the Company, each served as executive officers of Orion on the
Filing Date.
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PROPOSAL NO. 3--RATIFICATION OF
THE APPOINTMENT OF INDEPENDENT AUDITORS
The Board of Directors of MMG has appointed the firm of KPMG Peat Marwick
LLP, independent auditors, to audit the consolidated financial statements of MMG
and its subsidiaries for the fiscal year ending December 31, 1997, subject to
ratification by the MMG Stockholders.
A partner of KPMG Peat Marwick LLP is expected to be present at the Annual
Meeting and to be provided with an opportunity to make a statement if such
partner desires to do so and to be available to respond to appropriate questions
from stockholders.
If the MMG Stockholders do not ratify the appointment KPMG Peat Marwick LLP
as MMG's independent auditors for the forthcoming fiscal year, such appointment
will be reconsidered by the Audit Committee and the Board of Directors.
The affirmative vote of the holders of a majority of shares of Common Stock
present in person or represented by proxy at the Annual Meeting will be required
to approve and adopt Proposal Number 3.
THE BOARD OF DIRECTORS RECOMMENDS THAT STOCKHOLDERS VOTE "FOR" RATIFICATION
OF THE APPOINTMENT OF KPMG PEAT MARWICK LLP AS THE INDEPENDENT AUDITORS OF MMG'S
CONSOLIDATED FINANCIAL STATEMENTS FOR THE FISCAL YEAR ENDING DECEMBER 31, 1997.
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PROPOSAL NO. 4--STOCKHOLDER PROPOSAL
Alan G. Hevesi, investment adviser and a trustee of the New York City
Teachers' Retirement System ("NYCTRS"), c/o The City of New York, Office of the
Comptroller, 1 Centre Street, New York, New York 10007-2341, owner of 15,900
shares of Common Stock, has submitted the following proposal on behalf of
NYCTRS:
"BE IT RESOLVED, that the shareholders of Metromedia International Group
request that the Board of Directors amend the certificate of incorporation
to reinstate the rights of the shareholders to take action by written
consent and to call special meetings".
STATEMENT IN SUPPORT: "The rights of the shareholders to take action by
written consent and to call special meetings should not be abridged.
The Company's elimination of these rights, in our opinion, effectively
removes important processes by which shareholders can act expeditiously to
protect their investment interests.
For example, the right of shareholders to act to remove incumbent directors
for egregious conduct should not be limited to the annual meeting. Also,
shareholders should not be prevented from giving timely consideration to a
bidder's proposal to acquire control of the Company, or a dissident
shareholder's slate of nominees for election to the Board of Directors,
because such proposals are required to be presented only at the annual
meeting."
STATEMENT OF THE BOARD OF DIRECTORS: Presently, the Restated Certificate of
Incorporation and By-laws of the Company (collectively, the "Corporate
Documents") (i) require, among other things, that special meetings of
Stockholders for any purpose be called by either the Chairman or Vice Chairman
of the Board of Directors and (ii) do not provide for Stockholder action by
written consent. If the Company amended the Corporate Documents as proposed, it
would be allowing its Stockholders to call special meetings and act without a
meeting whenever, however frequently and for whatever reason such Stockholders
may desire. For the reasons stated below, the Board of Directors believes that
the requested amendments to the Corporate Documents are not in the best
interests of the Company and its Stockholders.
Applicable Delaware law does not grant stockholders of a corporation the
absolute right to call a special meeting or act by written consent, and instead
permits each individual corporation to determine in its Corporate Documents
whether stockholders will have such rights. The Board of Directors believes that
the Delaware legislature adopted this approach due to the significant financial
and administrative burdens that a special meeting or stockholder action by
consent can impose on a public corporation.
Approximately 7,788 persons and entities are the record and beneficial
owners of the Common Stock, each of whom, if Proposal No. 4 is approved, would
be entitled under the proposal to demand a special meeting or institute action
by written consent. Each such Stockholder would also be entitled to notice of,
and to receive proxy materials relating to, any special meeting, thereby
necessitating actual expenditures (legal, printing and postage) in addition to
those associated with the Company's annual meeting. In addition, the calling of
a special meeting would necessitate the diversion of corporate officers and
employees from their other duties in order to prepare for such a meeting. The
Board of Directors believes that the interest of the Company's Stockholders
would be better served utilizing these resources to improve its businesses.
Similarly, the Board of Directors believes that permitting action to be taken by
written consent would create confusion as multiple stockholders would be able to
solicit written consents on various matters and would divert valuable corporate
resources to this process.
In light of the foregoing, the Board of Directors believes that the adoption
of Proposal No. 4 could leave the Company exposed to numerous calls for special
meetings and stockholder action by consent that may be of little or no benefit
to Stockholders and which are a significant burden to the Company. Stockholders,
such as the proponent of Proposal No. 4, remain free to make proposals at the
Company's
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annual meeting. The Board of Directors believe that the Chairman and Vice
Chairman of the Board of Directors are in the best position to determine if a
special meeting is warranted.
FOR THE REASONS STATED ABOVE, THE BOARD OF DIRECTORS BELIEVES THAT PROPOSAL
NO. 4 IS NOT IN THE BEST INTERESTS OF THE COMPANY AND ITS STOCKHOLDERS.
ACCORDINGLY, THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS THAT YOU VOTE
AGAINST PROPOSAL NO. 4.
Approval by the affirmative vote of the holders of a majority of the
outstanding shares of Common Stock is required for approval of Proposal No. 4.
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ANNUAL REPORT; INCORPORATION BY REFERENCE
The Company's Annual Report on Form 10-K, as amended, for the fiscal year
ended December 31, 1996 (which includes the Company's audited consolidated
financial statements) is contained elsewhere in this Proxy Statement. To the
extent this Proxy Statement has been or will be specifically incorporated by
reference into any filing by the Company under the Securities Act of 1933, as
amended, or the Exchange Act, the sections of the Proxy Statement entitled
"Board of Directors Report on Compensation" and "Performance Graph" shall not be
deemed to be so incorporated unless specifically otherwise provided in any such
filing.
STOCKHOLDER PROPOSALS FOR 1998 ANNUAL MEETING
Any MMG Stockholder who wishes to present a proposal at the 1998 Annual
Meeting of Stockholders of MMG, and who wishes to have such proposal included in
MMG's proxy statement for that meeting, must deliver a copy of such proposal to
MMG at One Meadowlands Plaza, East Rutherford, New Jersey 07073-2137, Attention:
Corporate Secretary, no later than March 12, 1998; PROVIDED, HOWEVER, that if
the 1998 Annual Meeting of Stockholders is held on a date more than 30 days
before or after the corresponding date of the 1997 Annual Meeting of
Stockholders, any Stockholder who wishes to have a proposal included in MMG's
proxy statement for that meeting must deliver a copy of the proposal to MMG a
reasonable time before the proxy solicitation is made. MMG reserves the right to
decline to include in MMG's proxy statement any stockholder's proposal which
does not comply with the rules of the Commission for inclusion therein.
OTHER BUSINESS
The Board of Directors does not intend to bring any other business before
the Annual Meeting and it is not aware that anyone else intends to do so. If any
other business comes before the meeting, it is the intention of the persons
named in the enclosed form of proxy to vote as proxies in accordance with their
best judgment.
PLEASE EXERCISE YOUR RIGHT TO VOTE BY PROMPTLY COMPLETING, SIGNING AND
RETURNING THE ENCLOSED PROXY FORM. You may later revoke the proxy and, if you
are able to attend the meeting, you may vote your shares in person.
By Order of the Board of Directors,
Arnold L. Wadler
EXECUTIVE VICE PRESIDENT,
GENERAL COUNSEL AND SECRETARY
June 18, 1997
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APPENDIX A
STOCK PURCHASE AGREEMENT
AMONG
METROMEDIA INTERNATIONAL GROUP, INC.,
ORION PICTURES CORPORATION
AND
P&F ACQUISITION CORP.
DATED AS OF MAY 2, 1997
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
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<C> <S> <C>
ARTICLE I. DEFINITIONS....................................................................................... 1
1.01. Definitions....................................................................................... 1
1.02. Index of Other Defined Terms...................................................................... 9
ARTICLE II. TRANSFER OF ASSETS............................................................................... 11
2.01. Sale of Stock..................................................................................... 11
2.02. Closing........................................................................................... 11
2.03. Purchase Price.................................................................................... 11
ARTICLE III. REPRESENTATIONS AND WARRANTIES OF SELLER........................................................ 13
3.01. Ownership of Stock................................................................................ 13
3.02. Corporate Existence and Power..................................................................... 13
3.03. Corporate Authorization of Seller................................................................. 13
3.04. Subsidiaries...................................................................................... 13
3.05. Entertainment Group............................................................................... 14
3.06. Corporate Authorization........................................................................... 14
3.07. Governmental Authorization........................................................................ 14
3.08. Non-Contravention................................................................................. 14
3.09. Financial Statements; Undisclosed Liabilities..................................................... 15
3.10. Absence of Certain Changes........................................................................ 15
3.11. Properties; Tangible Assets....................................................................... 17
3.12. Affiliates........................................................................................ 17
3.13. Litigation........................................................................................ 18
3.14. Contracts......................................................................................... 18
3.15. Permits; Required Consents........................................................................ 20
3.16. Compliance with Applicable Laws................................................................... 20
3.17. Employment Agreements; Change in Control; and Employee Benefits................................... 20
3.18. Labor and Employment Matters...................................................................... 23
3.19. Intellectual Property............................................................................. 24
3.20. Library Films..................................................................................... 25
3.21. Films In Progress................................................................................. 27
3.22. Development Projects.............................................................................. 30
3.23. Advisory Fees..................................................................................... 30
3.24. Environmental Compliance.......................................................................... 30
3.25. Insurance......................................................................................... 31
3.26. Tax Matters....................................................................................... 31
3.27. SEC Documents..................................................................................... 31
3.28. Disclosure........................................................................................ 31
3.29. Financial Statements of Landmark.................................................................. 32
3.30. No Contract With Landmark......................................................................... 32
3.31. Board Recommendations............................................................................. 32
3.32. Bankruptcy........................................................................................ 33
ARTICLE IV. REPRESENTATIONS AND WARRANTIES OF BUYER.......................................................... 33
4.01. Corporate Existence and Power..................................................................... 33
4.02. Corporate Authorization........................................................................... 33
4.03. Governmental Authorization........................................................................ 33
4.04. Non-Contravention................................................................................. 34
4.05. Advisory Fees..................................................................................... 34
</TABLE>
i
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<TABLE>
<CAPTION>
PAGE
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<C> <S> <C>
4.06. Litigation........................................................................................ 34
4.07. Purchase for Investment........................................................................... 34
4.08. Ownership of MGM.................................................................................. 34
ARTICLE V. COVENANTS OF SELLER AND ORION..................................................................... 34
5.01. Conduct of the Business........................................................................... 35
5.02. Access to Information............................................................................. 38
5.03. Compliance with Terms of Required Governmental Approvals and Required Contractual Consents........ 38
5.04. Maintenance of Insurance Policies................................................................. 38
5.05. Confidentiality................................................................................... 39
5.06. Specific Performance.............................................................................. 40
5.07. Bankruptcy Cases.................................................................................. 40
5.08. No Solicitations.................................................................................. 40
5.09. Transfer of Assets................................................................................ 41
5.10. Use of Trade Names................................................................................ 42
ARTICLE VI. COVENANTS OF BUYER............................................................................... 42
6.01. Compliance with Terms of Required Governmental Approvals and Required Contractual Consents........ 42
6.02. Confidentiality................................................................................... 42
6.03. Specific Performance.............................................................................. 42
6.04. Use of Metromedia Name............................................................................ 43
6.05. Bank Waivers...................................................................................... 43
ARTICLE VII. COVENANTS OF ALL PARTIES........................................................................ 43
7.01. Further Assurances................................................................................ 43
7.02. Certain Filings................................................................................... 43
7.03. Public Announcements.............................................................................. 43
7.04. Administration of Accounts........................................................................ 44
7.05. Specific Performance.............................................................................. 44
7.06. Right of First Negotiation........................................................................ 44
7.07. Proxy Consent Solicitation........................................................................ 44
7.08. Refinancing of Debt............................................................................... 45
ARTICLE VIII. CONDITIONS TO CLOSING.......................................................................... 46
8.01. Conditions to Obligation of Buyer................................................................. 46
8.02. Conditions to Obligation of Seller................................................................ 47
ARTICLE IX. INDEMNIFICATION.................................................................................. 49
9.01. Indemnification of Buyer.......................................................................... 49
9.02. Indemnification of Seller......................................................................... 49
9.03. Survival of Representations, Warranties and Covenants............................................. 50
9.04. Claims for Indemnification........................................................................ 50
9.05. Defense of Claims................................................................................. 51
9.06. Nature of Payments................................................................................ 52
9.07. Taxes 52
ARTICLE X. TERMINATION....................................................................................... 52
10.01. Grounds for Termination........................................................................... 52
10.02. Effect of Termination............................................................................. 54
10.03. Commitment Fee.................................................................................... 54
</TABLE>
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<TABLE>
<CAPTION>
PAGE
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<C> <S> <C>
ARTICLE XI. TAX MATTERS...................................................................................... 57
11.01. Tax Returns and Payments.......................................................................... 57
11.02. Section 338(h)(10)................................................................................ 58
11.03. Indemnification................................................................................... 59
11.04. Procedures for Indemnification.................................................................... 59
ARTICLE XII. MISCELLANEOUS................................................................................... 60
12.01. Notices........................................................................................... 60
12.02. Amendments; No Waivers............................................................................ 62
12.03. Construction...................................................................................... 62
12.04. Expenses.......................................................................................... 63
12.05. Successors and Assigns............................................................................ 63
12.06. Governing Law..................................................................................... 63
12.07. Counterparts; Effectiveness....................................................................... 63
12.08. Entire Agreement.................................................................................. 63
12.09. Captions.......................................................................................... 63
12.10. Severability...................................................................................... 63
12.11. Forum; Attorneys' Fees............................................................................ 63
12.12. Cumulative Remedies............................................................................... 64
12.13. Third Party Beneficiaries......................................................................... 64
12.14. Knowledge......................................................................................... 64
</TABLE>
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SCHEDULES
<TABLE>
<S> <C>
Schedule 1.01 Permitted Liens
Schedule 1.02 Statement of Assumptions
Schedule 3.04 Subsidiaries
Schedule 3.08(c) Conflicts
Schedule 3.09 Financial Statements; Undisclosed Liabilities
Schedule 3.10(e) Absence of Certain Changes
Schedule 3.10(h) Distributions
Schedule 3.11(a) Liens
Schedule 3.11(c) Leases
Schedule 3.11(d) Real Property Owned
Schedule 3.12 Affiliates
Schedule 3.13 Litigation
Schedule 3.14(a) Scheduled Contracts
Schedule 3.14(b) Valid and Binding Contracts
Schedule 3.14(c) Participations
Schedule 3.15(a) Permits
Schedule 3.15(b) Required Consents
Schedule 3.16 Compliance with Applicable Laws
Schedule 3.17(a) Certain Employment Agreements
Schedule 3.17(b) Other Employment Agreements
Schedule 3.17(c) Benefit Plans
Schedule 3.17(d) Employee Pension Benefit Plans
Schedule 3.17(e) Multiemployer Plans
Schedule 3.17(f) Entertainment Plans
Schedule 3.18(a) Labor and Employment Matters
Schedule 3.18(b) Labor Disputes
Schedule 3.19(a) Owned Intellectual Property Rights
Schedule 3.19(b) Licensed Intellectual Property Rights
Schedule 3.19(c) Licenses
Schedule 3.19(d) Claims
Schedule 3.19(e) Royalties
Schedule 3.20(a) Library Films
Schedule 3.20(a)(i) Availability Dates
Schedule 3.20(a)(ii) Film Rights
Schedule 3.20(a)(iii) Dormant Films
Schedule 3.20(a)(iv) Film Liens
Schedule 3.20(b) Ratings
Schedule 3.20(c) Elements
Schedule 3.20(f) Copyrights
</TABLE>
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<TABLE>
<S> <C>
Schedule 3.20(g) Music
Schedule 3.20(i) Insurance Claims
Schedule 3.20(j) Rights
Schedule 3.20(l) Participations
Schedule 3.21(a) Films In Progress
Schedule 3.21(b) Ownership
Schedule 3.21(c) Ratings
Schedule 3.21(d) Elements
Schedule 3.21(i) Copyrights
Schedule 3.21(j) Music
Schedule 3.21(l) Insurance Claims
Schedule 3.21(m) Rights
Schedule 3.21(o) Participations
Schedule 3.22 Development Projects
Schedule 3.24(a) Environmental Permits
Schedule 3.24(b) Compliance with Environmental Laws
Schedule 3.24(c) Continuing Compliance with Environmental Laws
Schedule 3.25 Insurance
Schedule 3.26 Tax Matters
Schedule 3.29(a) Landmark Financial Statements
Schedule 3.29(b) Landmark Transferred Assets
Schedule 3.30 Contracts with Landmark
Schedule 3.32(c) Plan Liens
Schedule 5.01(a)(ix) Budgets
Schedule 7.06 First Negotiation Territories
Schedule 9.01(c) Indemnified Litigation
</TABLE>
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<PAGE>
STOCK PURCHASE AGREEMENT
This STOCK PURCHASE AGREEMENT (the "Agreement") dated as of May 2, 1997 is
by and among METROMEDIA INTERNATIONAL GROUP, INC., a Delaware corporation
("Seller"), ORION PICTURES CORPORATION, a Delaware corporation ("Orion" and,
together with all of its direct and indirect subsidiaries other than the
Landmark Theater Group and its subsidiaries ("Landmark"), the "Entertainment
Companies"), and P&F ACQUISITION CORP., a Delaware corporation ("Buyer").
R E C I T A L S
A. The Entertainment Companies are engaged in the business of the production
and worldwide distribution and exploitation in all media of motion pictures,
television programming and other filmed entertainment, including the
exploitation of a library of motion pictures, television programming and other
filmed entertainment;
B. Seller owns all of the issued and outstanding stock of Orion (the
"Shares"); and
C. Seller desires to sell and Buyer desires to purchase all of the Shares on
the terms and conditions set forth herein.
A G R E E M E N T
NOW, THEREFORE, in consideration of the premises, and the mutual
representations, warranties, covenants and agreements hereinafter set forth, the
parties hereto agree as follows.
ARTICLE I
DEFINITIONS
1.01. DEFINITIONS. The following terms, as used herein, have the following
meanings:
"AFFILIATE" means, with respect to any Person, any Person directly or
indirectly controlling, controlled by or under direct or indirect common control
with such Person.
"ALTERNATIVE PROPOSAL" shall mean a proposal or offer (other than by Buyer)
for a stock purchase, asset acquisition, merger, consolidation or other business
combination involving any Entertainment Company or any proposal to acquire in
any manner a direct or indirect substantial equity interest in, or all or any
substantial part of the assets of, any Entertainment Company, but shall not
include a proposal or offer to acquire an equity interest in Seller by a Person
that agrees for the benefit of Buyer to cause Seller to comply with the terms of
this Agreement and to vote all shares of Seller's common stock or other equity
securities beneficially owned by such Person in favor of approval of this
Agreement and the transactions contemplated hereby.
"APPLICABLE LAW" means, with respect to any Person, any domestic or foreign,
federal, state or local statute, law, ordinance, rule, administrative
interpretation, regulation, order, writ, injunction, directive, judgment, decree
or other requirement of any Governmental Authority (including any Environmental
Law) applicable to such Person or any of its Affiliates or Plan Affiliates or
any of their respective properties, assets, officers, directors, employees,
consultants or agents (in connection with such officer's, director's,
employee's, consultant's or agent's activities on behalf of such Person or any
of its Affiliates or Plan Affiliates).
"ASSOCIATE" or "ASSOCIATED WITH" means, when used to indicate a relationship
with any Person, (a) any other Person of which such Person is an officer or
partner or is, directly or indirectly, the beneficial owner of ten percent (10%)
or more of any class of equity securities issued by such other Person, (b) any
trust or other estate in which such Person has a substantial beneficial interest
or as to which such Person serves as trustee or in a similar fiduciary capacity,
and (c) any relative or spouse of such Person, or any relative of such spouse
who has the same home as such Person or who is a director or officer of such
Person or any Affiliate thereof.
<PAGE>
"BANKRUPTCY CASES" means the bankruptcy cases of IN RE ORION PICTURES, INC.,
A DELAWARE CORPORATION, ET. AL., DEBTORS, jointly administered under case number
91 B 15635 (BRL) commenced in the Bankruptcy Court under title 11 of the United
States Bankruptcy Code.
"BANKRUPTCY COURT" means the United States Bankruptcy Court for the Southern
District of New York acting in any of the Bankruptcy Cases.
"BENEFIT ARRANGEMENT" means any material benefit arrangement that is not an
Employee Benefit Plan, including, without limitation, (i) each employment or
consulting agreement, (ii) each arrangement providing for insurance coverage or
workers' compensation benefits, (iii) each incentive bonus or deferred bonus
arrangement, (iv) each arrangement providing termination allowance, severance or
similar benefits, (v) each equity compensation plan, (vi) each deferred
compensation plan and (vii) each compensation policy and practice maintained by
Seller or any Entertainment Company or any ERISA Affiliate of any of the
foregoing covering the employees, former employees, directors and former
directors thereof and the beneficiaries of any of them.
"BENEFIT PLAN" means an Employee Benefit Plan or Benefit Arrangement.
"BUSINESS DAY" means a day other than a Saturday, Sunday or other day on
which commercial banks in New York, New York are authorized or required by law
to close.
"BUYER AFFILIATED GROUP" shall mean Buyer and members of the affiliated
group, within the meaning of Section 1504 of the Code, of which Buyer is the
common parent.
"CODE" means the Internal Revenue Code of 1986, as amended.
"CONFIRMATION DOCUMENTS" means the Plan of Reorganization and the Order
Confirming Plan, and any other orders of the Bankruptcy Court entered in the
Bankruptcy Cases, which modifies the treatment of the claims of creditors or of
equity security holders or that limits the power or authority of any
Entertainment Company to use, sell or lease its property as authorized by
applicable non-bankruptcy law, or that requires any Entertainment Company to
give notice to or obtain the approval of the Bankruptcy Court in connection with
the conduct of its business and affairs.
"CONTRACTS" means all contracts, agreements, options, leases, License
Agreements, output agreements, distribution contracts, sales and purchase
orders, commitments, instruments and other obligations of any kind, whether
written or oral, inclusive of amendments, to which any Entertainment Company is
a party on the Closing Date, including the Scheduled Contracts and the
Subsequent Material Contracts.
"CONSOLIDATED RETURNS" shall mean federal Income Tax Returns that Seller has
elected to file on a consolidated basis.
"DAMAGES" means all demands, claims, actions or causes of action,
assessments, losses, damages, costs, expenses, liabilities, judgments, awards,
fines, sanctions, penalties, charges and amounts paid in settlement net of
insurance proceeds actually received, including without limitation (i) interest
on cash disbursements in respect of any of the foregoing at the Reference Rate
in effect from time to time, compounded quarterly, from the date each such cash
disbursement is made until the Person incurring the same shall have been
indemnified in respect thereof and (ii) reasonable costs, fees and expenses of
attorneys, accountants and other agents of such Person.
"DEBT" means any indebtedness of any Entertainment Company, whether or not
contingent, in respect of borrowed money or evidenced by bonds, notes,
debentures or other similar instruments or letters of credit (or reimbursement
obligations in respect thereof) or banker's acceptances or representing
capitalized lease obligations or the balance deferred and unpaid of the purchase
price of any property, except any such balance that constitutes an accrued
expense or account payable, in each case incurred in the ordinary course of
business, as well as all indebtedness of others secured by a Lien on any asset
of any Entertainment Company (whether or not such indebtedness is assumed by an
Entertainment Company)
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and, to the extent not otherwise included, any Guaranty by any Entertainment
Company of any indebtedness of any other Person (other than another
Entertainment Company).
"ELEMENTS" means negative and positive film, soundtracks, music tracks,
effects tracks, optical, audio, video and advertising materials and supplies
associated with any Film.
"EMPLOYEE BENEFIT PLAN" means any employee benefit plan, as defined in
Section 3(3) of ERISA, that is sponsored or contributed to by Seller or any
Entertainment Company or any ERISA Affiliate thereof covering employees or
former employees of any Entertainment Company.
"EMPLOYEE PENSION BENEFIT PLAN" means any employee pension benefit plan, as
defined in Section 3(2) of ERISA, that is subject to Title IV of ERISA, other
than a Multiemployer Plan.
"ENVIRONMENTAL LAWS" means all Applicable Laws relating to the protection of
the environment or human health including, without limitation, (i) all
requirements pertaining to reporting, licensing, permitting, controlling,
investigating or remediating emissions, discharges, releases or threatened
releases of Hazardous Substances, chemical substances, pollutants, contaminants
or toxic substances, materials or wastes, whether solid, liquid or gaseous in
nature, into the air, surface water, groundwater or land; (ii) all requirements
relating to the manufacture, processing, distribution, use, treatment, storage,
disposal, transport or handling of Hazardous Substances, chemical substances,
pollutants, contaminants or toxic substances, materials or wastes, whether
solid, liquid or gaseous in nature; and (iii) the Resource Conservation and
Recovery Act ("RCRA"), the Comprehensive Environmental Response, Compensation
and Liability Act ("CERCLA"), the Clean Air Act, the Water Pollution Control
Act, the Safe Drinking Water Act, the Toxic Substances Control Act ("TSCA") and
all regulations promulgated pursuant to any of these or analogous state or local
statutes.
"ENVIRONMENTAL LIABILITIES" means Liabilities of a Person that arise under
any Environmental Law.
"ERISA" means the Employee Retirement Income Security Act of 1974, as
amended.
"ERISA AFFILIATE" of any Person means any other Person that, together with
such Person as of the relevant measuring date under ERISA, was or is required to
be treated as a single employer under Section 414 of the Code.
"EXISTING ORION CREDIT FACILITY" means the Amended and Restated Credit,
Guaranty and Security Agreement, dated as of June 27, 1996, by and among Orion,
the lenders listed therein and The Chase Manhattan Bank, as agent.
"FILMS" means motion pictures (including feature films), shorts, television
programming, animated programming or other filmed entertainment, and the
components thereof (whether or not now known or recognized) as to which any
Entertainment Company owns any right, title or interest including, without
limitation, Library Films, Films In Progress and Development Projects and
including, without limitation: (i) completed, delivered and released projects;
(ii) works in progress comprising projects in development, principal photography
and/or post-production, projects complete but not yet released, and unreleased
or completed but undelivered pick-ups; (iii) underlying rights in and to the
literary, musical and dramatic and other material associated with or related to
or necessary to the exploitation of the works or projects referred to in clauses
(i) or (ii) including, without limitation, copyrights pertaining thereto; (iv)
to the extent related to the works or projects referred to in clauses (i) or
(ii), sequel, prequel and remake rights, all rights to novelization,
merchandising, character, serialization, games and interactive video; (v) all
other ancillary and subsidiary rights throughout the universe related to such
works and projects; (vi) all Elements; and (vii) all contractual and other
rights associated with or related to such works or projects and the related
ancillary and subsidiary rights whether in any media now known or hereafter
developed.
"GAAP" means generally accepted accounting principles, consistently applied.
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"GOVERNMENTAL AUTHORITY" means any foreign, domestic, federal, territorial,
state or local governmental authority, quasi-governmental authority,
instrumentality, court (including, without limitation, the Bankruptcy Court),
government or self-regulatory organization, commission, tribunal or organization
or any regulatory, administrative or other agency, or any political or other
subdivision, department or branch of any of the foregoing.
"GROUP HEALTH PLAN" means any group health plan, as defined in Section
5000(b)(1) of the Code.
"GUARANTY" means, as to any Person (the "guaranteeing person"), any
obligation of (a) the guaranteeing person or (b) another Person (including,
without limitation, any bank under any letter of credit) to induce the creation
of which the guaranteeing person has made or issued a guaranty, reimbursement,
counterindemnity or similar obligation, in any case guaranteeing or in effect
guaranteeing any Debt, lease, dividend or other obligation (the "primary
obligation") of any ther Person (the "primary obligor"), in any manner, whether
directly or indirectly, including, without limitation, any obligation of the
guaranteeing person, whether or not contingent, (i) to purchase any such primary
obligation or any property constituting direct or indirect security therefor,
(ii) to advance or supply funds (1) for the purchase or payment of any such
primary obligation or (2) to maintain working capital or equity capital of the
primary obligor or otherwise to maintain the net worth or solvency of the
primary obligor, (iii) to purchase property, securities or services primarily
for the purpose of assuring the owner of any such primary obligation of the
payment thereof including, without limitation, any negative pick-up obligation,
or (iv) otherwise to assure or hold harmless the owner of any such primary
obligation against loss in respect thereof; PROVIDED, HOWEVER, that the term
Guaranty shall not include (A) endorsements of instruments for deposit or
collection in the ordinary course of business, (B) commitments to produce Films,
(C) minimum guaranteed payments in License Agreements with respect to Films, or
(D) obligations in respect of Participations payable to others, which
Participations were created in connection with the development, production,
acquisition, distribution, exhibition, exploitation or financing of Films. The
amount of any obligation in respect of a Guaranty shall be deemed to be the
lower of (a) an amount equal to the stated or determinable amount of the primary
obligation in respect of which such Guaranty is made and (b) the maximum amount
for which such guaranteeing person may be liable pursuant to the terms of the
instrument embodying such Guaranty, unless such primary obligation and the
maximum amount for which such guaranteeing person may be liable are not stated
or determinable, in which case the amount of such Guaranty shall be such
guaranteeing person's maximum reasonably anticipated liability in respect
thereof as determined by Buyer in good faith.
"HAZARDOUS SUBSTANCE" means any substance, waste or material: (i) the
presence of which requires investigation or remediation under any Environmental
Law; or (ii) the generation, storage, treatment, transportation, disposal,
remediation, removal, handling or management of which is regulated by any
Environmental Law; or (iii) that is defined as a "hazardous waste" or "hazardous
substance" under any Environmental Law; or (iv) that is toxic, explosive,
corrosive, flammable, infectious, radioactive, carcinogenic or mutagenic or
otherwise hazardous and is regulated by any Governmental Authority; or (v) the
presence of which poses a hazard to the health or safety of Persons; or (vi) the
presence of which constitutes a nuisance, trespass or other tortious condition
for which a Seller could be or is alleged to be liable; or (vii) without
limitation, that contains gasoline, diesel fuel or other petroleum hydrocarbons,
polychlorinated biphenols (PCBs) or asbestos.
"HSR ACT" means the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as
amended.
"INCOME TAX" shall mean all Taxes based upon, measured by or calculated with
respect to net income or profits, including any interest, penalty or addition
thereto.
"INDEMNIFYING PARTY" means: (i) with respect to any Buyer Indemnitee
asserting a claim under Sections 9.01 or 12.12, Seller; and (ii) with respect to
any Seller Indemnitee asserting a claim under Sections 9.02 or 12.12, Buyer.
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"INDEMNITEE" means: (i) each of Buyer and its Affiliates with respect to any
claim for which Seller is an Indemnifying Party under Sections 9.01 or 12.12;
and (ii) Seller and its Affiliates with respect to claims for which Buyer is an
Indemnifying Party under Sections 9.02 or 12.12.
"IRS" means the Internal Revenue Service.
"LIABILITY" means, with respect to any Person, any liability or obligation
of such Person of any kind, character or description, whether known or unknown,
absolute or contingent, accrued or unaccrued, liquidated or unliquidated,
secured or unsecured, joint or several, due or to become due, vested or
unvested, executory, determined, determinable or otherwise and whether or not
the same is required to be accrued on the financial statements of such Person.
"LICENSE AGREEMENTS" means agreements to which any Entertainment Company is
a party or by which any Entertainment Company is otherwise bound, pursuant to
which an Entertainment Company grants or licenses to or acquires from a third
party any right, title or interest elating to the distribution, exhibition or
other exploitation of one or more Films.
"LIEN" means, with respect to any asset, any mortgage, title defect or
objection, lien, pledge, charge, security interest, hypothecation, restriction,
encumbrance or charge of any kind in respect of such asset.
"LIBOR" shall mean, with respect to each day during any applicable one month
period, the one month London interbank offered rate for Dollar deposits as of
11:00 a.m. (London time) on the day which is two Business Days prior to the
first day of such period, as quoted on Telerate page 3750 or on such replacement
system as is then customarily used to quote the London interbank offered rate.
If two or more such rates appear on Telerate page 3750 or associated pages, the
rate in respect of such period shall be the arithmetic mean of such offered
rates (rounded upwards, if necessary, to the nearest 1/100th of one percent).
"MATERIAL ADVERSE EFFECT" means a material change in, or material adverse
effect on, the assets, liabilities, business, operations or financial condition
of the Entertainment Companies taken as a whole.
"MGM CREDIT FACILITY" means the $800 Million Credit Agreement, dated as of
October 10, 1996, among Metro-Goldwyn-Mayer Inc., the Lenders listed therein,
the L/C issuers named therein and Morgan Guaranty Trust Company of New York, as
agent, and all related documents.
"MULTIEMPLOYER PLAN" means a multiemployer plan, as defined in Section 3(37)
and 4001(a)(3) of ERISA.
"NEW ORION CREDIT FACILITY" means a revolving credit facility, naming Orion
as borrower, that is to take effect concurrent with the Closing and that in all
respects is in form and substance satisfactory to Buyer.
"ORDER CONFIRMING PLAN" means the order of the Bankruptcy Court entitled
"Order Confirming the Debtors' Modified Third Amended Joint Consolidated Plan of
Reorganization," dated October 20, 1992, entered in the Bankruptcy Cases.
"PARTICIPATIONS" means, with respect to any Film, all amounts (whether
described as a deferment, a gross participation or otherwise) which any
Entertainment Company may be contractually obligated to pay to any person, for
rights or services in connection with any Film and which are based on or
dependent on all or any percentage of the proceeds of the Film (irrespective of
the manner in which such proceeds are defined or computed), including royalties,
residuals and guild payments, whether or not such payment has then become due or
been made.
"PERMITTED LIENS" means (i) Liens for Taxes or governmental assessments;
charges or claims the payment of which is not yet due, or for Taxes the validity
of which are being contested in good faith by appropriate proceedings; (ii)
statutory Liens of landlords and Liens of carriers, warehousemen, mechanics,
materialmen and other similar Persons and other Liens imposed by Applicable Law
incurred in the ordinary course of business for sums not yet delinquent or being
contested in good faith; (iii) Liens relating
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to deposits made in the ordinary course of business in connection with workers'
compensation, unemployment insurance and other types of social security or to
secure the performance of leases, trade contracts or other similar agreements;
(iv) Liens securing executory obligations under any Lease that constitutes an
"operating lease" under GAAP; (v) guild Liens; (vi) customary Liens (a) granted
in the ordinary course to secure a licensee's ability to retain distribution
rights under a License Agreement to which the licensee is a party and (b) which
Liens, if enforced, in the aggregate would not have a Material Adverse Effect;
and (vii) other Liens set forth on SCHEDULE 1.01 hereto. Notwithstanding the
foregoing, no Lien arising under the Code or ERISA with respect to the
operation, termination, restoration or funding of any Benefit Plan sponsored by,
maintained by or contributed to by Seller or any Entertainment Company or by any
of their ERISA Affiliates or arising in connection with any material excise tax
or penalty tax with respect to such Benefit Plan shall be a Permitted Lien.
"PERSON" means an individual, corporation, partnership, association, trust,
estate or other entity or organization, including a Governmental Authority.
"PLAN AFFILIATE" means, with respect to any Person, any employee benefit
plan or arrangement sponsored by, maintained by or contributed to by such
Person, and with respect to any employee benefit plan or arrangement, any Person
sponsoring, maintaining or contributing to such plan or arrangement.
"PLAN OF REORGANIZATION" means the "Debtors' Third Amended Joint
Consolidated Plan of Reorganization," dated September 3, 1992, filed in the
Bankruptcy Cases.
"POST-CLOSING PERIOD" shall mean any Taxable period that begins after the
Closing Date.
"PRE-CLOSING PERIOD" shall mean any Taxable period that ends on or before
the Closing Date.
"PROCEEDING" means an action, suit, hearing, arbitration, proceeding (public
or private) or, to Seller's knowledge, governmental investigation, that has been
brought by or against any Governmental Authority or any other Person.
"PROHIBITED TRANSACTION" means a transaction that is prohibited under
Section 4975 of the Code or Section 406 of ERISA and not exempt under Section
4975 of the Code or Section 408 of ERISA, respectively.
"REFERENCE RATE" means LIBOR as in effect from time to time plus 1.00%. The
party to whom interest is payable hereunder shall determine LIBOR for successive
one month periods until the obligation bearing interest is paid in full.
"SELLER AFFILIATED GROUP" shall mean Seller and members of the affiliated
group, within the meaning of Section 1504 of the Code, of which Seller is the
common parent.
"SHARE ENCUMBRANCES" means, with respect to any of the Shares, any lien,
charge, claim, option, pledge, right of other parties, voting trust, proxy,
stockholder or similar agreement, restriction, adverse claim or any other
encumbrance of any nature whatsoever.
"STATEMENT OF ASSUMPTIONS" means the statement of assumptions derived by
Buyer from information made available to it in its due diligence investigation
of the Entertainment Companies prior to the date of this Agreement that is
attached as SCHEDULE 1.02 hereto.
"STRADDLE PERIOD" shall mean any Taxable period that begins before and ends
after the Closing Date.
"SUBSIDIARY" means, with respect to any Person, (i) any corporation as to
which more than 10% of the outstanding stock having ordinary voting rights or
power (and excluding stock having voting rights only upon the occurrence of a
contingency unless and until such contingency occurs and such rights may be
exercised) is owned or controlled, directly or indirectly, by such Person and/or
by one or more of such Person's Subsidiaries, and (ii) any partnership, joint
venture or other similar relationship between such
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Person (or any Subsidiary thereof) and any other Person (whether pursuant to a
written agreement or otherwise), if such Person has a 10% or more equity
interest therein.
"TAX" shall mean all federal, state, local and foreign income, gross
receipts, license, payroll, employment, excise, severance, stamp, occupation,
premium, windfall profits, environmental, customs, duties, capital stock,
franchise, profits, withholding, social security (or similar), unemployment,
disability, real property, personal property, sales, use, transfer,
registration, value added, alternative or add-on minimum, estimated, or other
tax of any kind whatsoever, including any interest, penalty, or addition
thereto, irrespective of whether imposed directly or indirectly, as a successor
or transferee liability, as a joint and several liability pursuant to Section
1.1502-6 of the Treasury Regulations or comparable or similar provisions of
state, local or foreign law, or whether by reason of any tax sharing, tax
reimbursement or tax indemnification agreement, or by reason of a tax treaty.
"Taxes" and "Taxable" shall have the correlative meanings.
"TAX RETURN" means all returns, reports, statements, forms or other
materials or information required to be filed with respect to any Tax.
"UNION BANK LOAN" means the loan in the amount of Seven Million Dollars
($7,000,000) from Union Bank of California on the Film entitled "Music From
Another Room" which is secured solely by the assets of such Film and which is
otherwise without recourse against any Entertainment Company.
1.02. INDEX OF OTHER DEFINED TERMS. In addition to those terms defined
above, the following terms shall have the respective meanings given thereto in
the sections indicated below:
<TABLE>
<CAPTION>
DEFINED TERM SECTION
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<S> <C>
"1996 Balance Sheet"............................................................. 3.09
"A Films"........................................................................ 3.20(a)
"Annual Statements".............................................................. 3.09
"ASCAP".......................................................................... 3.20(g)
"B Films"........................................................................ 3.20(a)
"BMI"............................................................................ 3.20(g)
"Buyer".......................................................................... Preamble
"Closing"........................................................................ 2.02
"Closing Date"................................................................... 2.02
"Commitment Fee"................................................................. 10.03
"Development Projects"........................................................... 3.22
"Distributions".................................................................. 3.10(h)
"Employment Agreements".......................................................... 3.17(a)
"Entertainment Companies"........................................................ Preamble
"Entertainment Plan"............................................................. 3.17(c)
"Equity Securities".............................................................. 3.01
"Essential Consents"............................................................. 3.15(b)
"Film Rentals"................................................................... 5.09
"Films In Progress".............................................................. 3.21(a)
"Final Statement"................................................................ 2.03(c)
"Financial Statements"........................................................... 3.09
"Insurance Policies"............................................................. 3.25
"Intellectual Property Rights"................................................... 3.19(b)
"Interim Statements"............................................................. 3.09
"Landmark"....................................................................... Preamble
"Landmark Financial Statements".................................................. 3.29
"Leases"......................................................................... 3.11(c)
"Library Films".................................................................. 3.20(a)
</TABLE>
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<TABLE>
<CAPTION>
DEFINED TERM SECTION
- --------------------------------------------------------------------------------- -----------
<S> <C>
"Licensed Intellectual Property Rights".......................................... 3.19(b)
"MPAA"........................................................................... 3.20(b)
"Orion".......................................................................... Preamble
"Overpayment".................................................................... 2.03(e)
"Owned Intellectual Property Rights"............................................. 3.19(a)
"P&A"............................................................................ 5.01(a)(ix)
"Permits"........................................................................ 3.15(a)
"Personal Property Leases"....................................................... 3.11(c)
"Preliminary Purchase Price"..................................................... 2.03(b)
"Preliminary Statement".......................................................... 2.03(b)
"Proceedings".................................................................... 3.13
"Pro Forma Statements"........................................................... 3.09
"Purchase Price"................................................................. 2.03(a)
"Real Property Leases"........................................................... 3.11(c)
"Required Consents".............................................................. 3.15(b)
"Required Contractual Consent"................................................... 3.15(b)
"Required Governmental Approval"................................................. 3.15(b)
"Scheduled Contracts"............................................................ 3.14(a)
"SEC"............................................................................ 3.05
"SEC Documents".................................................................. 3.27
"Section 338 Elections".......................................................... 11.02(a)
"Section 338 Taxes".............................................................. 11.02(c)
"Securities Act"................................................................. 7.07(a)
"Selected Firm".................................................................. 2.03(c)
"Seller"......................................................................... Preamble
"Seller Indemnitees"............................................................. 9.02
"Shares"......................................................................... Recitals
"Subsequent Material Contract"................................................... 5.01(b)(v)
"Tax Claim"...................................................................... 11.04(a)
"Tax Indemnitee"................................................................. 11.04(a)
"Tax Indemnitor"................................................................. 11.04(a)
"Unaffiliated Production Company"................................................ 3.21(b)
"Unpaid Balance"................................................................. 2.03(d)
</TABLE>
ARTICLE II
SALE OF STOCK
2.01. SALE OF STOCK. Upon the terms and subject to the conditions of this
Agreement and in reliance upon the representations, warranties and agreements
herein set forth, Buyer agrees to purchase from Seller and Seller agrees to sell
to Buyer all of the Shares on the Closing Date. At the Closing, Seller shall
deliver to Buyer a certificate evidencing the Shares duly endorsed for transfer
and with all transfer stamps attached and such other instruments as may be
reasonably requested by Buyer to transfer full legal and beneficial ownership of
the Shares to Buyer, free and clear of all Share Encumbrances.
2.02. CLOSING. The closing (the "Closing") of the transactions
contemplated by this Agreement shall take place at the offices of Gibson, Dunn &
Crutcher LLP, 333 South Grand Avenue, Los Angeles, California 90071 on the date
on which the last of the conditions to Closing set forth in Sections 8.01 and
8.02 have been satisfied or waived by the party or parties entitled to waive the
same or such other date as to which Buyer and Seller may agree (the "Closing
Date"). At the Closing, Buyer shall deliver to Seller the Purchase Price.
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2.03. PURCHASE PRICE.
(a) As consideration for the Shares and the covenants and agreements of
Seller set forth herein, Buyer shall deliver to Seller at the Closing in
immediately available funds to be delivered by wire transfer (to a bank account
designated at least three business days prior to the Closing Date in writing by
Seller) an amount (the "Purchase Price") equal to Five Hundred Seventy Three
Million Dollars ($573,000,000) less the sum of: (i) the greater of (A) all Debt
and other amounts outstanding under the Existing Orion Credit Facility on
December 31, 1996, net of cash on hand of the Entertainment Companies on
December 31, 1996, or (B) all Debt and other amounts outstanding under the
Existing Orion Credit Facility on the Closing Date, net of cash on hand of the
Entertainment Companies on the Closing Date; plus (ii) unpaid interest on Debt
under the Existing Orion Credit Facility accrued to, but not including, the
Closing Date; plus (iii) the greater of (A) Thirteen Million Dollars
($13,000,000) or (B) all Debt of the Entertainment Companies (other than Debt
outstanding under the Existing Orion Credit Facility on the Closing Date)
outstanding on the Closing Date; plus (iv) unpaid interest on such Debt (other
than the Existing Orion Credit Facility) accrued to, but not including, the
Closing Date.
(b) Not later than three Business Days prior to the Closing Date, Seller
shall prepare and deliver to Buyer a statement (the "Preliminary Statement")
containing (i) a schedule of total Debt anticipated to be outstanding on the
Closing Date and an estimate of unpaid interest to be accrued thereon as of the
Closing Date and other amounts that then will be payable with respect thereto,
and (ii) an estimate of cash that would be reflected on a consolidated balance
sheet of Orion and its Subsidiaries prepared as of the Closing Date (adjusted,
if necessary, to give pro forma effect to distribution to Seller of all capital
stock of Landmark on the Closing Date). Based upon the Preliminary Statement, a
preliminary determination of the Purchase Price shall be made (the "Preliminary
Purchase Price"), which Preliminary Purchase Price shall be subject to
adjustment as provided in Sections 2.03(d) and (e).
(c) Within thirty (30) days after the Closing Date, Buyer shall prepare and
deliver to Seller a statement (the "Final Statement") containing (i) a schedule
of total Debt outstanding on the Closing Date and accrued and unpaid interest
thereon, and other amounts payable with respect thereto, as of the Closing Date
(assuming that such Debt was repaid in full on that date), (ii) a calculation of
cash on hand that would be reflected on a consolidated balance sheet of Orion
and its Subsidiaries prepared as of the Closing Date (adjusted, if necessary, to
give pro forma effect to distribution to Seller of all capital stock of Landmark
on the Closing Date), and (iii) a calculation of the Purchase Price. The Final
Statement and the calculation of the Purchase Price shall be binding upon the
parties to this Agreement unless Seller gives written notice of disagreement
therewith to Buyer within thirty (30) days after its receipt of the Final
Statement, specifying in reasonable detail the nature and extent of such
disagreement. If Buyer and Seller mutually agree upon the Final Statement and
the calculation of the Purchase Price within thirty (30) days after Seller's
receipt of such notice from Buyer, such agreement shall be binding upon the
parties to this Agreement. If Buyer and Seller are unable to resolve any such
disagreement within such period, the disagreement shall be referred for final
determination to an independent accounting firm of national reputation selected
by the mutual agreement of Buyer and Seller (the "Selected Firm"), and the
resolution of that disagreement and the calculation of the total Debt, cash on
hand resulting therefrom and the Purchase Price shall be final and binding upon
the parties hereto for purposes of this Agreement. The fees and disbursements of
the Selected Firm shall be paid by Buyer and Seller as the Selected Firm shall
determine based upon its assessment of the relative merits of the positions
taken by each in any disagreement presented to such firm. Buyer will grant
Seller full access to the books and records of the Entertainment Companies and
its relevant personnel in order for it to make its evaluations under this
Section 2.03.
(d) If the Preliminary Purchase Price is less than the Purchase Price (such
difference being referred to herein as the "Unpaid Balance"), then, in addition
to the amount payable to Seller under Section 2.01(a) of this Agreement, within
five (5) Business Days after the final determination of the Final Statement and
the Purchase Price, Buyer shall deliver to Seller an amount equal to the Unpaid
Balance,
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together with interest thereon at the Reference Rate in effect from time to time
from the Closing Date until the date of such payment, in cash in immediately
available funds by wire transfer to a bank account designated in writing by
Seller prior to the due date thereof.
(e) If the Preliminary Purchase Price is greater than the Purchase Price
(such difference being referred to herein as an "Overpayment"), then within five
(5) Business Days after the final determination of the Final Statement and the
Purchase Price, Seller shall reimburse to Buyer an amount equal to the
Overpayment, together with interest thereon at the Reference Rate in effect from
time to time from the Closing Date until the date of such reimbursement, in cash
in immediately available funds by wire transfer to a bank account designated in
writing by Buyer prior to the due date thereof.
ARTICLE III
REPRESENTATIONS AND WARRANTIES OF SELLER
Seller represents and warrants to Buyer as follows:
3.01. OWNERSHIP OF STOCK. Seller is the legal and beneficial owner of all
of the Shares, free and clear of all Share Encumbrances. The delivery to Buyer
of the Shares pursuant to the provisions of this Agreement will transfer to
Buyer valid title thereto, free and clear of any and all Share Encumbrances. All
of the Shares have been duly authorized and were validly issued and are fully
paid and nonassessable and were not issued in violation of any preemptive
rights. The Shares represent all of the issued and outstanding shares of capital
stock of Orion. There are not, and on the Closing Date there will not be,
outstanding (i) any options, warrants, rights of first refusal or other rights
to purchase from Seller or Orion any capital stock of Orion, (ii) any securities
convertible into or exchangeable for shares of such stock or (iii) any other
commitments of any kind for the issuance of additional shares of capital stock
or options, warrants or other securities of Orion (such options, warrants,
rights of first refusal or other rights, convertible securities, exchangeable
securities or other commitments are referred to herein collectively as "Equity
Securities"). There is no contract, right or option outstanding to require
Seller or Orion to redeem, purchase or otherwise reacquire any Equity Securities
of Orion, and there are no preemptive rights with respect to any Equity
Securities of Orion.
3.02. CORPORATE EXISTENCE AND POWER. Each of Seller and Orion is a
corporation duly incorporated, validly existing and in good standing under the
laws of the state of its incorporation, and has all corporate power and
authority to enter this Agreement and consummate the transactions contemplated
hereby. Orion is duly qualified to do business as a foreign corporation in each
jurisdiction where the character of the property owned or leased by it or the
nature of its activities makes such qualification necessary to carry on its
business as now conducted, except for those jurisdictions where the failure to
be so qualified has not been, and could not reasonably be expected to be,
material.
3.03. CORPORATE AUTHORIZATION OF SELLER. This Agreement has been duly and
validly executed by Seller and constitutes the legal, valid and binding
agreement of Seller, enforceable against it in accordance with its terms, except
as may be limited by applicable bankruptcy, insolvency, reorganization,
moratorium or similar laws affecting creditors' rights generally; PROVIDED,
HOWEVER, that the legality, validity, binding effect and enforceability of this
Agreement against Seller is not limited by the Bankruptcy Cases; and PROVIDED,
FURTHER, that the consummation by Seller of the Closing and the transfer of the
Shares are subject to the approval of Seller's stockholders.
3.04. SUBSIDIARIES. Schedule 3.04 sets forth a complete list of each
direct or indirect Subsidiary of Orion, its jurisdiction of organization, the
authorized capital stock of each such Subsidiary, the number of shares of
outstanding capital stock of each such Subsidiary and the owners thereof. All
such issued and outstanding shares of capital stock of each such Subsidiary have
been duly authorized and validly issued and are fully paid and nonassessable and
were not issued in violation of any preemptive rights. Each Subsidiary is a
corporation duly organized, validly existing and in good standing under the laws
of its
10
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jurisdiction of incorporation and has all corporate power and all material
governmental licenses, governmental authorizations, governmental consents and
governmental approvals required to carry on the business as now conducted by
such Subsidiary and to own and operate the business as now owned and operated by
such Subsidiary. Except as disclosed in SCHEDULE 3.04, no Subsidiary holds any
of its issued and outstanding shares of capital stock in its treasury, and there
are not, and on the Closing Date there will not be, outstanding any Equity
Securities of or with respect to such Subsidiary. Except as otherwise disclosed
in SCHEDULE 3.04,Orion or a wholly-owned Subsidiary of Orion owns, directly or
indirectly, free and clear of all Share Encumbrances, all of the outstanding
capital stock or other Equity Securities of each of its Subsidiaries identified
in SCHEDULE 3.04. No Subsidiary is required to be qualified to conduct business
in any state other than: (a) the states set forth in SCHEDULE 3.04, in which
states the relevant Subsidiary is duly qualified and in good standing, and (b)
such states where the failure to be so qualified, whether singly or in the
aggregate, could not reasonably be expected to have a Material Adverse Effect.
3.05. ENTERTAINMENT GROUP. Other than the assets of Landmark reflected in
the Landmark Financial Statements, Orion and its Subsidiaries together own all
of the assets of the "Entertainment Group" as described in Seller's most recent
report filed with the Securities and Exchange Commission (the "SEC") on Form
10-K.
3.06. CORPORATE AUTHORIZATION OF ORION. The execution, delivery and
performance by Orion of this Agreement and the consummation by Orion of the
transactions contemplated hereby are within Orion's corporate powers and have
been duly authorized by all necessary corporate action on the part of Orion.
This Agreement has been duly and validly executed by Orion and constitutes the
legal, valid and binding agreement of Orion, enforceable against it in
accordance with its terms, except as may be limited by applicable bankruptcy,
insolvency, reorganization, moratorium or similar laws affecting creditors'
rights generally; PROVIDED, HOWEVER, that the legality, validity, binding effect
and enforceability of this Agreement against Orion is not limited by the
Bankruptcy Cases.
3.07. GOVERNMENTAL AUTHORIZATION. The execution, delivery and performance
by Seller and Orion of this Agreement requires no action by, consent or approval
of, or filing with, any Governmental Authority other than (a) compliance with
any applicable requirements of the HSR Act, (b) the filing of a preliminary and
definitive proxy statement with the SEC and (c) any actions, consents, approvals
or filings otherwise expressly referred to in Section 3.15 hereof.
3.08. NON-CONTRAVENTION. The execution, delivery and performance by Seller
and Orion of this Agreement, and consummation of the transactions contemplated
hereby, including without limitation, the transfer of the Shares to Buyer, do
not and will not (a) contravene or conflict with the articles or certificate of
incorporation or bylaws of Seller or any Entertainment Company, true and correct
copies of all of which have been delivered to Buyer by Seller; (b) assuming
receipt of the Required Consents, contravene or conflict with or constitute a
violation of any provision of any material Applicable Law binding upon or
applicable to Seller or any Entertainment Company; (c) except as set forth on
SCHEDULE 3.08(C), constitute a default under or give rise to any right of
termination, cancellation or acceleration of, or to a loss of any benefit to
which Seller or any Entertainment Company is entitled under, any material
Contract to which it is a party or any material Permit or similar authorization;
or (d) except as set forth on SCHEDULE 3.08(C), result in the creation or
imposition, under any Contract of any Entertainment Company or Applicable Law,
or any Lien on the Shares or on any asset of any Entertainment Company or of
Buyer or any Subsidiary of Buyer, or impose any contractual obligation or
restriction under such Contract on Buyer or any Subsidiary of Buyer (other than
Orion and its Subsidiaries).
3.09. FINANCIAL STATEMENTS; UNDISCLOSED LIABILITIES. SCHEDULE 3.09
contains true and complete copies of (i) the audited balance sheets and related
statements of operations and retained earnings and of cash flows for Orion and
its consolidated Subsidiaries for the years ended December 31, 1995 and December
31, 1996 (the "Annual Statements"), (ii) the pro forma balance sheets for Orion
and its consolidated Subsidiaries as at December 31, 1996 and March 31, 1997
(which March 31, 1997 balance sheet shall be
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<PAGE>
delivered on or before May 8, 1997), adjusted to reflect distribution of the
capital stock of Landmark to Seller as if it had occurred on the date thereof
(the "Pro Forma Statements") and (iii) the balance sheets and related statements
of operations for the three month periods ended March 31, 1996 and March 31,
1997 which shall be delivered on or before May 8, 1997 (collectively, the
"Interim Statements" and, together with the Annual Statements and the Pro Forma
Statements, the "Financial Statements"). The December 31, 1996 balance sheet
referred to in clause (i) above is referred to herein as the "1996 Balance
Sheet." Each of the Financial Statements has been prepared based on the books
and records of Orion and its Subsidiaries in accordance with GAAP and their
normal accounting practices, consistent with past practice and with each other,
and present fairly the financial condition, results of operations and cash flows
of Orion and its Subsidiaries as of the dates indicated or for the periods
indicated, subject in the case of the Interim Statements to normal year-end
audit adjustments, which adjustments in the aggregate are not material. The
adjustments made to the balance sheet included in the Annual Statements and
Interim Statements in the preparation of the Pro Forma Statements were
reasonable in all material respects. Except as set forth on SCHEDULE 3.09, there
are no Liabilities of any Entertainment Company other than: (i) any Liability
accrued as a Liability on the 1996 Balance Sheet; (ii) Liabilities specifically
disclosed and identified as such in the schedules to this Agreement; (iii)
Liabilities incurred since the date of the 1996 Balance Sheet that do not, and
will not, individually or in the aggregate, have a Material Adverse Effect; and
(iv) Liabilities incurred since the date of the 1996 Balance Sheet that have
been incurred in the ordinary course of business of any of the Entertainment
Companies.
3.10. ABSENCE OF CERTAIN CHANGES. Since the date of the 1996 Balance
Sheet, each Entertainment Company has conducted its business in the ordinary
course consistent with past practice, and without limitation, there has not
been:
(a) any event, occurrence, development or state of circumstances or facts or
change in the assets, liabilities, business, operations or financial conditions
of any Entertainment Company that has had or that could reasonably be expected
to have, either alone or together with all such events, occurrences,
developments, states of circumstances or facts or changes, a Material Adverse
Effect;
(b) any incurrence, assumption or guarantee of any Debt by any Entertainment
Company other than drawdowns under the Existing Orion Credit Facility and the
Union Bank Loan;
(c) any creation, assumption or sufferance of the existence of any Lien
other than Permitted Liens created, assumed or suffered to exist in the ordinary
course of business consistent with past practice;
(d) any transaction or commitment made, or any Contract entered into, by any
Entertainment Company (including the acquisition or disposition of any assets),
or any waiver, amendment, termination or cancellation of any Contract by any
Entertainment Company, or any relinquishment of any rights thereunder by any
Entertainment Company, or of any other right or debt owed to any Entertainment
Company, other than in each such case actions taken in the ordinary course of
business consistent with past practice;
(e) except as set forth in SCHEDULE 3.10(E), any (i) grant of any severance,
continuation or termination pay to any director, officer, stockholder or
employee of any Entertainment Company or any Associate of any of the foregoing,
(ii) entering into of any employment, deferred compensation or other similar
agreement (or any amendment to any such existing agreement) with any director,
officer, stockholder or employee of any Entertainment Company or any Associate
of any of the foregoing, (iii) increase in benefits payable or potentially
payable under any severance, continuation or termination pay policies or
employment agreements with any director, officer, stockholder or employee of any
Entertainment Company or any Associate of any of the foregoing, (iv) increase in
compensation, bonus or other benefits payable or potentially payable to
directors, officers, stockholders or employees of any Entertainment Company or
any Associate of any of the foregoing, other than in the ordinary course of
business consistent with past practice or pursuant to existing Contracts, or (v)
change in the terms of any bonus, pension,
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insurance, health or other Benefit Plan of Seller or any of its Affiliates
applicable to any Entertainment Company or of any Entertainment Company;
(f) any loan to or guarantee or assumption of any loan or obligation on
behalf of any stockholder, director, officer or employee of Seller or any of its
Affiliates or of any Associate of any of the foregoing, except business expense
advances to employees of any Entertainment Company occurring in the ordinary
course of business consistent with past practice;
(g) except as required by GAAP, any material change by any Entertainment
Company in its accounting principles, methods or practices or in the manner it
keeps its books and records or any material change by any Entertainment Company
of its current practices with regards to inventory, sales, receivables, payables
or accrued expenses which would affect the timing of collection of receivables
or the payment of payables;
(h) any distribution, dividend, bonus or other payment by any Entertainment
Company to Seller or any Affiliate of Seller (other than any Entertainment
Company) or any officer, director, stockholder or Affiliate of Seller or any
Entertainment Company or any of their respective Affiliates or Associates
(collectively, "Distributions"), except for the distribution of Landmark as set
forth in SCHEDULE 3.10(H) or occurring in the ordinary course of business
consistent with past practice;
(i) any payment, discharge or satisfaction of any Liabilities of any
Entertainment Company, other than payments, discharges or satisfactions in the
ordinary course of business consistent with past practice; or (j) (i) any
payment, discharge or other satisfaction of any claim, liability or obligation
owed to any Entertainment Company by Seller or any of its Affiliates (other than
any Entertainment Company) or owed to Seller or any of its Affiliates (other
than any Entertainment Company) by any Entertainment Company or (ii) any
prepayment of any Debt (other than payments of revolving loans made under the
Existing Orion Credit Facility).
3.11. PROPERTIES; LEASES; TANGIBLE ASSETS.
(a) Except for Permitted Liens and those Liens identified on SCHEDULE
3.11(A), the Entertainment Companies own all of the assets (real, personal or
mixed, tangible or intangible (including the Intellectual Property Rights))
reflected in the 1996 Balance Sheet (except those assets disposed of in the
ordinary course of business after the date thereof and the Films), free and
clear of all Liens.
(b) All tangible properties and assets (other than the Films) and premises
owned or leased by the Entertainment Companies are in good condition and repair
and are adequate in all material respects for the uses to which they are put,
and no tangible properties or assets necessary for the conduct of the business
of any Entertainment Company in substantially the same manner as it has
heretofore been conducted are in need of replacement, maintenance or repairs,
except for routine and not materially deferred replacement, maintenance and
repair.
(c) SCHEDULE 3.11(C) sets forth a true and complete list of all material
personal property leases (the "Personal Property Leases") and all leases of real
property (the "Real Property Leases" and collectively with the Personal Property
Leases, the "Leases") to which any Entertainment Company is a party or by which
any Entertainment Company is bound. With respect to the Leases, except as set
forth on SCHEDULE 3.11(C), there exist no defaults by any Entertainment Company,
or, to the knowledge of Seller, any default or threatened default by any lessor
or third party thereunder, that has affected or could reasonably be expected to
materially affect the rights and privileges thereunder of any Entertainment
Company. Assuming the Required Consents are obtained, the sale of the Shares to
Buyer will not adversely affect any Leases with non-Affiliates to which any
Entertainment Company is a party or by which any Entertainment Company is bound.
(d) No real property is owned by any Entertainment Company except as set
forth on SCHEDULE 3.11(D).
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3.12. AFFILIATES. Except as set forth in SCHEDULE 3.12, to the knowledge
of Seller, no stockholder of Seller or any officer or director of Seller or any
Entertainment Company (or any immediate family member of any such officer or
director):
(a) now has or at any time subsequent to January 1, 1996 had, directly or
indirectly, an equity interest in, or holds debt of, any Person which furnishes
or sells or during such period furnished or sold services or products to any
Entertainment Company or purchases or during such period purchased from any
Entertainment Company any goods or services, or otherwise does or during such
period did business with any Entertainment Company; PROVIDED, HOWEVER, that no
stockholder of Seller or any Entertainment Company or any of their respective
officers, directors or other Affiliates shall be deemed to have such an interest
(A) solely by virtue of the ownership of less than five percent (5%) of the
outstanding voting stock or debt securities of any publicly held company, the
stock or debt securities of which are traded on a national stock exchange or
quoted on the National Association of Securities Dealers Automated Quotation
System or (B) by reason of having such an interest in Seller or such
Entertainment Company; or
(b) now is or at any time subsequent to January 1, 1996 was, directly or
indirectly, a party to any contract, commitment or agreement to which any
Entertainment Company is or during such period was a party or under which any
Entertainment Company is or was obligated or bound or to which any Entertainment
Company's properties may be or may have been subject.
3.13. LITIGATION. Except as disclosed in SCHEDULE 3.13, (i) there are no
actions, claims, suits, hearings, arbitrations, proceedings (public or private)
or, to Seller's knowledge, governmental investigations, that have been brought
by or against any Governmental Authority or any other Person (collectively,
"Proceedings") pending or, to the knowledge of Seller, threatened, against or by
any Entertainment Company or against Seller with respect to or relating to any
Entertainment Company other than collection actions by any Entertainment Company
involving claims of amounts less than Twenty Five Thousand Dollars ($25,000), or
which seek to enjoin or rescind the transactions contemplated by this Agreement
or otherwise seek to prevent Seller or any Entertainment Company from complying
with the terms and provisions of this Agreement, and (ii) there are no existing
orders, judgments or decrees of any Governmental Authority affecting any of the
Entertainment Companies. All matters identified on SCHEDULE 3.13 in the
aggregate will not have a Material Adverse Effect.
3.14. CONTRACTS.
(a) SCHEDULE 3.14(A) sets forth a complete list of all material Contracts
(collectively with the Leases and the Employment Agreements, the "Scheduled
Contracts") including, without limitation:
(i) each Contract (other than License Agreements) between any
Entertainment Company and (A) except as disclosed in SCHEDULE 3.12 and
SCHEDULE 3.17(A), each present or former director, officer or other member
of management or other personnel of any Entertainment Company, (B) any
supplier of services or products (other than Films) to the Entertainment
Companies whose dollar volume of sales to the Entertainment Companies taken
as a whole exceeded in 1996 Five Hundred Thousand Dollars ($500,000), and
(C) any Person in which the aggregate payments made to the Entertainment
Companies taken as a whole under such Contract exceeded in 1996 Five Hundred
Thousand Dollars ($500,000);
(ii) each other agreement or arrangement of any Entertainment Company
that requires the payment or incurrence of Liabilities, or the rendering of
services, by any Entertainment Company, subsequent to the date hereof of
more than Five Hundred Thousand Dollars ($500,000) or that is reasonably
expected to require payment of more than Five Hundred Thousand Dollars
($500,000) in the aggregate;
(iii) all Contracts relating to, and evidences of or guarantees of, or
providing security for, Debt or the deferred purchase price of property
(whether incurred, assumed, guaranteed or secured by any asset);
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(iv) all partnership, joint venture or other similar Contracts,
arrangements or agreements, excluding those Contracts which relate to
partnerships or joint ventures formed for the purpose of producing one or
more Films;
(v) all License Agreements to which any Entertainment Company is a party
or by which any Entertainment Company is otherwise bound in which the
aggregate payments to be made to or by any Entertainment Company under such
License Agreement subsequent to the date hereof are more than Seven Hundred
Fifty Thousand Dollars ($750,000) or are reasonably expected to require
payment of more than Seven Hundred Fifty Thousand Dollars ($750,000) in the
aggregate; and
(vi) all License Agreements or other Contracts that constitute output
deals or similar arrangements.
(b) Except as disclosed in SCHEDULE 3.14(B), each Scheduled Contract
relating to any Entertainment Company is a legal, valid and binding obligation
of each Entertainment Company that is party thereto and, to the knowledge of
Seller, each other party thereto, enforceable against each such Entertainment
Company that is party thereto and, to the knowledge of Seller, each such other
party thereto, in accordance with its terms, except to the extent that
unenforceability would not adversely affect any Entertainment Company's rights
thereunder or as may be limited by applicable bankruptcy, insolvency,
reorganization, moratorium or similar laws affecting creditors' rights
generally, and neither any Entertainment Company that is party thereto nor, to
the knowledge of Seller, any other party thereto, is in material default or has
failed to perform any material obligation thereunder. Complete and correct
copies of each Scheduled Contract have been delivered or made available to
Buyer. There is no default or failure to perform under other Contracts which
could reasonably be expected to have a Material Adverse Effect.
(c) Except as disclosed in SCHEDULE 3.14(C), each Entertainment Company has
paid all material Participations due and payable by it as of the date hereof in
accordance with past practice as such practice relates to the timing of such
payments, and no Entertainment Company is in default or has failed to perform
any obligation with respect to the payment of any such material Participations.
3.15. PERMITS; REQUIRED CONSENTS.
(a) SCHEDULE 3.15(A) sets forth all material approvals, authorizations,
certificates, consents, licenses, orders and permits or other similar
authorizations of all Governmental Authorities (and all other Persons) necessary
for the operation of the Entertainment Companies in substantially the same
manner as currently operated or affecting or relating in any way to the
Entertainment Companies (the "Permits").
(b) SCHEDULE 3.15(B) lists (i) each governmental or other registration,
filing, application, notice, transfer, consent, approval, order, qualification
and waiver (each, a "Required Governmental Approval") required under Applicable
Law to be obtained by Seller or any Entertainment Company by virtue of the
execution and delivery of this Agreement or the consummation of the transactions
contemplated hereby to avoid the loss of any material Permit or otherwise, (ii)
each Scheduled Contract with respect to which the consent of the other party or
parties thereto must be obtained by Seller or any Entertainment Company by
virtue of the execution and delivery of this Agreement or the consummation of
the transactions contemplated hereby to avoid the invalidity of the transfer of
such Contract, the termination thereof, a breach or default thereunder or any
other change or modification to the terms thereof (each, a "Required Contractual
Consent") and (iii) each Required Contractual Consent which Seller and Buyer
have mutually agreed is critical to the consummation of the transactions
contemplated hereby as set forth on SCHEDULE 3.15(B) (each, an "Essential
Consent" and collectively with the Required Governmental Approvals and the
Required Contractual Consents, the "Required Consents"). Except as set forth in
SCHEDULE 3.15(B), each Permit is valid and in full force and effect in all
material respects and, assuming the related Required Consents have been obtained
prior to the Closing, are or will be transferable by Seller, and assuming the
related Required Consents have been obtained prior to the Closing, none of the
Permits will be terminated or become terminable or impaired in any material
respect as a result of the transactions contemplated hereby. To the knowledge of
Seller, there are no facts relating to the identity or circumstances of Seller
that would prevent or materially delay obtaining any of the Required Consents.
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3.16. COMPLIANCE WITH APPLICABLE LAWS. Except as set forth in SCHEDULE
3.16, the operation of the respective business of each Entertainment Company has
not violated or infringed, and does not violate or infringe, any Applicable Law
in a manner that could reasonably be expected to have, either alone or together
with all such violations or infringements, a Material Adverse Effect.
3.17. EMPLOYMENT AGREEMENTS; CHANGE IN CONTROL; AND EMPLOYEE BENEFITS.
(a) Except as set forth on SCHEDULE 3.17(A), there are no employment,
consulting, severance pay, continuation pay, termination pay or indemnification
agreements or other similar agreements of any nature whatsoever (collectively,
"Employment Agreements") between or binding upon any Entertainment Company, on
the one hand, and any current or former stockholder, officer, director, employee
or Affiliate of any Entertainment Company or any of their respective Associates
or any consultant or agent of any Entertainment Company, on the other hand, that
are currently in effect other than any such Employment Agreement that does not
provide for the payment of more than One Hundred Thousand Dollars ($100,000) in
the aggregate in any year.
(b) Except as set forth on SCHEDULE 3.17(B), there are no Employment
Agreements or any other similar agreements to which any Entertainment Company is
a party or by which it is bound under which the transactions contemplated by
this Agreement (i) will require any payment by any Entertainment Company or
Buyer, or any consent or waiver from any stockholder, officer, director,
employee or Affiliate of any Entertainment Company or any of their respective
Associates or any consultant or agent of any Entertainment Company, or Buyer or
(ii) will result in any increase, acceleration, vesting or other change in the
compensation, benefits or other rights of any stockholder, officer, director,
employee or Affiliate of any Entertainment Company or any of their respective
Associates or any consultant or agent of any Entertainment Company under any
such Employment Agreement or other similar agreement.
(c) SCHEDULE 3.17(C) sets forth all Benefit Plans of Seller, in which any
employees or former employees and their beneficiaries of any Entertainment
Company participate ("Entertainment Plans"). Seller has made available to Buyer
true and correct copies of all governing instruments and related agreements
pertaining to such Entertainment Plans.
(d) Except as set forth in SCHEDULE 3.17(D), neither Seller nor any
Entertainment Company nor any Affiliate or ERISA Affiliate of Seller or any
Entertainment Company sponsors or has ever sponsored, maintained, contributed
to, or incurred an obligation to contribute to, any Employee Pension Benefit
Plan. In connection with any Employee Pension Benefit Plan currently maintained
by any Entertainment Company or any ERISA Affiliate, (i) there have been no
accumulated funding deficiencies (within the meaning of Code Section 412),
whether or not waived, (ii) there have been no reportable events (within the
meaning of ERISA Section 4043(b)) other than any reportable event that may arise
in connection with the transactions contemplated by this Agreement, and (iii) no
circumstances exist that would warrant a termination of any such plan by the
Pension Benefit Guaranty Corporation pursuant to ERISA Section 4042. No Employee
Pension Benefit Plan has been terminated within the last five (5) years in other
than a standard termination under Section 4041(b) of ERISA and all liabilities
under such plans have been adequately and properly discharged. The foregoing
applies only to the extent any of the events results in a material Liability of
any Entertainment Company.
(e) Except as set forth in SCHEDULE 3.17(E), neither Seller nor any
Entertainment Company nor any Affiliate or ERISA Affiliate of Seller or any
Entertainment Company sponsors or has ever sponsored, maintained, contributed
to, or incurred an obligation to contribute to any Multiemployer Plan. Neither
Seller nor any Entertainment Company nor any of their ERISA Affiliates has at
any time withdrawn from a Multiemployer Plan in a complete withdrawal or a
partial withdrawal, as such terms are defined in ERISA Sections 4203 and 4205,
respectively, so as to result in any liability, contingent or otherwise, to
Seller, any Entertainment Company or any of their ERISA Affiliates. All
contributions required to be made by Seller, any Entertainment Company or any of
their ERISA Affiliates to each Multiemployer Plan have been made when due. To
the best knowledge of Seller, with respect to each Multiemployer Plan,
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(i) no such plan has been terminated or has been in reorganization under ERISA
so as to result, directly or indirectly, in any liability, contingent or
otherwise, of Seller, any Entertainment Company or any of their ERISA Affiliates
under Title IV of ERISA; (ii) no proceeding has been initiated by any Person
(including the PBGC) to terminate any such plan; (iii) Seller, any Entertainment
Company and any of their ERISA Affiliates have no reason to believe that any
Multiemployer Plan will be terminated or reorganized; and (iv) Seller, each
Entertainment Company and their ERISA Affiliates do not expect to withdraw from
any Multiemployer Plan.
(f) Except as set forth in SCHEDULE 3.17(F), no agreement, commitment or
obligation exists to increase benefits under any Entertainment Plan or to adopt
any new Entertainment Plan. Further, no individual shall accrue or receive
additional benefits, service or accelerated rights to payments of benefits under
any Benefit Plan, including the right to receive any parachute payment, as
defined in Section 280G of the Code, or become entitled to severance,
termination allowance or similar payments as a direct result of the transactions
contemplated hereby, and neither Seller nor any Entertainment Company is a party
to any agreement or arrangement that could result in the payment of any such
benefits or payments.
(g) No Entertainment Plan has participated in, engaged in or been a party to
any non-exempt Prohibited Transaction, and none of Seller, any Entertainment
Company or any Affiliate or ERISA Affiliate of Seller or any Entertainment
Company has had asserted against it any material claim for taxes under Chapter
43 of Subtitle A of the Code and Section 5000 of the Code, or for material
penalties under ERISA Section 502(c), (i) or (l), with respect to any Employee
Benefit Plan nor, to the knowledge of Seller, is there a material basis for any
such claim. No officer, director or employee of Seller or any Entertainment
Company has committed a material breach of any responsibility or obligation
imposed upon fiduciaries by Title I of ERISA with respect to any Entertainment
Plan, with respect to which breach Seller or any Entertainment Company is or
could be directly or indirectly liable.
(h) Other than routine claims for benefits, there is no claim pending, or to
the knowledge of Seller, threatened, involving any Entertainment Plan by any
Person against such plan or Entertainment Company. There is no pending, or to
the knowledge of Seller, threatened, proceeding involving any Employee Benefit
Plan before the IRS, the United States Department of Labor or any other
Governmental Authority that affects any Entertainment Plan.
(i) There is no material violation of any reporting or disclosure
requirement imposed by ERISA or the Code with respect to any Entertainment Plan.
(j) Each Entertainment Plan has at all times prior hereto been maintained in
all material respects, by its terms and in operation, in accordance with ERISA
and the Code. Seller, each Entertainment Company and their respective Affiliates
and ERISA Affiliates have made full and timely payment of all amounts required
to be contributed under the terms of each Entertainment Plan and Applicable Law
or required to be paid as expenses under such Entertainment Plan, and Seller and
each Entertainment Company and their respective Affiliates and ERISA Affiliates
shall continue to do so through the Closing. Each Entertainment Plan that is
intended to be qualified under Section 401(a) of the Code is and has always been
so qualified, and either has received a favorable determination letter with
respect to such qualified status from the IRS or has filed a request for such a
determination letter with the IRS within the remedial amendment period such that
such determination of qualified status will apply from and after the effective
date of any such Entertainment Plan.
(k) With respect to any Group Health Plans maintained by Seller, any
Entertainment Company or any Affiliates or ERISA Affiliates of Seller or any
Entertainment Company, whether or not for the benefit of the employees of
Seller, any Entertainment Company, Affiliates or its ERISA Affiliates, Seller,
the Entertainment Companies and their respective Affiliates and ERISA Affiliates
have complied in all material respects with the provisions of Part 6 of Title I
of ERISA and 4980B of the Code. No Entertainment Company is obligated to provide
health care benefits of any kind to any retired employees
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pursuant to any Employee Benefit Plan, including without limitation any Group
Health Plan, or pursuant to any agreement or understanding, other than as
required by applicable law.
(l) Seller and the Entertainment Companies have made available to Buyer a
copy of the three (3) most recently filed Federal Form 5500 series and
accountant's opinion, if applicable, for each Entertainment Plan.
3.18. LABOR AND EMPLOYMENT MATTERS.
(a) Except as set forth on SCHEDULE 3.18(A), no collective bargaining
agreement exists that is binding on any Entertainment Company and, except as
described on SCHEDULE 3.18(A), no petition has been filed or proceedings
instituted by an employee or group of employees with any labor relations board
seeking recognition of a bargaining representative at any time subsequent to
January 1, 1993. SCHEDULE 3.18(A) describes any organizational effort currently
being made or threatened by or on behalf of any labor union to organize any
employees of any Entertainment Company.
(b) Except as set forth on SCHEDULE 3.18(B), (i) there is no labor strike,
dispute, slow down or stoppage pending or, to the knowledge of Seller,
threatened, against or directly affecting any Entertainment Company, (ii) no
grievance or arbitration proceeding arising out of or under any collective
bargaining agreement is pending, and no claims therefor exist, and (iii) no
Entertainment Company nor any Affiliate of any Entertainment Company has
received any notice or has any knowledge of any threatened labor, employment or
civil rights dispute, controversy or grievance or any other unfair labor
practice proceeding or breach of contract claim or action with respect to claims
of, or obligations to, any employee or group of employees of any Entertainment
Company.
(c) Each of the Entertainment Companies has complied and are currently
complying, in respect of all employees of any Entertainment Company, with any
Applicable Law respecting employment and employment practices and the protection
of the health and safety of employees, from whatever source such law may be
derived, including, without limitation, statutes, ordinances, laws, rules,
regulations, policies, standards, judicial or administrative precedents,
judgments, orders, decrees, awards, citations, licenses, official
interpretations and guidelines, except for instances of noncompliance which
could not be reasonably expected to have, alone or in the aggregate, a Material
Adverse Effect.
(d) All individuals who are performing or have performed services for any
Entertainment Company or any Affiliate thereof and are or during 1995 or 1996
were classified by any of the Entertainment Companies as "independent
contractors" qualify for such classification under Section 530 of the Revenue
Act of 1978 or Section 1706 of the Tax Reform Act of 1986, as applicable, except
for such instances which are not, in the aggregate, material.
3.19. INTELLECTUAL PROPERTY.
(a) Other than copyright registrations, applications and claims relating to
the Films and common law trademark rights in the titles of the Films, SCHEDULE
3.19(A) sets forth a complete and correct list of all (i) foreign and United
States federal and state patent, trademark, trade name, service mark and
copyright registrations, (ii) foreign and United States federal and state
patent, trademark, trade name, service mark and copyright applications for
registration, (iii) common law claims to trademarks, service marks and trade
names, (iv) claims of copyright which exist although no registrations have been
issued with respect thereto, (v) fictitious business name filings with any state
or local Governmental Authority and (vi) inventions, discoveries, concepts,
ideas, drawings, designs, original works of authorship, computer programs, know-
how, research and development, techniques, data, trade secrets and other
proprietary and intellectual property rights owned by any of the Entertainment
Companies (collectively, the "OWNED INTELLECTUAL PROPERTY RIGHTS").
(b) Other than copyright registrations, applications and claims relating to
the Films and common law trademark rights in the titles of the Films, SCHEDULE
3.19(B) sets forth a complete and correct list of all
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(i) foreign and United States federal and state patent, trademark, trade name,
service mark and copyright registrations, (ii) foreign and United States federal
and state patent, trademark, trade name, service mark and copyright applications
for registration, (iii) common law claims to trademarks, service marks and trade
names, (iv) claims of copyright which exist although no registrations have been
issued with respect thereto, (v) fictitious business name filings with any state
or local Governmental Authority and (vi) inventions, discoveries, concepts,
ideas, drawings, designs, original works of authorship, computer programs, know-
how, research and development, techniques, data, trade secrets and other
proprietary and intellectual property rights which any of the Entertainment
Companies has a valid license to use, including a description of all Persons
from whom any of the Entertainment Companies have obtained such rights and the
material terms of such licenses (collectively, the "LICENSED INTELLECTUAL
PROPERTY RIGHTS"). The Owned Intellectual Property Rights and the Licensed
Intellectual Property Rights are collectively referred to herein as the
"INTELLECTUAL PROPERTY RIGHTS."
(c) SCHEDULE 3.19(C) lists all licenses pursuant to which any of the
Entertainment Companies have licensed any Person to use any Intellectual
Property Rights. No Person is in default in any material respect with respect to
its obligations under any of the licenses set forth in SCHEDULE 3.19(C).
(d) Except as set forth in SCHEDULE 3.19(D), (i) no claim is pending or, to
Seller's knowledge, threatened to the effect that the present or past use of the
Intellectual Property Rights by any of the Entertainment Companies infringes
upon or conflicts with or violates any patent, patent license, patent
application, trademark, tradename, trademark or tradename registration,
copyright, copyright registration, service mark or any pending application
relating thereto, or any trade secret, know-how, program or process, or common
law rights in respect of any of the foregoing, or any similar rights, of any
Person, (ii) use, sale or licensing of the Intellectual Property Rights by the
relevant Entertainment Company does not infringe upon or violate any rights of
any other Person, (iii) to the knowledge of Seller, no Person is infringing in
any material respect upon the rights of any of the Entertainment Companies in
and to the Intellectual Property Rights and (iv) the Intellectual Property
Rights are not subject to any Lien other than Permitted Liens and Liens granted
in connection with the Existing Orion Credit Facility which shall be
extinguished on or before the Closing. Except as set forth on SCHEDULE 3.19(D),
no Intellectual Property Right of any of the Entertainment Companies is subject
to any outstanding order, judgment, decree, stipulation or agreement restricting
the use thereof by the relevant Entertainment Company or, in the case of any
Intellectual Property Right licensed to others, restricting the sale, transfer,
assignment or licensing thereof by the relevant Entertainment Company to any
Person.
(e) Except for Participations or as set forth on SCHEDULE 3.19(E), no
Entertainment Company is obligated to make royalty or other payments to any
owner of, licensor of, other claimant to, or any other Person regarding any
Intellectual Property Rights.
3.20. LIBRARY FILMS.
(a) OWNERSHIP. All Films set forth on SCHEDULE 3.20(A) are designated
therein as "A Films" and "B Films," and all of such A Films and B Films shall be
referred to collectively herein as the "Library Films." SCHEDULE 3.20(A)(I)
identifies the availability dates of those A Films and B Films which are
currently being exploited by Seller, in each media, in the territories
indicated. SCHEDULE 3.20(A)(II) identifies all distribution rights owned or
controlled by the Entertainment Companies with respect to each Library Film.
SCHEDULE 3.20(A)(III) identifies all Films which Seller deems to be "dormant."
Except as set forth on SCHEDULE 3.20(A)(IV), the Library Films are free and
clear of all Liens other than Permitted Liens and Liens disclosed on SCHEDULE
3.11(A).
(b) RATINGS. Except as disclosed in SCHEDULE 3.20(B), each A Film that is a
feature-length motion picture was produced in color on either 35MM or 70MM film,
was submitted to the Motion Picture Association of America ("MPAA") for rating,
was released theatrically in the United States with a rating that is not more
restrictive than the current rating equivalent to an "R" under the present
system or its equivalent rating under any successor system and was produced
primarily in the English language.
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(c) ELEMENTS. SCHEDULE 3.20(C) identifies all available Elements owned or
controlled by the Entertainment Companies relating to the Library Films listed
therein. The Entertainment Companies have laboratory access letters with respect
to those Elements which the Entertainment Companies do not own. With respect to
each such Library Film identified, the Elements identified are sufficient to
produce copies, prints, video products and other reproductions for exploitation
in the theatrical, non-theatrical, television and video and audio markets that
are of such quality as is consistent with past practice of the Entertainment
Companies. SCHEDULE 3.20(C) identifies the correct identification and location
of each laboratory and other place which holds any of the foregoing Elements
relating to such Library Films.
(d) NO VIOLATION OF THIRD PARTY RIGHTS. No A Film, nor any B Film that is
currently being exploited by Seller, nor any part thereof, nor any of the
literary, dramatic or musical material contained therein or upon which any such
Film is based, nor the exercise by any authorized person or entity of any right
granted to any of the Entertainment Companies in connection therewith will
violate or infringe upon the trademark, service mark, tradename, copyright,
literary, dramatic, music, artistic, personal, private, civil, contract or
property right or rights of privacy or any other right, whether tangible or
intangible, of any Person.
(e) CLEARANCES. The relevant Entertainment Company has obtained proper and
effective licenses or grants of authority to use the results and proceeds of the
services of performers and other Persons connected with the production of the A
Films to the extent reasonably necessary or desirable to exercise all rights of
such Entertainment Company therein.
(f) COPYRIGHTS. Except as specified on SCHEDULE 3.20(F), good and sufficient
copyright notice is affixed to each A Film. Except as set forth in SCHEDULE
3.20(F), each A Film has been registered with the United States Copyright
Office.
(g) MUSIC. Except as set forth in SCHEDULE 3.20(G), all non-dramatic music
rights (so-called "small rights") contained in the A Films are (i) available by
license from American Society for Composers, Authors and Publishers ("ASCAP"),
Broadcast Music Inc. ("BMI") or SESAC, Inc., (ii) in the public domain, or (iii)
controlled by Orion or another Entertainment Company directly or through
licenses.
(h) CREDITS. The credits contained in the main and end titles of the A Films
comply in all material respects with all obligations with respect thereto,
including without limitation, contractual obligations to third parties who
rendered services in connection with the A Films and all applicable guild
agreements.
(i) INSURANCE CLAIMS. Except as set forth on SCHEDULE 3.20(I), no insurance
claims have been made and are currently outstanding and unsettled as of the date
of this Agreement on the producer's errors and omissions policies that Orion or
another Entertainment Company or any of its predecessors maintained with respect
to the A Films.
(j) RIGHTS. Except as set forth on SCHEDULE 3.20(J), which Schedule sets
forth any limitations out of the ordinary course with respect to the use of
performers' names and likenesses, editing rights and credit rights and
obligations with respect to the A Films, each relevant Entertainment Company
has, and has the right to grant to its Affiliates, agents, subdistributors and
licensees, the following rights on a non-exclusive basis to the extent
reasonably necessary or desirable to exploit the A Films:
(i) Use of Performers' Names: To disseminate, reproduce, print and
publish the name, likeness and biography of each performer, director,
producer, author and writer who rendered services in or in connection with
the production of each A Film, for the purpose of advertising, promoting and
exploiting such A Film, except that no use may be made so as to indicate or
imply that any such person or performer is endorsing a commercial product or
service; and
(ii) Editing Rights: To make such cuts, alterations, additions and
variations of and in any part of the A Films (including the dubbing-in of
languages) as may be deemed necessary or appropriate by such Entertainment
Company in its sole discretion excluding, however, any right to delete any
logo,
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copyright notice or credit other than such rights which would not adversely
impact the value of each such A Film.
(k) COMPLIANCE WITH SECTION 507. Each Entertainment Company has conformed to
the requirements of Section 507 of the Federal Communications Act of 1934, as it
may be amended or replaced in a more or less restrictive version, concerning
broadcast matter and disclosures required thereunder, insofar as that section
applies to persons furnishing program material for television broadcasting. The
following is an illustration of the parties' understanding of Section 507, but
in case of conflict the terms of Section 507 will control. The Library Films do
not include any matter for which any money, service or other valuable
consideration is directly or indirectly paid, or promised to, or charged or
accepted by Seller or any Entertainment Company or to Seller's knowledge by any
producer or independent contractor connected with the Library Films. As used in
this paragraph, the term "service or other valuable consideration" shall not
include any service or property furnished without charge or at a nominal charge
for use in, or in connection with the Library Films, "unless it is so furnished
in consideration for an identification in a broadcast of any person, product,
service, trademark or brand name beyond an identification which is reasonably
related to the use of such service or property on the broadcast," as such terms
are used in said Section 507. The provisions of this clause shall not apply to
feature motion pictures produced initially and primarily for theater exhibition
to the extent the Federal Communications Commission continues to waive the
requirements of Section 317(b) of the Communications Act with respect to such
motion pictures.
(l) SCHEDULE 3.20(L) sets forth all Participations as of March 31, 1997 with
respect to each A Film.
3.21. FILMS IN PROGRESS.
(a) COSTS. SCHEDULE 3.21(A) sets forth for each Entertainment Company a
complete list of all Films currently in principal photography, post-production
or that have been completed but not delivered (collectively, the "Films In
Progress"), together with (i) a complete summary of all costs and expenses paid
by the relevant Entertainment Company in connection with each Film In Progress
to the date set forth therein, and (ii) Seller's good-faith estimate of the cost
to complete and deliver each Film In Progress.
(b) OWNERSHIP. Except as set forth on SCHEDULE 3.21(B), the relevant
Entertainment Company, or an unaffiliated production company from whom an
Entertainment Company has the right to acquire such rights pursuant to a
Contract disclosed on a schedule to this Agreement (an "Unaffiliated Production
Company"), owns all right, title and interest of every kind and nature,
worldwide, in all media, whether now known or hereafter devised, in and to the
Films In Progress. Except as set forth on SCHEDULE 3.21(B), the Films In
Progress are, or will be when acquired by any Entertainment Company, free and
clear of all Liens other than Permitted Liens and those Liens which are
customarily incurred in connection with production financing.
(c) RATINGS. Except as disclosed in SCHEDULE 3.21(C), each Film In Progress
that is a feature-length motion picture is being produced in color on either
35MM or 70MM film, will be submitted to the MPAA for rating, will be released
theatrically in the United States with a rating that is not more restrictive
than the current rating equivalent to an "R" under the present system or its
equivalent rating under any successor system and is being produced primarily in
the English language.
(d) ELEMENTS. SCHEDULE 3.21(D) identifies all available Elements owned or
controlled by the Entertainment Companies relating to the Films In Progress
listed therein. The Entertainment Companies have laboratory access letters with
respect to those Elements which the Companies do not own. With respect to each
such Film In Progress identified, the Elements identified are sufficient to
produce copies, prints, video products and other reproductions for exploitation
in the theatrical, non-theatrical, television and video and audio markets that
are of such quality as is consistent with past practice of the Entertainment
Companies. SCHEDULE 3.21(D) sets forth the correct identification and location
of each laboratory and other place which holds any of the foregoing Elements
relating to such Films In Progress.
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(e) INSURANCE POLICIES. The relevant Entertainment Company or Unaffiliated
Production Company has in effect errors and omissions insurance coverage
relating to each Film In Progress.
(f) COMPLETION BOND. The relevant Entertainment Company or Unaffiliated
Production Company has in effect a completion bond guaranteeing the completion
and delivery of each Film In Progress according to its terms.
(g) NO VIOLATION OF THIRD PARTY RIGHTS. No Film In Progress, nor any part
thereof, nor any of the literary, dramatic or musical material contained therein
or upon which any such Film In Progress is based, nor the exercise by any
authorized person or entity of any right granted to any of the Entertainment
Companies in connection therewith will violate or infringe upon the trademark,
service mark, tradename, copyright, literary, dramatic, music, artistic,
personal, private, civil, contract or property right or rights of privacy or any
other right, whether tangible or intangible, of any Person.
(h) CLEARANCES. The relevant Entertainment Company or Unaffiliated
Production Company has obtained proper and effective licenses or grants of
authority to use the results and proceeds of the services of performers and
other Persons connected with the production of the Films In Progress to the
extent reasonably necessary or desirable to exercise all rights of such
Entertainment Company therein.
(i) COPYRIGHTS. Good and sufficient copyright notice will be affixed to each
Film In Progress in each case where such affixation is possible. Except as set
forth in SCHEDULE 3.21(I), all screenplay materials relating to each Film In
Progress have been registered with the United States Copyright Office.
(j) MUSIC. Except as set forth in SCHEDULE 3.21(J), all non-dramatic music
rights (so-called "small rights") contained in the Films In Progress are (i)
available by license from ASCAP, BMI or SESAC, Inc., (ii) in the public domain,
or (iii) controlled by Orion or another Entertainment Company directly or
through licenses.
(k) CREDITS. The credits contained in the main and end titles of the Films
In Progress, if any, comply in all material respects with all obligations with
respect thereto, including without limitation, contractual obligations to third
parties who rendered services in connection with the Films In Progress and all
applicable guild agreements.
(l) INSURANCE CLAIMS. Except as set forth on SCHEDULE 3.21(L), no insurance
claims have been made and are currently outstanding and unsettled as of the date
of this Agreement on the producer's errors and omissions policies that Orion or
another Entertainment Company or any of its predecessors maintained with respect
to the Films In Progress.
(m) RIGHTS. Except as set forth in SCHEDULE 3.21(M), which Schedule sets
forth any limitations out of the ordinary course with respect to the use of
performers' names and likenesses, editing rights and credit rights and
obligations with respect to the Films In Progress, each relevant Entertainment
Company has, and has the right to grant to its Affiliates, agents,
subdistributors and licensees the following rights on a non-exclusive basis to
the extent reasonably necessary or desirable to exploit the Films In Progress:
(i) Use of Performers' Names: To disseminate, reproduce, print and
publish the name, likeness and biography of each performer, director,
producer, author and writer who rendered services in or in connection with
the production of each Film In Progress, for the purpose of advertising,
promoting and exploiting such Film In Progress, except that no use may be
made so as to indicate or imply that any such person or performer is
endorsing a commercial product or service; and
(ii) Editing Rights: To make such cuts, alterations, additions and
variations of and in any part of the Films In Progress (including the
dubbing-in of languages) as may be deemed necessary or appropriate by the
relevant Entertainment Company in its sole discretion excluding, however,
any right to delete any logo, copyright notice or credit other than such
rights which would not adversely impact the value of each such Film In
Progress.
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(n) COMPLIANCE WITH SECTION 507. Each Entertainment Company has conformed to
the requirements of Section 507 of the Federal Communications Act of 1934, as it
may be amended or replaced in a more or less restrictive version, concerning
broadcast matter and disclosures required thereunder, insofar as that section
applies to persons furnishing program material for television broadcasting. The
following is an illustration of the parties' understanding of Section 507, but
in case of conflict the terms of Section 507 will control. The Films In Progress
do not include any matter for which any money, service or other valuable
consideration is directly or indirectly paid, or promised to, or charged or
accepted by Seller or any Entertainment Company or to Seller's knowledge by any
producer or independent contractor connected with the Films In Progress. As used
in this paragraph, the term "service or other valuable consideration" shall not
include any service or property furnished without charge or at a nominal charge
for use in, or in connection with the Films In Progress "unless it is so
furnished in consideration for an identification in a broadcast of any person,
product, service, trademark or brand name beyond an identification which is
reasonably related to the use of such service or property on the broadcast," as
such terms are used in said Section 507. The provisions of this clause shall not
apply to feature motion pictures produced initially and primarily for theater
exhibition to the extent the Federal Communications Commission continues to
waive the requirements of Section 317(b) of the Communications Act with respect
to such motion pictures.
(o) SCHEDULE 3.21(O) identifies all Participations as of March 31, 1997
with respect to each Film In Progress.
3.22. DEVELOPMENT PROJECTS. SCHEDULE 3.22 identifies all projects in
development by or on behalf of each Entertainment Company (the "Development
Projects") and all material Contracts relating thereto. The relevant
Entertainment Company owns all right, title and interest in and to such
Development Projects to the extent described therein.
3.23. ADVISORY FEES. Except for Donaldson, Lufkin & Jenrette Securities
Corporation (whose fees and expenses will be paid by Seller), there is no
investment banker, broker, finder or other intermediary or advisor that has been
retained by or is authorized to act on behalf of Seller or any Entertainment
Company who might be entitled to any fee, commission or reimbursement of
expenses from Buyer or any of its Affiliates or any of their respective
Associates or any Entertainment Company upon consummation of the transactions
contemplated by this Agreement.
3.24. ENVIRONMENTAL COMPLIANCE.
(a) Except as disclosed in SCHEDULE 3.24(A) the Entertainment Companies
have obtained all approvals, authorizations, certificates, consents,
licenses, orders and permits or other similar authorizations of all
Governmental Authorities, or from any other Person, that are required under
any Environmental Law. Schedule 3.24(a) also sets forth all permits,
licenses and other authorizations issued under any Environmental Law to any
Entertainment Company.
(b) Except as disclosed in SCHEDULE 3.24(B), the Entertainment Companies
are in compliance in all material respects with all terms and conditions of
all approvals, authorizations, certificates, consents, licenses, orders and
permits or other similar authorizations of all Governmental Authorities (and
all other Persons) required under all Environmental Laws and are in
compliance in all material respects with all other limitations,
restrictions, conditions, standards, requirements, schedules and timetables
required or imposed under all Environmental Laws.
(c) Except as disclosed in SCHEDULE 3.24(C), there are no past or
present events, conditions, circumstances, activities, practices, incidents,
actions, omissions or plans relating to or in any way affecting any
Entertainment Company that could reasonably be expected to interfere with or
prevent continued compliance with any Environmental Law by any Entertainment
Company or Buyer after the Closing, or that may give rise to any
Environmental Liability, or otherwise form the basis of any claim, action,
demand, suit, Proceeding, hearing, study or investigation (i) under any
Environmental Law, (ii) based on or related to the manufacture, processing,
distribution, use, treatment, storage
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(including without limitation underground storage tanks), disposal,
transport or handling, or the emission, discharge, release or threatened
release of any Hazardous Substance, or (iii) resulting from exposure to
workplace hazards.
3.25. INSURANCE. SCHEDULE 3.25 sets forth a complete and correct list of
all insurance policies of any kind or nature whatsoever currently in force or in
force at any time subsequent to January 1, 1995 with respect to the
Entertainment Companies (the "Insurance Policies"), including without limitation
all "occurrence based" liability policies, all errors and omissions policies and
all production package policies. For each Insurance Policy, SCHEDULE 3.25
indicates the type of coverage, the name of the insureds, the insurer, the
expiration date, the period to which it relates, the deductibles and loss
retention amounts and the amounts of coverage. The Insurance Policies described
as being material on SCHEDULE 3.25 and currently in effect are in full force and
effect and are valid, outstanding and enforceable, and all premiums due thereon
have been paid. Except as set forth on SCHEDULE 3.25, no insurance claims of
more than Fifty Thousand Dollars ($50,000) have been made and are currently
outstanding and unsettled.
3.26. TAX MATTERS.
(a) Except as set forth on SCHEDULE 3.26, Seller and each Entertainment
Company (i) have accurately prepared and timely filed or caused to be filed with
the appropriate Tax authorities all material Tax Returns required to have been
filed by them under applicable law, and (ii) have paid or caused to be paid to
the appropriate Tax authorities all material Taxes required to have been paid by
them. No Tax liens or assessments have been filed by any Tax authority against
the Entertainment Companies or any of their properties or assets.
(b) The Entertainment Companies are not and have not been required to be
included in any state, local or foreign combined, unitary or consolidated Tax
Return filed by Seller or any of Seller's Subsidiaries (other than the
Entertainment Companies).
3.27. SEC DOCUMENTS. Seller has made available to Buyer a true and
complete copy of each form, report, schedule, registration statement and
definitive proxy statement filed by Seller with the SEC since January 1, 1995
(as such documents have since the time of their filing been amended or
supplemented, the "SEC Documents"), which constitute all of the documents (other
than preliminary material) that Seller was required to file with the SEC since
such date.
3.28. DISCLOSURE. The Statement of Assumptions, taken as a whole, does not
contain an untrue statement of a material fact. None of (x) this Agreement and
the schedules (other than the Statement of Assumptions) delivered pursuant
hereto or certificates or other documents delivered to Buyer by or on behalf of
Seller or any Entertainment Company pursuant hereto, (y) any of the SEC
Documents or (z) any other document or written statement or other written
information which has been, or at any time prior to the Closing Date will be,
provided to Buyer by or on behalf of Seller or any Entertainment Company in
connection with this Agreement or the transactions contemplated hereby (taken as
a whole, with respect to such documents, statements or other information
relating to the same subject matter) contains or will contain an untrue
statement of a material fact or omits or will omit any information or statement
of a material fact necessary in order to make the information or statements
herein or therein not misleading. After reasonable investigation, including,
without limitation, consultation with the appropriate directors, officers and
employees of Seller and the Entertainment Companies, there is no fact or
condition within the knowledge of Seller which materially and adversely affects
the assets, liabilities, business, operations or financial condition of the
Entertainment Companies, taken as a whole, which has not been set forth in this
Agreement or any schedule hereto or certificate or other document delivered in
accordance with the terms hereof or any other written statement or other
document delivered to Buyer by or on behalf of Seller or any Entertainment
Company.
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3.29. FINANCIAL STATEMENTS OF LANDMARK.
(a) SCHEDULE 3.29(A) sets forth true and complete copies of the unaudited
balance sheet and related statement of operations for Landmark for the year
ended December 31, 1996 and the three-month period ended March 31, 1997 (the
"Landmark Financial Statements"). The Landmark Financial Statements have been
prepared based on the books and records of Landmark in accordance with GAAP and
its normal accounting practices, consistent with past practice, and present
fairly the financial condition and results of operations of Landmark as of the
date and for the periods indicated, subject to normal year-end adjustments. (b)
Since December 31, 1996, no Entertainment Company has transferred any asset or
property to Landmark (whether in payment of indebtedness, as a contribution to
capital or otherwise) except for (i) transfers of cash to Landmark in the
ordinary course of business in an aggregate amount (net of cash returned to the
Entertainment Companies) not exceeding Three Million Dollars ($3,000,000) and
(ii) transfer of those assets identified in SCHEDULE 3.29(B).
3.30. NO CONTRACT WITH LANDMARK. Except as set forth on SCHEDULE 3.30,
none of the Entertainment Companies is a party to or is bound by any Contract
with Landmark other than exhibition contracts with Orion negotiated on an
arms-length film-by-film basis relating to Films the theatrical distribution
rights to which are owned or controlled by Orion.
3.31. BOARD RECOMMENDATIONS. By the unanimous vote of the directors
present at a meeting of Seller's Board of Directors (which meeting was duly
called and held and at which a quorum was present), the Board of Directors of
Seller (a) duly and validly approved this Agreement and the transactions
contemplated hereby, and (b) resolved to recommend approval and adoption of this
Agreement and the transactions contemplated hereby by the stockholders of
Seller. Seller's financial advisor, Donaldson, Lufkin & Jenrette Securities
Corporation, has delivered to Seller's Board of Directors an oral opinion on the
date hereof (and has committed to deliver a written opinion not later than ten
(10) days after the date hereof) to the effect that on such date, the Purchase
Price is fair to Seller's stockholders from a financial point of view.
3.32. BANKRUPTCY.
(a) On or about November 5, 1992, all property of the bankruptcy estate of
each Entertainment Company that was a debtor in the Bankruptcy Cases revested in
such Entertainment Company.
(b) The use, sale or lease of property of each Entertainment Company,
whether or not such use, sale or lease is in the ordinary course of its business
and consistent with past practice, does not require any notice to or approval of
the Bankruptcy Court, the United States Trustee or any committee of creditors or
other representative of creditors appointed in the Bankruptcy Cases or pursuant
to the Confirmation Documents.
(c) Except for the claims set forth on SCHEDULE 3.32(C), all claims of the
creditors of each Entertainment Company that arose prior to the effective date
of the Plan of Reorganization (as defined therein) have been paid in full or
otherwise fully satisfied in accordance with the terms of the Confirmation
Documents.
ARTICLE IV
REPRESENTATIONS AND WARRANTIES OF BUYER
As an inducement to Seller to enter into this Agreement and to consummate
the transactions contemplated herein, Buyer hereby represents and warrants to
Seller that:
4.01. CORPORATE EXISTENCE AND POWER. Buyer is a corporation duly
incorporated, validly existing and in good standing under the laws of the State
of Delaware, and has all corporate power to carry out its business as now
conducted. Buyer is duly qualified to do business as a foreign corporation in
each jurisdiction where the character of the property owned or leased by it or
the nature of its activities makes
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such qualification necessary to carry on its business as now conducted, except
for those jurisdictions where the failure to be so qualified has not been, and
could not reasonably be expected to be, material.
4.02. CORPORATE AUTHORIZATION. The execution, delivery and performance by
Buyer of this Agreement and the consummation by Buyer of the transactions
contemplated hereby are within its corporate powers and have been duly
authorized by all necessary corporate action on its part. This Agreement has
been duly and validly executed by Buyer and constitutes the legal, valid and
binding agreement thereof, enforceable in accordance with its terms, except as
may be limited by applicable bankruptcy, insolvency, reorganization, moratorium
or similar laws affecting creditors' rights generally.
4.03. GOVERNMENTAL AUTHORIZATION. The execution, delivery and performance by
Buyer of this Agreement require no action by, consent or approval of, or filing
with, any Governmental Authority other than (i) compliance with any applicable
requirements of the HSR Act or (ii) any actions, consents, approvals or filings
otherwise expressly referred to in this Agreement.
4.04. NON-CONTRAVENTION. The execution, delivery and performance by Buyer of
this Agreement, and consummation of the transactions contemplated hereby, do not
and will not (a) contravene or conflict with the articles or certificate of
incorporation or bylaws of Buyer, true and correct copies of all of which have
been delivered to Seller by Buyer; (b) contravene or conflict with or constitute
a violation of any provision of any material Applicable Law binding upon or
applicable to Buyer; (c) constitute a default under any material contract,
agreement or understanding to which Buyer is a party or any material
authorization, license or permit of any Governmental Authority; or (d) result in
the creation or imposition of any Lien on the assets of Buyer.
4.05. ADVISORY FEES. Except for J.P. Morgan & Co., Inc. (whose fees and
expenses will be paid by Buyer), there is no investment banker, broker, finder
or other intermediary or advisor that has been retained by or is authorized to
act on behalf of Buyer who might be entitled to any fee, commission or
reimbursement of expenses from Seller or any of their respective Affiliates or
Associates upon consummation of the transactions contemplated by this Agreement.
4.06. LITIGATION. There is no Proceeding pending against, or to the
knowledge of Buyer, threatened against or affecting, Buyer before any court or
arbitrators or any governmental body, agency or official that in any matter
challenges or seeks to prevent, enjoin, alter or materially delay the
transactions contemplated by this Agreement.
4.07. PURCHASE FOR INVESTMENT. Buyer will acquire the Shares solely for its
own account for investment and not with a view toward any resale or distribution
thereof. Buyer agrees that the Shares may not be sold, transferred, offered for
sale, pledged, hypothecated or otherwise disposed of without registration under
the Securities Act of 1993, as amended, except pursuant to an exemption from
such registration available under such Act, and without compliance with foreign
securities laws, in each case, to the extent applicable. Buyer has such
knowledge and experience in financial and business matters that it is capable of
evaluating the merits and risks of its purchase of the Shares. Buyer confirms
that Seller has made available to Buyer the opportunity to ask questions of the
officers and management employees of the Entertainment Companies and to acquire
additional information about the business and financial condition of the
Entertainment Companies.
4.08. OWNERSHIP OF MGM. Buyer owns all of the issued and outstanding capital
stock of Metro-Goldwyn-Mayer Inc., a Delaware corporation.
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ARTICLE V
COVENANTS OF SELLER AND ORION
Each of Seller and Orion hereby agree that:
5.01. CONDUCT OF THE BUSINESS. From the date hereof until the Closing Date,
it shall cause each Entertainment Company to conduct its business operations in
the ordinary course of business consistent with past practice. Without limiting
the generality of this Section 5.01, from the date hereof until the Closing
Date:
(a) Seller and Orion, as applicable, will:
(i) (A) cause each Entertainment Company to maintain its assets in
the ordinary course of business consistent with past practice in good
operating order and condition, reasonable wear and tear, damage by fire
and other casualty excepted, other than through the transfer of all of
the issued and outstanding capital stock of Landmark to an Affiliate of
Seller that is not an Entertainment Company, (B) promptly repair, restore
or replace assets in the ordinary course of business consistent with past
practice, and (C) upon any damage, destruction or loss to any of its
assets, apply any and all insurance proceeds received with respect
thereto to the prompt repair, replacement and restoration thereof to the
condition of its assets before such event;
(ii) cause each of the Entertainment Companies to comply with all
Applicable Laws;
(iii) file all foreign, Federal, state and local Tax Returns required
to be filed and make timely payment of all applicable Taxes when due;
(iv) use reasonable commercial efforts to obtain, prior to the
Closing Date, all Required Consents;
(v) cause each of the Entertainment Companies to take all reasonable
actions necessary to be in compliance with, and to maintain the
effectiveness of, all material Permits;
(vi) promptly notify Buyer in writing of any action, event, condition
or circumstance, or group of actions, events, conditions or
circumstances, that results in, or could reasonably be expected to result
in, a Material Adverse Effect, other than changes in general economic
conditions;
(vii) promptly notify Buyer in writing of the commencement of any
Proceeding by or against Seller which relates to this Agreement or any of
the Entertainment Companies or by or against any Entertainment Company,
or Seller becoming aware of any threat, claim, action, suit, inquiry,
proceeding, notice of violation, demand letter, subpoena, government
audit or disallowance that could reasonably be expected to result in such
a Proceeding;
(viii) promptly notify Buyer in writing of the occurrence of any
breach by Seller of any representation or warranty, or by Seller or Orion
of any covenant or agreement, contained in this Agreement; and
(ix) cause each Entertainment Company to continue to make
expenditures as required by and in accordance with the budget for each
Film In Progress including, without limitation, all such expenditures
required for prints and advertising ("P&A"), as contained in SCHEDULE
5.01(A)(IX).
(b) without Buyer's prior written consent, Seller and Orion will not
permit any Entertainment Company to:
(i) purchase or otherwise acquire assets from any other Person other
than in the ordinary course of business consistent with past practice;
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(ii) sell, assign, lease, license, transfer or otherwise dispose of,
or mortgage, pledge or encumber any of its assets other than in the
ordinary course of business consistent with past practice or pursuant to
existing obligations of Seller as set forth in Schedule 3.11(a);
(iii) make or commit to make any expenditures of amounts in excess of
the amounts set forth on SCHEDULE 5.01(A)(IX) with respect to each Film
In Progress including the budgeted expenditures for P&A; PROVIDED,
HOWEVER, that the amount expended for P&A may be increased above that
budgeted in the event Buyer provides all of such excess amounts;
(iv) enter any agreement or arrangement that requires or allows
payment, acceleration of payment or incurrence of Liabilities, or the
rendering of services by any Entertainment Company outside the ordinary
course of business or unless expressly contemplated by the terms of this
Agreement;
(v) enter into, amend or modify in any material respect or terminate
any Scheduled Contract or any other Contract entered into by any
Entertainment Company after the date hereof which, if in existence on the
date hereof, would be required to be set forth in SCHEDULE 3.14(A) as a
Scheduled Contract (each, a "Subsequent Material Contract");
(vi) except in the ordinary course of business, waive, cancel or take
any other action materially impairing any of its rights;
(vii) make or commit to make any capital expenditure (other than
capital expenditures expressly required under any Scheduled Contract) if,
after giving effect thereto, the aggregate of capital expenditures made
or committed to be made after the date of this Agreement would exceed Two
Hundred Fifty Thousand Dollars ($250,000);
(viii) enter into or commit or propose to enter into any Subsequent
Material Contract;
(ix) (A) create, incur, assume, or guarantee any indebtedness for
borrowed money other than drawdowns under the Existing Orion Credit
Facility or the Union Bank Loan or (B) incur any Liability relating to a
documentary or standby letter of credit, other than in each such case
referred to in this clause (ix) in the ordinary course of business where
the aggregate dollar amount of all of the foregoing by the Entertainment
Companies does not exceed Fifty Thousand Dollars ($50,000);
(x) (A) increase the rate or terms of compensation payable or to
become payable to its directors, officers or employees except in the
ordinary course of business consistent with past practice, (B) pay or
agree to pay any pension, retirement allowance or other employee benefit
not provided for by any Employee Benefit Plan, Benefit Arrangement or
Employment Agreement set forth in the schedules hereto, (C) commit itself
to any additional pension, profit sharing, bonus, incentive, deferred
compensation, stock purchase, stock option, stock appreciation right,
group insurance, severance pay, continuation pay, termination pay,
retirement or other employee benefit plan, agreement or arrangement, or
increase the rate or terms of any Employee Benefit Plan or Benefit
Arrangement, (D) enter into any employment agreement with or for the
benefit of any Person, or (E) increase the rate of compensation under or
otherwise change the terms of any Employment Agreement identified in
SCHEDULE 3.17(A);
(xi) make any change in its accounting methods or in the manner of
keeping its books and records or any change in its current practices with
respect to inventory, sales, receivables, payables or accrued expenses,
except as required by GAAP;
(xii) declare or pay any dividend or make any distribution in respect
of any of its capital stock, options, warrants, rights of first refusal
or other rights to purchase capital stock of any Entertainment Company
or, directly or indirectly, redeem, purchase or otherwise acquire any of
its Equity Securities or the Equity Securities of any of its Affiliates
or make any other payments
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of any kind to the holders of any of its Equity Securities in respect
thereof or to the holders of any Equity Securities of any of its
Affiliates in respect thereof, or enter into any commitment agreement to
do any of the foregoing other than the dividend or distribution of the
capital stock of Landmark;
(xiii) amend its charter or Bylaws;
(xiv) organize any new Subsidiary or acquire any capital stock or
other equity securities or ownership interest of any corporation or
business entity;
(xv) pay, discharge or satisfy any claim, liability or obligation
(absolute, accrued, contingent or otherwise), other than the payment,
discharge or satisfaction for fair and equivalent value in the ordinary
course of business consistent with past practice of liabilities or
obligations reflected or reserved against in the 1996 Balance Sheet or
incurred in the ordinary course of business since the date of the 1996
Balance Sheet;
(xvi) (A) pay, discharge or satisfy any claim, liability or
obligation (absolute, accrued, contingent or otherwise) owed to any
Entertainment Company by Seller or any of its Affiliates (other than any
Entertainment Company) or owed to Seller or any of its Affiliates (other
than any Entertainment Company) by any Entertainment Company or (B)
prepay any Debt (other than payments of revolving loans made under the
Existing Orion Credit Facility);
(xvii) write down the value of any inventory or write-off as
uncollectible any notes or accounts receivable, except for write-downs
and write-offs in accordance with GAAP and in the ordinary course of
business consistent with past practice which are not material to the
Entertainment Companies, taken as a whole;
(xviii) dispose of or permit to lapse any rights to the use of any
Intellectual Property Rights or dispose of or disclose any Intellectual
Property Rights not a matter of public knowledge other than in the
ordinary course of business consistent with past practice and which
collectively are not material to the business of the Entertainment
Companies, taken as a whole; or
(xix) merge or consolidate with any other corporation, acquire
control of all or substantially all of the assets of any other
corporation or business entity, or take any steps incident to, or in
furtherance of, any of such actions, whether by entering into an
agreement or otherwise.
5.02. ACCESS TO INFORMATION. Subject to compliance with Applicable Laws,
from the date of this Agreement until Closing, Seller and Orion will promptly:
(a) give Buyer and its counsel, financial advisors, auditors and other
authorized representatives reasonable access to the offices, properties, books
and records of each Entertainment Company upon reasonable prior notice in order
to conduct its due diligence investigation of the Entertainment Companies, (b)
furnish to Buyer, its counsel, financial advisors, auditors and other authorized
representatives such information relating to the Entertainment Companies as
Buyer may reasonably request in order to conduct its due diligence investigation
of the Entertainment Companies, and (c) instruct the directors, officers,
employees, counsel, auditors and financial advisors of each Entertainment
Company to cooperate with Buyer and its counsel, financial advisors, auditors
and other authorized representatives in their due diligence investigation of the
Entertainment Companies and their preparation of all necessary certificates or
similar documents required to be prepared and delivered by Buyer to Seller
pursuant to this Agreement.
5.03. COMPLIANCE WITH TERMS OF REQUIRED GOVERNMENTAL APPROVALS AND REQUIRED
CONTRACTUAL CONSENTS. On and after the Closing Date, Seller shall comply at its
own expense with all conditions and requirements set forth in (i) all Required
Governmental Approvals as necessary to keep the same in full force and effect
assuming continued compliance with the terms thereof by Buyer and (ii) all
Required Contractual Consents and Essential Consents as necessary to keep the
same effective and enforceable against the
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Persons giving such Required Contractual Consents and Essential Consents
assuming continued compliance with the terms thereof by Buyer.
5.04. MAINTENANCE OF INSURANCE POLICIES. On and after the date hereof
(including after the Closing Date), neither Seller nor Orion shall take or fail
to take or permit any Entertainment Company to fail to take any action if such
action or inaction, as the case may be, would adversely affect the applicability
of any insurance in effect on the date hereof that covers all or any part of the
assets of any Entertainment Company. Notwithstanding the foregoing, Seller shall
not have any obligation to make any monetary payment to maintain the
effectiveness of any such insurance policy after the Closing Date.
5.05. CONFIDENTIALITY.
(a) Seller and Orion will, and will cause their representatives to,
treat any data and information obtained with respect to Buyer or any of its
Affiliates from any representative, officer, director, or employee of Buyer,
or from any books or records of Buyer in connection with this Agreement,
confidentially and with commercially reasonable care and discretion, and
will not disclose any such information to third parties; PROVIDED, HOWEVER,
that the foregoing shall not apply to (i) information in the public domain
or that becomes public through disclosure by any party other than Seller or
any Affiliate or representative of Seller or any such Affiliate, so long as
such other party is not in breach of a confidentiality obligation, (ii)
information that may be required to be disclosed by Applicable Law or (iii)
information required to be disclosed to obtain any Required Consents.
(b) In the event that the Closing fails to take place and this Agreement
is terminated, Seller and Orion, upon the written request of Buyer, will,
and will cause their respective representatives to, promptly deliver to
Buyer any and all documents or other materials furnished by Buyer or any of
its Affiliates to Seller or Orion in connection with this Agreement without
retaining any copy thereof. In the event of such request, all other
documents, whether analyses, compilations or studies, that contain or
otherwise reflect the information furnished by Buyer to Seller or Orion,
shall be destroyed by Seller or Orion or shall be returned to Buyer, and
Seller or Orion, as the case may be, shall confirm to Buyer in writing that
all such materials have been returned or destroyed. No failure or delay by
Buyer in exercising any right, power or privilege hereunder shall operate as
a waiver thereof, nor shall any single or partial exercise thereof preclude
any other or further exercise thereof or the exercise of any right, power or
privilege hereunder.
(c) From and after the Closing, Seller will, and will cause its
Subsidiaries and the representatives of Seller and its Subsidiaries to,
treat any data and information obtained with respect to any Entertainment
Company from any representative, officer, director, or employee of Seller or
any Entertainment Company, or from any books or records of Seller or any
Entertainment Company (whether or not obtained in connection with this
Agreement) confidentially and with commercially reasonable care and
discretion, and will not disclose any such information to third parties;
PROVIDED, HOWEVER, that the foregoing shall not apply to (i) information in
the public domain or that becomes public through disclosure by any party
other than Seller or any Affiliate of Seller or representative of Seller or
any such Affiliate, so long as such other party is not in breach of a
confidentiality obligation, (ii) information that may be required to be
disclosed by the rules of the American Stock Exchange, Inc. or Applicable
Law, or (iii) information required to be disclosed to obtain any Required
Consents. To the extent permitted by the terms of any confidentiality
agreements to which Seller or any of its Affiliates (other than any
Entertainment Company) is a party relating to any of the Entertainment
Companies or their respective businesses, Seller will assign to Buyer at
Closing all right, title and interest of Seller under such confidentiality
agreements. To the extent that Seller or any such Affiliate is prohibited
from assigning any of its right, title and interest under any such
confidentiality agreement by the terms thereof, Seller or such Affiliate
shall use its reasonable commercial efforts to enforce its rights and
remedies thereunder, and Buyer agrees to advance Seller or such Affiliate
for all actual out-of-pocket expenses incurred in connection with or arising
out of such enforcement (including, without
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limitation, reasonable attorneys' fees and costs), if Buyer shall provide
Seller with an indemnification agreement reasonably acceptable to Seller
that indemnifies Seller from and against all counterclaims asserted or other
losses incurred by Seller as a result of such attempted enforcement of
rights or assertion of remedies thereunder.
5.06. SPECIFIC PERFORMANCE. The parties hereto recognize and agree that in
the event of a breach by Seller or Orion of this Article V, money damages would
not be an adequate remedy to Buyer or its Affiliates for such breach and, even
if money damages were adequate, it would be impossible to ascertain or measure
with any degree of accuracy the damages sustained by Buyer or its Affiliates
therefrom. Accordingly, if there should be a breach or threatened breach by
Seller or Orion of provisions of this Article V, Buyer and its Affiliates shall
be entitled to an injunction restraining Seller and Orion from any breach
without showing or proving actual damage sustained by Buyer or its Affiliates,
as the case may be. Nothing in the preceding sentence shall limit or otherwise
affect any remedies that Buyer may otherwise have under Applicable Law.
5.07. BANKRUPTCY CASES. Between the date hereof and the Closing Date, Seller
and Orion shall use commercially reasonable efforts to have the Bankruptcy Cases
closed in conformity with Applicable Law (it being understood that this covenant
shall not be a condition to Closing).
5.08. NO SOLICITATIONS. From and after the date hereof, Seller, without the
prior written consent of Buyer, will not, and will not authorize any of its or
any of its Subsidiaries' officers, employees, directors, stockholders or other
representatives to, directly or indirectly, solicit, initiate or encourage
(including by way of furnishing information) or take any other action to
facilitate knowingly any inquiries or the making of any proposal that
constitutes or could be reasonably expected to lead to an Alternative Proposal
from any Person, or engage in any discussions or negotiations relating thereto
or accept any Alternative Proposal or make or authorize any statement,
recommendation or solicitation in support of any Alternative Proposal; PROVIDED,
HOWEVER, that notwithstanding any other provision hereof, Seller may (a) at any
time prior to the time Seller's stockholders shall have voted to approve this
Agreement and the transactions contemplated hereby, engage in discussions or
negotiations with a third party who (without any solicitation, initiation,
encouragement, discussion or negotiation, directly or indirectly, by or with
Seller or any of its Subsidiaries or any officer, employee, director,
stockholder or other representative of Seller or any of its Subsidiaries after
the date hereof) seeks to initiate such discussions or negotiations and may
furnish such third party information concerning the Entertainment Companies if,
and only to the extent that, (i) (x) such third party has first made, after the
date hereof, an Alternative Proposal in writing the terms of which reflect a
superior transaction than the transactions contemplated by this Agreement and
has demonstrated that the funds necessary for the Alternative Proposal are
reasonably likely to be available (as determined in good faith in each case by
Seller's Board of Directors after consultation with its financial advisors) and
(y) Seller's Board of Directors shall have determined in good faith, on the
basis of advice of Paul, Weiss, Rifkind, Wharton & Garrison or other outside
counsel of similar stature, that such action is necessary for the Board of
Directors to comply with its fiduciary duties to stockholders under Applicable
Law and (ii) prior to furnishing information to or entering into discussions or
negotiations with such Person, Seller receives from such Person an executed
confidentiality agreement in reasonably customary form and containing terms not
in the aggregate materially more favorable to such Person than the terms
contained in Section 6.02 or in any confidentiality agreement previously
executed by Seller and Buyer or any of its Subsidiaries; or (b) comply with Rule
14e-2 promulgated under the Securities and Exchange Act of 1934 with regard to a
tender or exchange offer. Seller shall immediately cease and terminate any
existing solicitation, initiation, engagement, activity, discussion or
negotiation with any Persons conducted heretofore by Seller or any officer,
employee, director, stockholder or other representative of Seller or any of its
Subsidiaries with respect to the foregoing. Seller shall not release any third
party from, or waive any provision of, any standstill agreement to which it is a
party or any confidentiality agreement between it and another Person who has
made, or who may reasonably be considered likely to make, an Alternative
Proposal, unless its Board of Directors shall determine in good faith, on the
basis of
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the advice of Paul, Weiss, Rifkind, Wharton & Garrison or other outside counsel
of similar stature, that such action is necessary for the Board of Directors to
comply with its fiduciary duties to stockholders under Applicable Law. Seller
shall notify Buyer orally and in writing of any such inquiries (that are or
appear to be serious or legitimate), offers or proposals (including the terms
and conditions of any such offer or proposal, the identity of the Person making
it and a copy of any written Alternative Proposal), as promptly as practicable
and in any event within forty-eight (48) hours after the receipt thereof, shall
keep Buyer informed of the status and details of any such inquiry, offer or
proposal, and shall give Buyer five (5) days advance written notice of any
agreement to be entered into with, or any information to be supplied to, any
Person making such inquiry, offer or proposal.
5.09. TRANSFER OF ASSETS. Between the date hereof and the Closing Date,
neither Orion nor any other Entertainment Company will transfer to Landmark any
assets of Orion or any other Entertainment Company other than (a) transfers of
cash to Landmark in the ordinary course of business consistent with past
practice in an aggregate amount (net of cash returned to the Entertainment
Companies) not exceeding Five Million Dollars ($5,000,000) as long as all such
amounts are funded from the Existing Orion Credit Facility (and Seller shall
provide Buyer with reasonably satisfactory evidence of such funding upon Buyer's
request) and (b) transfer of those assets identified in SCHEDULE 3.29(B).
Immediately prior to the Closing, Seller and Orion will cause (i) Landmark to
offset against any amounts owing by Landmark to any Entertainment Company any
amounts owed by Landmark to such Entertainment Company (other than Film rentals
payable by Landmark with respect to the theatrical exhibition of Films ("Film
Rentals")), and (ii) any balance owed to Landmark by any Entertainment Company
shall be forgiven and any balance owed by Landmark to any Entertainment Company
shall be contributed to the capital of Landmark. Since December 31, 1996,
Landmark has paid, and between the date hereof and the Closing Date Landmark
will pay, Film Rentals only in the ordinary course of business consistent with
past practice.
5.10. USE OF TRADE NAMES. From and after the Closing, neither Seller nor any
Affiliate of Seller shall use the tradename of any Entertainment Company in the
conduct of Seller's or such Affiliate's business without Buyer's prior written
consent.
ARTICLE VI
COVENANTS OF BUYER
6.01. COMPLIANCE WITH TERMS OF REQUIRED GOVERNMENTAL APPROVALS AND REQUIRED
CONTRACTUAL CONSENTS. On and after the Closing Date, Buyer shall comply at its
own expense with all conditions and requirements set forth in (i) all Required
Governmental Approvals as necessary to keep the same in full force and effect
assuming continued compliance with the terms thereof by Seller and (ii) all
Required Contractual Consents as necessary to keep the same effective and
enforceable against the Persons giving such Required Contractual Consents
assuming continued compliance with the terms thereof by Seller.
6.02. CONFIDENTIALITY.
(a) Buyer will, and will cause its representatives to, treat any data and
information obtained with respect to Seller from any representative, officer,
director or employee of Seller, or from any books or records of Seller in
connection with this Agreement, confidentially and with commercially reasonable
care and discretion, and will not disclose any such information to third
parties; PROVIDED, HOWEVER, that the foregoing shall not apply to (i)
information in the public domain or that becomes public through disclosure by
any party other than Buyer, or its Affiliates or representatives, so long as
such other party is not in breach of a confidentiality obligation, (ii)
information that may be required to be disclosed by Applicable Law, (iii)
information required to be disclosed to obtain any Required Consents, or (iv)
any information that is disclosed by Buyer or its Affiliates to any of their
actual or prospective lenders or investors in connection with financing the
transactions contemplated by this Agreement.
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(b) In the event that the Closing fails to take place and this Agreement is
terminated, Buyer, upon the written request of Seller, will, and will cause its
representatives to, promptly deliver to Seller any and all documents or other
materials furnished by Seller to Buyer in connection with this Agreement without
retaining any copy thereof and without using any confidential information of
Seller to solicit any customers of Seller. In the event of such request, all
other documents, whether analyses, compilations or studies, that contain or
otherwise reflect the information furnished by Seller to Buyer, shall be
destroyed by Buyer or shall be returned to Seller, and Buyer shall confirm to
Seller in writing that all such materials have been returned or destroyed. No
failure or delay by Seller in exercising any right, power or privilege hereunder
shall operate as a waiver thereof, nor shall any single or partial exercise
thereof preclude any other or further exercise thereof or the exercise of any
right, power or privilege hereunder.
6.03. SPECIFIC PERFORMANCE. The parties hereto recognize and agree that in
the event of a breach by Buyer of this Article VI, money damages would not be an
adequate remedy to Seller for such breach and, even if money damages were
adequate, it would be impossible to ascertain or measure with any degree of
accuracy the damages sustained by Seller therefrom. Accordingly, if there should
be a breach or threatened breach by Buyer of provisions of this Article VI,
Seller shall be entitled to an injunction restraining Buyer from any breach
without showing or proving actual damage sustained by Seller. Nothing in the
preceding sentence shall limit or otherwise affect any remedies that Seller may
otherwise have under Applicable Law.
6.04. USE OF METROMEDIA NAME. Neither Buyer nor any Affiliate of Buyer
shall use the "Metromedia" tradename in the conduct of its business after the
Closing without Seller's prior written consent.
6.05. BANK WAIVERS. Buyer shall use reasonable commercial efforts to
obtain the requisite consents of the lenders under the MGM Credit Facility.
ARTICLE VII
COVENANTS OF ALL PARTIES
7.01. FURTHER ASSURANCES. Subject to the terms and conditions of this
Agreement, each party will use all reasonable efforts to take, or cause to be
taken, all actions and to do, or cause to be done, all things necessary or
reasonably desirable under Applicable Law to consummate the transactions
contemplated by this Agreement. Buyer and Seller agree to execute and deliver
such other documents, certificates, agreements and other writings and to take
such other actions as may be reasonably necessary or desirable in order to
consummate or implement expeditiously the transactions contemplated by this
Agreement.
7.02. CERTAIN FILINGS. The parties hereto shall cooperate with one another
in determining whether any action by or in respect of, or filing with, any
Governmental Authority is required or reasonably appropriate, or any action,
consent, approval or waiver from any party to any Contract is required or
reasonably appropriate, in connection with the consummation of the transactions
contemplated by this Agreement. Subject to the terms and conditions of this
Agreement, in taking such actions or making any such filings, the parties hereto
shall furnish information required in connection therewith and seek timely to
obtain any such actions, consents, approvals or waivers. Without limiting the
foregoing, the parties hereto shall each promptly complete and file all reports
and forms, and respond to all requests or further requests for additional
information, if any, as may be required or authorized under the HSR Act.
7.03. PUBLIC ANNOUNCEMENTS. Up to (and including) the Closing Date, each
party agrees that, without the consent of the other party, it will not, except
as may be required by the rules of the American Stock Exchange, Inc. or
Applicable Law, issue any press release or make any public statement with
respect to this Agreement or the transactions contemplated hereby. For a period
of ten (10) days after the Closing Date, the parties agree to consult with each
other before issuing any press release or making any public statement with
respect to this Agreement or the transactions contemplated hereby, and, except
as may be required by the rules of the American Stock Exchange, Inc. or
Applicable Law, will not issue any such
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press release or public statement prior to such consultation. Neither Seller nor
any officer, employee, director, stockholder or other representative shall, at
any time from and after the Closing, issue any press release or make any public
statement that is critical, disparaging or otherwise could reasonably be
interpreted as being negative with respect to any of the Entertainment Companies
or their respective businesses or financial condition or officers, employees or
directors.
7.04. ADMINISTRATION OF ACCOUNTS. All payments and reimbursements made in
the ordinary course by any third party in the name of or to Seller or any
Affiliate thereof in connection with or arising out of the business of any
Entertainment Company shall be held by Seller or such Affiliate in trust for the
benefit of the relevant Entertainment Company and, immediately upon receipt by
Seller or such Affiliate of any such payment or reimbursement, Seller shall pay,
or cause to be paid, over to the relevant Entertainment Company the amount of
such payment or reimbursement without right of set off.
7.05. SPECIFIC PERFORMANCE. The parties hereto recognize and agree that in
the event of a breach by one party hereto of this Article VII, money damages
would not be an adequate remedy to the other party for such breach and, even if
money damages were adequate, it would be impossible to ascertain or measure with
any degree of accuracy the damages sustained by the non-breaching party
therefrom. Accordingly, if there should be a breach or threatened breach by one
party of provisions of this Article VII, the non-breaching party shall be
entitled to an injunction restraining the breaching party from any breach
without showing or proving actual damage sustained by the non-breaching party.
7.06. RIGHT OF FIRST NEGOTIATION. For a period of five (5) years following
consummation of the Closing, Buyer will afford Seller a right of first
negotiation to obtain the right to distribute by wired or wireless cable, in the
territories noted on SCHEDULE 7.06, all Films owned by Buyer or any of its
Subsidiaries, all Library Films and all Films hereafter produced by Buyer or any
of its Subsidiaries, including without limitation, the Entertainment Companies,
to the extent Buyer owns such rights in the territories specified and subject to
any existing licenses or other agreements to which Buyer or any of its
Subsidiaries is a party or by which Buyer or any of its Subsidiaries is bound.
In the event Buyer elects to dispose of any rights covered by the first
negotiation described herein to any third party, Buyer and Seller shall
negotiate in good faith for a period of fifteen (15) days following written
notice by Buyer to Seller of its desire to dispose of such rights for the
purposes of agreeing upon the terms under which said rights may be conveyed to
Seller. In the event the parties are unable to agree on terms within said
fifteen (15) day period, Buyer shall be free to dispose of said rights without
any further obligation of any kind to Seller.
7.07. PROXY CONSENT SOLICITATION.
(a) In connection with any proxy statement or consent solicitation that may
be distributed to stockholders of Seller with respect to the execution and
delivery of this Agreement and the consummation of the transactions contemplated
hereby, Buyer will furnish to Seller in writing such information and documents
concerning Buyer and its Subsidiaries as Seller reasonably requests for use in
connection with any such proxy statement or consent solicitation and, to the
extent permitted by law, will indemnify and hold harmless Seller, its directors
and officers and each other Person who controls Seller (within the meaning of
the Securities Act of 1933 (the "Securities Act")) against any losses, claims,
damages, liabilities, joint or several, to which Seller or any such director or
officer or controlling person may become subject under the Securities Act or
otherwise, insofar as such losses, claims, damages or liabilities (or actions or
proceedings, whether commenced or threatened, in respect thereof) arise out of
or are based upon (i) any untrue statement of a material fact contained in the
proxy statement or consent solicitation or any amendment thereof or supplement
thereto or (ii) any omission of a material fact required to be stated therein or
necessary to make the statements therein not misleading, but only to the extent
that such untrue statement or omission is made in such proxy statement or
consent solicitation or any amendment or supplement thereto in reliance upon and
in conformity with written information concerning Buyer or any of its Affiliates
prepared and furnished to Seller by Buyer expressly for use therein, and Buyer
will
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reimburse Seller and each such director, officer and controlling person for any
legal or any other expenses incurred by them in connection with defending any
such loss, claim, liability, action or proceeding.
(b) To the extent permitted by law, Seller will indemnify and hold harmless
Buyer, its directors and officers and each other Person who controls Buyer
(within the meaning of the Securities Act) against any losses, claims, damages,
liabilities, joint or several, to which Buyer or any such director or officer or
controlling person may become subject under the Securities Act or otherwise,
insofar as such losses, claims, damages or liabilities (or actions or
proceedings, whether commenced or threatened, in respect thereof) arise out of
or are based upon (i) any untrue statement of a material fact contained in the
proxy statement or consent solicitation or any amendment thereof or supplement
thereto or (ii) any omission of a material fact required to be stated therein or
necessary to make the statements therein not misleading, but only to the extent
that such untrue statement or omission is not made in such proxy statement or
consent solicitation or any amendment or supplement thereto in reliance upon and
in conformity with written information concerning Buyer or any of its Affiliates
prepared and furnished to Seller by Buyer expressly for use therein, and Seller
will reimburse Buyer and each such director, officer and controlling person for
any legal or any other expenses incurred by them in connection with defending
any such loss, claim, liability, action or proceeding.
7.08. REFINANCING OF DEBT.
(a) Concurrent with the Closing, Seller will (i) offset against any amounts
owing to Seller or any Affiliate of Seller (other than any Entertainment
Company) from any Entertainment Company all payables owed from Seller or any
Affiliate of Seller (other than any Entertainment Company) to such Entertainment
Company on the Closing Date and (ii) if following the offset provided for in
(i), (A) there are any remaining amounts owing to Seller or any Affiliate of
Seller (other than any Entertainment Company) by any Entertainment Company,
contribute all such amounts to the capital of such Entertainment Company, or (B)
there are any remaining amounts owing to any Entertainment Company, pay all such
amounts.
(b) Seller and Orion shall cooperate with Buyer, between the date hereof and
the Closing Date, in order to assist Buyer in arranging for the New Orion Credit
Facility to be executed and become effective concurrent with the Closing, such
that funds may be drawn thereunder to be utilized, along with other funds to be
made available to Orion by Buyer concurrent with the Closing, to satisfy all of
Orion's obligations under the Existing Orion Credit Facility. Buyer covenants to
deliver to Orion concurrent with the Closing an amount of cash such that such
cash, together with funds available at such time under the New Orion Credit
Facility, will be sufficient to permit Orion to satisfy all its obligations
under the Existing Orion Credit Facility and cause Seller and its Affiliates to
be released of all obligations thereunder.
ARTICLE VIII
CONDITIONS TO CLOSING
8.01. CONDITIONS TO OBLIGATION OF BUYER. The obligations of Buyer to
consummate the Closing are subject to the satisfaction on or prior to the
Closing Date of each of the following conditions:
(a) (i) Each of Seller and Orion shall have performed and satisfied each of
its obligations hereunder required to be performed and satisfied by it on or
prior to the Closing Date, (ii) each of the representations and warranties of
Seller contained in this Agreement shall be true and correct, at and as of the
Closing Date with the same force and effect as if made as of the Closing Date
(except that representations and warranties made as of a specific date (other
than the date of this Agreement) shall continue to be true and correct in all
material respects as of such specific date), except for any breach of any such
representations or warranties which, when combined with all other breaches of
such representations and warranties, could not be reasonably expected to result
in a Material Adverse Effect, and (iii) Buyer shall have received certificates
signed by a duly authorized executive officer of Seller to the foregoing effect
and
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to the effect that, to the knowledge of such executive officer, the conditions
specified in this Section 8.01 have been satisfied.
(b) All Required Governmental Approvals and Essential Consents shall have
been obtained without the imposition of any conditions that are or would become
applicable to any Entertainment Company or Buyer (or any of its Affiliates)
after the Closing that Buyer in good faith determines would be materially
burdensome upon the Entertainment Companies taken as a whole or Buyer (or any of
its Affiliates) or the businesses of the Entertainment Companies taken as a
whole and Buyer substantially as such businesses have been conducted prior to
the Closing Date or as said businesses, as of the date hereof, would reasonably
be expected to be conducted after the Closing Date. All such Required
Governmental Approvals and Essential Consents shall be in effect. All conditions
and requirements prescribed by any Required Governmental Approval and Essential
Consent (or any such other consent) to be satisfied on or prior to the Closing
Date shall have been satisfied allowing all such Required Governmental Approvals
and Essential Consents (and all such other consents) to be effective and
enforceable, and to remain effective and enforceable against the Persons giving
such Required Governmental Approvals and Essential Consents (and such other
consents) assuming continued compliance with the terms thereof.
(c) The transactions contemplated by this Agreement and the consummation of
the Closing shall not violate any Applicable Law. No temporary restraining
order, preliminary or permanent injunction, cease and desist order or other
order issued by any court of competent jurisdiction or any competent
Governmental Authority or any other legal restraint or prohibition preventing
the transfer and exchange contemplated hereby or the consummation of the
Closing, or imposing Damages in respect thereto, shall be in effect, and there
shall be no pending or threatened actions or proceedings (i) by any Governmental
Authority (or determinations by any Governmental Authority) challenging or in
any manner seeking to restrict or prohibit the transactions contemplated hereby
or the consummation of the Closing, (ii) or by any Governmental Authority (or
determinations by any Governmental Authority) or by any other person or to
impose conditions that Buyer reasonably determines would be materially
burdensome upon the Entertainment Companies taken as a whole, the Shares or
Buyer (or any of its Affiliates) or the businesses of the Entertainment
Companies taken as a whole and Buyer substantially as such businesses have been
conducted prior to the Closing Date or as said businesses, as of the date
hereof, could be reasonably expected to be conducted after the Closing Date.
(d) Since the date hereof, there shall not have been any change in any
Entertainment Company, its assets or the Shares (including any damage,
destruction or other casualty loss, but excluding any event, occurrence,
development or state of circumstances or facts or change resulting from changes
in general economic conditions) that has had or that could be reasonably
expected to have, either alone or together with all such events, occurrences,
developments, states of circumstances or facts or changes, a Material Adverse
Effect.
(e) Buyer shall have received an opinion of counsel from Paul, Weiss,
Rifkind, Wharton & Garrison in form and substance reasonably satisfactory to
Buyer.
(f) Buyer and its Subsidiaries shall have obtained in writing all consents,
approvals and waivers required to be obtained by Buyer and its Subsidiaries by
virtue of the execution and delivery of this Agreement or the consummation of
the transactions contemplated hereby under the MGM Credit Facility.
(g) All Persons who are directors of any Entertainment Company whose
principal employment is not as an officer and/or employee of an Entertainment
Company shall have resigned such directorships.
(h) Seller shall have provided to Buyer written evidence satisfactory to
Buyer of the consummation of the transfer of the ownership of all issued and
outstanding stock of Landmark to an Affiliate of Seller that is not an
Entertainment Company.
8.02. CONDITIONS TO OBLIGATION OF SELLER. The obligations of Seller to
consummate the Closing are subject to the satisfaction on or prior to the
Closing Date of each of the following conditions:
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(a) (i) Buyer shall have performed and satisfied each of its obligations
hereunder required to be performed and satisfied by it on or prior to the
Closing Date; (ii) the representations and warranties of Buyer contained in this
Agreement shall be true, complete and accurate in all material respects at and
as of the Closing Date, as if made at and as of the Closing Date (except that
representations and warranties made as of a specific date (other than the date
of this Agreement) shall continue to be true and correct in all material
respects as of such specific date) except for any breach of any such
representations and warranties which, when combined with all other breaches of
such representations and warranties, would not be materially adverse to Seller
and (iii) Seller shall have received a certificate signed by a duly authorized
senior officer of Buyer to the foregoing effect and to the effect that, to such
senior officer's knowledge, the conditions specified in this Section 8.02 have
been satisfied.
(b) All Required Governmental Approvals and Essential Consents shall have
been obtained without the imposition of any conditions that are or would become
applicable to Seller (or any of its Affiliates) after the Closing that Seller in
good faith determines would be materially burdensome upon Seller (or any of its
Affiliates) or the businesses of Seller taken as a whole and Buyer substantially
as such businesses have been conducted prior to the Closing Date or as said
businesses, as of the date hereof, would reasonably be expected to be conducted
after the Closing Date. All such Required Governmental Approvals and Essential
Consents shall be in effect. All conditions and requirements prescribed by any
Required Governmental Approval and Essential Consent (or any such other consent)
to be satisfied on or prior to the Closing Date shall have been satisfied
allowing all such Required Governmental Approvals and Essential Consents (and
all such other consents) to be effective and enforceable, and to remain
effective and enforceable against the Persons giving such Required Governmental
Approvals and Essential Consents (and such other consents) assuming continued
compliance with the terms thereof.
(c) The transactions contemplated by this Agreement and the consummation of
the Closing shall not violate any Applicable Law. No temporary restraining
order, preliminary or permanent injunction, cease and desist order or other
order issued by any court of competent jurisdiction or any competent
Governmental Authority or any other legal restraint or prohibition preventing
the transfer and exchange contemplated hereby or the consummation of the
Closing, or imposing Damages in respect thereto, shall be in effect, and there
shall be no pending or threatened actions or proceedings (i) by any Governmental
Authority (or determinations by any Governmental Authority) challenging or in
any manner seeking to restrict or prohibit the transactions contemplated hereby
or the consummation of the Closing, (ii) or by any Governmental (or
determinations by any Governmental Authority) or by any other person or to
impose conditions that Seller reasonably determines would be materially
burdensome upon Seller (or any of its Affiliates) or the businesses of Seller
substantially as such businesses have been conducted prior to the Closing Date
or as said businesses, as of the date hereof, could be reasonably expected to be
conducted after the Closing Date.
(d) Seller shall have received an opinion of counsel from Gibson, Dunn &
Crutcher LLP in form and substance reasonably satisfactory to Seller.
(e) Seller shall have obtained the approval of its stockholders required to
be obtained by Seller by virtue of the execution and delivery of this Agreement
and the consummation of the transactions contemplated hereby under its
Certificate of Incorporation, its Bylaws or Applicable Law.
(f) Seller shall have been released of all obligations as guarantor of that
certain Lease pertaining to the real property located at 1888 Century Park East,
Los Angeles, California, occupied by the Entertainment Companies on the date
hereof.
(g) Seller and its Affiliates shall have been released from all obligations
thereof in connection with the Existing Orion Credit Facility.
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ARTICLE IX
INDEMNIFICATION
9.01. INDEMNIFICATION OF BUYER. From and after the Closing Date and
subject to the terms and conditions of this Section 9.01, Buyer and its
Affiliates (collectively, the "Buyer Indemnitees") shall each be indemnified and
held harmless to the extent set forth in this Article IX by Seller in respect of
any and all Damages actually incurred by any Buyer Indemnitee:
(a) as a result of any misrepresentation in or breach of or failure to
perform any representation, warranty, covenant and/or agreement made by
Seller in this Agreement; PROVIDED, HOWEVER, that Seller, with respect to
Damages incurred by any Buyer Indemnitee as a result of any such
misrepresentation, breach or failure other than those described in clauses
(i) or (ii) of Section 9.03(c) (as to which the limits described in this
proviso shall not apply), shall have no obligation under this clause (i) of
Section 9.01(a) unless and until the aggregate amount of Damages so incurred
by all Buyer Indemnitees collectively exceeds Fifteen Million Dollars
($15,000,000), whereupon Seller shall be liable to indemnify the Buyer
Indemnitees for all such Damages in excess of such amount up to a maximum
amount equal to the Purchase Price;
(b) as a result of any violations or infringements of any material
Applicable Law, or any order, writ, injunction or decree of any Governmental
Authority, but only to the extent that such violation or infringement occurs
prior to the Closing Date; or
(c) as a result of any liability arising out of or in connection with the
litigation described in SCHEDULE 9.01(C) or by or among one or more of the
parties to such litigation identified therein or arising out of the facts giving
rise to the matters described therein, and all counter-claims, cross-claims and
other actions relating thereto. Any indemnity arising with respect to Taxes
shall be governed by the provisions of Article XI below.
9.02. INDEMNIFICATION OF SELLER. From and after the Closing Date, Seller
and its Affiliates (collectively, the "Seller Indemnitees") shall each be
indemnified and held harmless to the extent set forth in this Article IX by
Buyer in respect of any and all Damages actually incurred by any Seller
Indemnitee (i) as a result of any misrepresentation in or breach of or failure
to perform any representation, warranty, covenant or agreement made by Buyer in
this Agreement and (ii) resulting from Buyer's operation of the Entertainment
Companies or ownership of the Shares after the Closing Date.
9.03. SURVIVAL OF REPRESENTATIONS, WARRANTIES AND COVENANTS.
(a) Except as otherwise provided in this Article IX, all representations,
warranties, covenants, agreements and obligations of each Indemnifying Party
contained herein and all claims of any Buyer Indemnitee or Seller Indemnitee in
respect of any breach of any representation, warranty, covenant, agreement or
obligation of any Indemnifying Party contained in this Agreement, shall survive
the Closing and any due diligence examination or investigation by Buyer,
regardless of when it is conducted, and shall expire on the first anniversary of
the Closing Date.
(b) Notwithstanding Section 9.03(a), each of the representations and
warranties of Seller set forth in Sections 3.20 and 3.21 shall survive the
Closing Date and shall expire on the second anniversary of the Closing Date.
(c) Notwithstanding Section 9.03(a), each of the following representations,
warranties, covenants, agreements and obligations of Seller as Indemnifying
Party shall survive the Closing Date until the expiration of thirty (30) days
following any applicable statute of limitations, including extensions thereof:
(i) any misrepresentation in or breach of any representation or warranty made in
Sections 3.01, 3.02, 3.03, 3.04, 3.17, 3.23, 3.24 or 3.26 and (ii) the breach or
failure to perform by Seller after the Closing Date of any of the covenants,
agreements or obligations contained in this Agreement or in the Exhibits
attached hereto required to be performed after the Closing Date, including those
contained in Section 7.07 and Article XI.
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(d) Notwithstanding Section 9.03(a), each of the following representations,
warranties, covenants, agreements and obligations of Buyer as an Indemnifying
Party shall survive the Closing Date until the expiration of thirty (30) days
following the applicable statute of limitations, including extensions thereof:
(i) any misrepresentation in or breach of any representation or warranty made in
Sections 4.01, 4.02 or 4.05 and (ii) the breach or failure to perform by Buyer
after the Closing Date of any of the covenants, agreements or obligations of
Buyer contained in this Agreement or in the Exhibits attached hereto required to
be performed after the Closing Date.
9.04. CLAIMS FOR INDEMNIFICATION.
(a) If any Indemnitee shall believe that such Indemnitee is entitled to
indemnification pursuant to this Article IX in respect of any Damages, such
Indemnitee shall promptly give the appropriate Indemnifying Party notice of such
claim (a "Notice of Claim") (but such Notice of Claim must be delivered within
the time periods specified in Sections 9.03(a), (b) and (c)). Any such Notice of
Claim shall set forth in reasonable detail and to the extent then known the
basis for such claim for indemnification and the amount of the claim, to the
extent specified or otherwise known. The failure of such Indemnitee to give the
Notice of Claim for indemnification promptly shall not adversely affect such
Indemnitee's right to indemnity hereunder except to the extent that the defense
of any claim is prejudiced by such failure.
(b) No Person shall have any claim or cause of action as a result of any
misrepresentation in or breach of or failure to perform any representation,
warranty, covenant, agreement or obligation of any Indemnifying Party referred
to in this Article IX against any Affiliate, stockholder, director, officer,
employee, consultant or agent of such Indemnifying Party unless any of the
foregoing is a successor or assign of such Indemnifying Party. Nothing set forth
in this Article IX shall be deemed to prohibit or limit any Buyer Indemnitee's
or Seller Indemnitee's right at any time before, on or after the Closing Date,
to seek injunctive or other equitable relief for the failure of any Indemnifying
Party to perform any covenant or agreement contained herein.
9.05. DEFENSE OF CLAIMS.
(a) In connection with any claim which may give rise to indemnity under this
Article IX resulting from or arising out of any claim or Proceeding against an
Indemnitee by a Person that is not a party hereto, the Indemnifying Party may
(unless such Indemnitee elects not to seek indemnity hereunder for such claim),
upon written notice to the relevant Indemnitee, assume the defense of any such
claim or Proceeding if all Indemnifying Parties with respect to such claim or
Proceeding jointly acknowledge to the Indemnitee its right to indemnity pursuant
hereto in respect of the entirety of such claim (as such claim may have been
modified through written agreement of the parties) and provide assurances,
reasonably satisfactory to such Indemnitee, that the Indemnifying Parties will
be financially able to satisfy such claim in full if such claim or Proceeding is
decided adversely. If the Indemnifying Parties assume the defense of any such
claim or Proceeding, the Indemnifying Parties shall select counsel reasonably
acceptable to such Indemnitee to conduct the defense of such claim or
Proceeding, shall take all steps necessary in the defense or settlement thereof
and shall at all times reasonably diligently and promptly pursue the resolution
thereof. If the Indemnifying Parties shall have assumed the defense of any claim
or Proceeding in accordance with this Section 9.05, the Indemnifying Parties
shall be authorized to consent to a settlement of, or the entry of any judgment
arising from, any such claim or Proceeding, with the consent of the Indemnitee,
which consent will be not unreasonably withheld or delayed; PROVIDED, that no
such consent shall be required from such Indemnitee if the Indemnifying Parties
shall pay or cause to be paid all amounts arising out of such settlement or
judgment concurrently with the effectiveness thereof; PROVIDED, FURTHER, that
the Indemnifying Parties shall not be authorized to encumber any of the assets
of any Indemnitee or to agree to any restriction that would apply to any
Indemnitee or to its conduct of business; and PROVIDED, FURTHER, that a
condition to any such settlement shall be a complete release of such Indemnitee
and its Affiliates, officers, employees and if named as a defendant, consultants
and agents with respect to such claim. Each Indemnitee shall be entitled to
participate in the defense of any such action at its own cost and expense.
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Each Indemnitee shall, and shall cause each of its Affiliates, officers,
employees, consultants and agents to, cooperate fully with the Indemnifying
Parties in the defense of any claim or Proceeding being defended by the
Indemnifying Parties pursuant to this Section 9.05.
(b) If the Indemnifying Parties do not assume the defense of any claim or
Proceeding resulting therefrom in accordance with the terms of this Section
9.05(a), such Indemnitee may defend against such claim or Proceeding in the
manner as it may deem appropriate, including settling such claim or Proceeding
after giving notice of the same to the Indemnifying Parties, on such terms as
such Indemnitee may deem appropriate. If the Indemnifying Parties seek to
question the manner in which such Indemnitee defended such claim or Proceeding
or the amount of or nature of any such settlement, the Indemnifying Parties
shall have the burden to prove by a preponderance of the evidence that such
Indemnitee did not defend such claim or Proceeding in a reasonably prudent
manner.
(c) Although the indemnification rights provided in this Article IX shall
extend to the respective Affiliates of Buyer and Seller, for the purpose of the
procedures set forth in this Section 9.05, any claims for indemnification shall
be made by and through Buyer or Seller, as the case may be.
9.06. NATURE OF PAYMENTS. Any payment under this Article IX shall be
treated for tax purposes as an adjustment of the Purchase Price to the extent
such characterization is proper and permissible under relevant Tax authorities,
including court decisions, statutes, regulations and administrative
promulgations.
9.07. TAXES The provisions of this Article IX shall not be applicable to
Taxes, which shall be governed by Article XI.
ARTICLE X
TERMINATION
10.01. GROUNDS FOR TERMINATION. This Agreement may be terminated at any
time (except with respect to clauses (h), (i), (j) and (k) which contain certain
time limitations) prior to the Closing:
(a) by mutual written agreement of all of the parties hereto;
(b) by Buyer after written notice to Seller of any one or more
misrepresentations in or breaches of the representations or warranties made
by Seller contained herein that, if not cured on or prior to the Closing
Date, could be reasonably expected to give Buyer grounds not to close under
Section 8.01 when taken into account with all other uncured
misrepresentations in or breaches of such representations or warranties as
to which Buyer shall have given notice to Seller as provided in this
paragraph (b). A termination pursuant to this paragraph (b) shall become
effective (i) fifteen (15) days after such notice with respect to such a
misrepresentation or breach that is not capable of being cured on or prior
to the Closing Date, or (ii) immediately prior to the Closing with respect
to such a misrepresentation or breach that is capable of being cured, but is
not cured, on or prior to the Closing Date;
(c) by Buyer after written notice to Seller of the failure by Seller or
any Entertainment Company to perform and satisfy any of its obligations
under this Agreement required to be performed and satisfied by Seller or
such Entertainment Company on or prior to the Closing Date, if the aggregate
of all such failures shall be material. A termination pursuant to this
paragraph (c) shall become effective (i) fifteen (15) days after such notice
with respect to such a failure that is not capable of being cured on or
prior to the Closing Date, or (ii) immediately prior to the Closing with
respect to such a failure that is capable of being cured, but is not cured,
on or prior to the Closing Date;
(d) by Seller after written notice to Buyer of any one or more
misrepresentations in or breaches of the representations or warranties made
by Buyer herein which, if not cured on or prior to the Closing Date, could
be reasonably expected to give Seller grounds not to close under Section
8.02
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when taken into account with all other uncured misrepresentations in or
breaches of such representations or warranties as to which Seller shall have
given notice to Buyer as provided in this clause (d). A termination pursuant
to this paragraph (d) shall become effective (i) fifteen (15) days after
such notice with respect to such a misrepresentation or breach that is not
capable of being cured on or prior to the Closing Date, or (ii) immediately
prior to the Closing with respect to such a misrepresentation or breach that
is capable of being cured, but is not cured, on or prior to the Closing
Date;
(e) by Seller after written notice to Buyer of Buyer's failure to
perform and satisfy any of its obligations under this Agreement required to
be performed and satisfied by Buyer on or prior to the Closing Date, if the
aggregate of all such failures shall be material. A termination pursuant to
this paragraph (e) shall become effective (i) fifteen (15) days after such
notice with respect to such a failure that is not capable of being cured on
or prior to the Closing Date, or (ii) immediately prior to the Closing with
respect to such a failure that is capable of being cured, but is not cured,
on or prior to the Closing Date;
(f) by Buyer or by Seller, if the Closing shall not have been
consummated by September 30, 1997; PROVIDED, HOWEVER, that neither Buyer nor
Seller may terminate this Agreement pursuant to this clause (f) if the
Closing shall not have been consummated within such time period by reason of
the failure of such party or any of its Affiliates to perform in all
material respects any of its or their respective covenants or agreements
contained in this Agreement;
(g) by any party hereto if any Federal, state or foreign law or
regulation thereunder shall hereafter be enacted or become applicable that
makes the transactions contemplated hereby or the consummation of the
Closing illegal or otherwise prohibited, or if any judgment, injunction,
order or decree enjoining either party hereto from consummating the
transactions contemplated hereby is entered, and such judgment, injunction,
order or decree shall become final and nonappealable;
(h) by Buyer by written notice delivered to Seller at any time prior to
5:00 p.m. (Los Angeles time) on May 9, 1997, if at any time prior to such
time Buyer discovers any fact, occurrence or circumstance relating to any
Entertainment Company not known to Buyer on or before the date of this
Agreement that is materially adverse to the assets, liabilities, business,
operations or financial condition of the Entertainment Companies taken as a
whole.
(i) by Buyer or Seller if Seller shall have convened a meeting of its
stockholders to vote upon this Agreement and the transactions contemplated
hereby and at such meeting shall have failed to obtain in writing all
consents and approvals of its stockholders required to be obtained by Seller
by virtue of the execution and delivery of this Agreement or the
transactions contemplated hereby under its Certificate of Incorporation, its
Bylaws or Applicable Law.
(j) by Seller at any time after submission of this Agreement and the
transactions contemplated herein by the stockholders of Seller in accordance
with Applicable Law, if (i) Seller's financial advisors shall have withdrawn
(either before or after such meeting) their opinion to the effect that the
Purchase Price is fair to Seller's stockholders from a financial point of
view or (ii) Seller's Board of Directors shall have withdrawn, modified or
amended in any material respect its approval or recommendation of this
Agreement or the transactions contemplated hereby and Seller receives a
legal opinion of Delaware counsel that is reasonably acceptable to Buyer to
the effect that submission of this Agreement and the transactions
contemplated hereby would be unlawful under Delaware law.
(k) by Seller at any time prior to the approval of this Agreement and
the transactions contemplated herein by the stockholders of Seller in
accordance with Applicable Law, if Seller's Board of Directors determines in
good faith, on the basis of the advice of Paul, Weiss, Rifkind, Wharton &
Garrison or other outside counsel of comparable stature, that the approval
and adoption of this Agreement and the transactions contemplated hereby
would be inconsistent with the compliance by the Board of Directors with its
fiduciary duties to stockholders under Applicable Law.
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The party desiring to terminate this Agreement pursuant to clauses (b)
through (k) shall give written notice of such termination to the other party.
10.02. EFFECT OF TERMINATION. If this Agreement is terminated as permitted
by Section 10.01, such termination shall be without liability of any party to
any other party to this Agreement except as hereinafter expressly provided in
this Section 10.02. If such termination shall result from the breach by any
party of its representations, warranties or covenants contained in this
Agreement, such party shall be fully liable for any and all Damages incurred or
suffered by the other parties as a result of such failure or breach. The
provisions of Sections 5.05, 6.02, 12.04, 12.06 and 12.12 shall survive any
termination of this Agreement pursuant to Article X, and each party hereto shall
be fully responsible for any breach of any such provision, whether or not such
breach occurs prior to or after the termination of this Agreement.
10.03. COMMITMENT FEE.
(a) To compensate Buyer for entering into this Agreement and taking action
to consummate the transactions contemplated hereby and incurring the costs and
expenses related thereto and other losses and expenses, including the foregoing
by Buyer of other opportunities, Seller agrees to pay to Buyer an aggregate
amount equal to Thirty Million Dollars ($30,000,000), less any amount due
pursuant to Section 10.03(c) below (the "Commitment Fee") if this Agreement is
terminated:
(i) by Seller pursuant to Section 10.01(j) or (k);
(ii) by Buyer or Seller pursuant to Section 10.01(i), if, in any such
case specified in this clause (ii), prior to the time of Seller's meeting of
stockholders (A) Seller's Board of Directors shall have withdrawn, modified
or amended in any material respect its approval or recommendation of this
Agreement or the transactions contemplated hereby or shall have resolved to
do any of the foregoing, (B) Seller's Board of Directors shall have
recommended acceptance of any Alternative Proposal or shall have resolved to
do so or (C) Seller or any of its Affiliates shall have entered into an
agreement providing for an Alternative Proposal with a party other than
Buyer or shall have resolved to do so; or
(iii) by Buyer or Seller pursuant to Section 10.01(i), if, in any such
case specified in this clause (iii) (A) prior to the time of Seller's
meeting of stockholders an Alternative Proposal shall have been publicly
announced or shall have become publicly known or Seller's financial advisors
shall have withdrawn, modified or amended in any material respect their
opinion to the effect that the Purchase Price is fair to Seller's
stockholders from a financial point of view, (B) Seller's Board of Directors
shall not have withdrawn, modified or amended in any material respect its
approval and recommendation of this Agreement and the transactions
contemplated hereby, Seller's Board of Directors shall not have recommended
acceptance of any Alternative Proposal nor shall Seller's Board of Directors
have resolved to do so, and neither Seller nor any of its Affiliates shall
have entered into an agreement providing for an Alternative Proposal with a
party other than Buyer nor shall any of them have resolved to do so and (C)
during the term of this Agreement or within one (1) year after the
termination of this Agreement, Seller's Board of Directors recommends an
Alternative Proposal with a party other than Buyer, Seller or any of its
Affiliates enters into an agreement providing for an Alternative Proposal
with a party other than Buyer, or an Alternative Proposal with a party other
than Buyer occurs, and, in any such case, the purchase price in respect of
such Alternative Proposal (or the portion thereof allocable to the
Entertainment Companies or their assets, if such Alternative Proposal
relates to Seller or assets and operations of Seller in addition to the
Entertainment Companies) is higher than the Purchase Price; PROVIDED,
HOWEVER, that in determining such purchase price, there shall be included
therein the fair value of any property of any Entertainment Company
transferred to Seller in connection with or in anticipation of such
transaction.
(b) The Commitment Fee and the reimbursement of expenses required by Section
10.03(c) shall be payable (i) at the time of termination if the termination is
by Seller pursuant to Section 10.01(j) or (k), (ii) on the next business day
following termination if the termination is by Buyer or Seller pursuant to
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Section 10.01(i) and is covered by clause (ii) of Section 10.03(a) and (iii) on
the next business day following the earliest of the recommendation of an
Alternative Proposal, the entering into of an agreement providing for an
Alternative Proposal or the occurrence of an Alternative Proposal, if the
termination is by Seller or Buyer pursuant to Section 10.01(i) and such
termination is covered by clause (iii) of Section 10.03(a).
(c) Seller shall reimburse Buyer and its Affiliates for actual out-of-pocket
expenses, not to exceed Ten Million Dollars ($10,000,000), of Buyer and its
Affiliates incurred in connection with or arising out of this Agreement and the
transactions contemplated hereby (including, without limitation, amounts paid or
payable to investment bankers, fees and expenses of counsel, accountants and
consultants, and printing expenses), regardless of when those expenses are
incurred, if this Agreement is terminated:
(i) by Seller pursuant to Section 10.01(j) or (k);
(ii) by Buyer or Seller pursuant to Section 10.01(i) or (j), if, in any
such case specified in this clause (ii), prior to the time of Seller's
meeting of stockholders (A) Seller's Board of Directors shall have
withdrawn, modified or amended in any material respect its approval or
recommendation of this Agreement or the transactions contemplated hereby or
shall have resolved to do any of the foregoing, (B) Seller's Board of
Directors shall have recommended acceptance of any Alternative Proposal or
shall have resolved to do so or (C) Seller or any of its Affiliates shall
have entered into an agreement providing for an Alternative Proposal with a
party other than Buyer or shall have resolved to do so; or
(iii) by Buyer or Seller pursuant to Section 10.01(i), if, in any such
case specified in this clause (iii) (A) prior to the time of Seller's
meeting of stockholders an Alternative Proposal shall have been publicly
announced or shall have become publicly known or Seller's financial advisors
shall have withdrawn, modified or amended in any material respect their
opinion to the effect that the Purchase Price is fair to Seller's
stockholders from a financial point of view, (B) Seller's Board of Directors
shall not have withdrawn, modified or amended in any material respect its
approval and recommendation of this Agreement and the transactions
contemplated hereby, Seller's Board of Directors shall not have recommended
acceptance of any Alternative Proposal nor shall Seller's Board of Directors
have resolved to do so, and neither Seller nor any of its Affiliates shall
have entered into an agreement providing for an Alternative Proposal with a
party other than Buyer nor shall any of them have resolved to do so and (C)
during the term of this Agreement or within one (1) year after the
termination of this Agreement, Seller's Board of Directors recommends an
Alternative Proposal with a party other than Buyer, Seller or any of its
Affiliates enters into an agreement providing for an Alternative Proposal
with a party other than Buyer, or an Alternative Proposal with a party other
than Buyer occurs, and, in any such case, the purchase price in respect of
such Alternative Proposal (or the portion thereof allocable to the
Entertainment Companies or their assets, if such Alternative Proposal
relates to Seller or assets and operations of Seller in addition to the
Entertainment Companies) is higher than the Purchase Price; PROVIDED,
HOWEVER, that in determining such purchase price, there shall be included
therein the fair value of any property of any Entertainment Company
transferred to Seller in connection with or in anticipation of such
transaction.
(d) Seller acknowledges that the agreements contained in this Section 10.03
are an integral part of the transactions contemplated by this Agreement, and
that, without these agreements, Buyer would not enter into this Agreement.
Accordingly, if Seller fails to pay any amounts owing pursuant to this Section
10.03 when due, Seller shall in addition thereto pay to Buyer all costs and
expenses (including attorneys' fees and costs) incurred in collecting such
amounts, together with interest on such amounts (or any unpaid portion thereof)
from the date such payment was required to be made until the date such payment
is received by Buyer at one percentage point in excess of the Reference Rate as
in effect from time to time during such period; provided, however, that in no
event shall such interest rate exceed the maximum rate permitted by Applicable
Law.
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ARTICLE XI
TAX MATTERS
11.01. TAX RETURNS AND PAYMENTS.
(a) Seller shall be responsible for the preparation and filing of all
Seller's Consolidated Returns with respect to all Pre-Closing Periods, which
shall include the Entertainment Companies, and for the payment of all federal
Income Taxes with respect to such Consolidated Returns. Seller shall be entitled
to any refunds of Income Taxes with respect to such Tax Returns.
(b) (i) Seller shall be responsible for the preparation and filing of
all Tax Returns, other than Consolidated Returns, of the Entertainment
Companies for any Pre-Closing Period, that are required to be filed on or
before the Closing Date, and for the payment of all Taxes with respect to
such Tax Returns. Seller shall be entitled to any refunds of Taxes with
respect to such Tax Returns. Such Tax Returns shall be prepared in a manner
consistent with prior practice, and shall utilize accounting methods,
elections and conventions that do not have the effect of distorting the
allocation of income or expense between Pre-Closing Periods and Post-Closing
Periods.
(ii) Buyer shall be responsible for the preparation and filing of all Tax
Returns, other than Consolidated Returns, of the Entertainment Companies for
any Pre-Closing Period, that are required to be filed after the Closing
Date. Seller shall pay Buyer, in immediately available funds, any Taxes that
are required to be paid with such Tax Returns, and shall be entitled to any
refunds of Taxes with respect to such Tax Returns.
(c) Buyer shall be responsible for the preparation and filing of all
Straddle Period Tax Returns with respect to the Entertainment Companies, and for
the payment of all Taxes with respect to such returns. Seller shall reimburse
Buyer, in immediately available funds, for the portion of any Tax relating to a
Straddle Period that is allocable, in accordance with paragraph (f) below, to
the pre-Closing portion of such Straddle Period, less any estimated Taxes paid
by Seller or the Entertainment Companies with respect to such Straddle Period
before the Closing Date. Any refunds of Straddle Period taxes shall be allocated
between the Seller and the Buyer based on the same principles.
(d) Buyer shall be responsible for the preparation and filing of all Tax
Returns and the payment of all other Taxes with respect to the Entertainment
Companies for all Post-Closing Periods. Buyer shall be entitled to any refunds
of such Taxes. In the case of any Post-Closing Tax Return where the Taxes
payable by an Entertainment Company are dependent upon the Tax attributes of or
are consistent with Tax accounting methods utilized by such Entertainment
Company for a Pre-Closing Period, without Seller's consent Buyer shall not take
a position that (i) is inconsistent with a position taken by Seller for such
Pre-Closing Period and (ii) will have the effect of increasing the Seller's Tax
liability for a Pre-Closing Period, unless in the opinion of Buyer's independent
tax counsel or accountant, Seller's position is not supported by "substantial
authority" within the meaning of Section 6662 of the Code.
(e) To the extent permitted by law, Seller and Buyer shall use their best
efforts to cause any Taxable period to close on the Closing Date.
(f) Taxes payable with respect to a Straddle Period shall be allocated to
the Pre-Closing Period and Post-Closing Period on the basis of a closing of the
books as of the Closing Date or any other method agreed upon by Buyer and
Seller, except that Taxes imposed on a periodic basis, such as real and personal
property Taxes, shall be prorated based on the number of days before and after
the Closing Date.
(g) Seller, Buyer and the Entertainment Companies shall cooperate in good
faith in (i) preparing and filing all Tax Returns, (ii) maintaining and making
available to each other all records necessary in connection with the preparation
and filing of all Tax Returns and the payment of Taxes, and (iii) resolving all
disputes and audits with respect to any Tax Returns and Taxes. Buyer and Seller
recognize that each may
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need access, from time to time, after the Closing Date, to certain accounting
and Tax records and information held by the other; therefore, Buyer and Seller
agree (i) to retain and maintain Tax records relating to the Entertainment
Companies for a period of five (5) years after the Closing Date, (ii) to allow
each other and their agents and representatives, at times and dates mutually
acceptable to the parties, to inspect, review and make copies of such records,
such activities to be conducted during normal business hours and at the
requesting party's expense, and (iii) and to offer the other parties such
records before destroying such records.
(h) Seller shall pay any stock transfer taxes due as a result of the sale of
the Shares to Buyer pursuant to the transactions contemplated by this Agreement.
(i) Seller shall cause the provisions of any tax sharing agreement to which
any of the Entertainment Companies is a party to be terminated on or before the
Closing Date, and the Entertainment Companies shall have no liability to Seller
or its Affiliates under any such agreements.
(j) Seller shall have the sole and exclusive authority to file amended
Consolidated Tax Returns for the Entertainment Companies for any Pre-Closing
Period, and to control any Tax audits, disputes, administrative or judicial
proceedings or settlements with respect to such Consolidated Tax Returns. Buyer
and the Entertainment Companies shall have the sole and exclusive authority to
file any other amended Tax Returns and to control any other Tax audits,
disputes, administrative or judicial proceedings or settlements with respect to
the Entertainment Companies; PROVIDED, HOWEVER, that Buyer shall not without
Seller's consent file an amended Tax Return with respect to a Pre-Closing Period
or settle, compromise, challenge or litigate a Tax dispute with respect to a
Pre-Closing Period, if any such action may materially increase Seller's
liability for Taxes.
11.02. SECTION 338(H)(10).
(a) Seller shall join Buyer in making elections under Section 338(g) and
Section 338(h)(10) of the Code and any state, local and foreign counterparts
with respect to the Entertainment Companies (the "Section 338 Elections").
Seller and Buyer shall jointly complete and make the Section 338 Elections on
the applicable forms and in accordance with Applicable Law. Seller shall deliver
such forms and related documents to Buyer at least ninety (90) days prior to the
due date for filing such elections or forms. Buyer shall deliver to Seller at
least forty-five (45) days prior to the due date for filing, such completed
forms as are required to be filed with respect to the Section 338 Elections.
Buyer and Seller shall timely file the Section 338 Elections and any required
forms and documents.
(b) Buyer and Seller shall act reasonably and in good faith to reach an
agreement promptly, but in no event later than ninety (90) days after the
Closing Date, on the allocation of the Purchase Price among the assets of the
Entertainment Companies for purposes of the Section 338 Elections. If Buyer and
Seller are unable to reach an agreement within such ninety (90) day period, they
shall submit the issue to arbitration by a nationally recognized accounting firm
mutually acceptable to Buyer and Seller, whose determination shall be final and
binding on both parties, and whose expenses shall be shared equally by Buyer and
Seller. The valuations and allocations determined pursuant to this Section shall
be used for purposes of all relevant Tax Returns, but shall not have any effect
on any other provision of this Agreement, except insofar as these other
provisions relate to or affect Taxes or Tax Returns.
(c) Seller shall be responsible for the payment of any Taxes of Seller
Affiliated Group or the Entertainment Companies that result from the Section 338
Elections (the "Section 338 Taxes").
11.03. INDEMNIFICATION.
(a) Seller shall indemnify Buyer and the Entertainment Companies for (i) all
liability for Taxes of the Seller Affiliated Group, including the Entertainment
Companies, for all Pre-Closing Periods and for the portion of all Straddle
Periods that end on the Closing Date, (ii) all Section 338 Taxes, and (iii) all
liability
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for reasonable legal and accounting fees and expenses incurred with respect to
any item indemnified pursuant to clauses (i) and (ii) above.
(b) Buyer and the Entertainment Companies shall indemnify Seller for (i) all
liability for Taxes of the Buyer Affiliated Group for any Post-Closing Taxable
period, (ii) all liability for Taxes of the Entertainment Companies for the
portion of all Straddle Periods that commence after the Closing Date, and (iii)
all liability for reasonable legal and accounting expenses incurred with respect
to any item indemnified pursuant to clauses (i) and (ii) above.
11.04. PROCEDURES FOR INDEMNIFICATION.
(a) If a claim is made by any Taxing authority, which, if successful, might
result in an indemnity payment by a party ("Tax Indemnitor") to another ("Tax
Indemnitee") pursuant to Section 11.02, Tax Indemnitee shall promptly notify Tax
Indemnitor in writing of such claim (a "Tax Claim"). If notice of a Tax Claim is
not given to Tax Indemnitor within a sufficient period of time to allow Tax
Indemnitor to effectively contest such Tax Claim, or in reasonable detail to
apprise Tax Indemnitor of the nature of the Tax Claim, in each case taking into
account the facts and circumstances with respect to such Tax Claim, Tax
Indemnitor shall not be liable to Tax Indemnitee to the extent that Tax
Indemnitor's ability to effectively contest such Tax Claim is actually
prejudiced as a result thereof.
(b) With respect to any Tax Claim, Tax Indemnitor shall control all
proceedings taken in connection with such Tax Claim (including, without
limitation, selection of counsel) and, without limiting the foregoing, may in
its sole discretion pursue or forego any and all administrative appeals,
proceedings, hearings and conferences with any Taxing authority with respect
thereto and may, in its sole discretion, either pay the Tax claimed and sue for
a refund where Applicable Law permits such refund suits or contest the Tax Claim
in any permissible manner; PROVIDED, HOWEVER, that Tax Indemnitor shall not
settle or compromise a Tax Claim without giving thirty (30) days notice to Tax
Indemnitee and without Tax Indemnitee's consent, which shall not be unreasonably
withheld, if such settlement or compromise would result in a material Tax
Liability of Tax Indemnitee or members of its affiliated group for any Taxable
period. If Tax Indemnitee reasonably withholds its consent, the indemnification
obligation of Tax Indemnitor to Tax Indemnitee under this Article XI shall be
limited to the amount of such settlement or compromise, and Tax Indemnitee shall
have the right to take over the control of any proceedings with respect to such
Tax Claim at its own expense.
(c) Buyer and Seller shall cooperate with each other in contesting any Tax
Claim, which cooperation shall include, without limitation, granting powers of
attorney to the party who is entitled to control the proceedings, retaining and
providing records and information that are reasonably relevant to such Tax
Claim, and making employees available on a mutually convenient basis to provide
additional information or explanation of any material provided hereunder or to
testify at proceedings relating to such Tax Claim.
(d) Any payment under this Article XI shall be treated for tax purposes as
an adjustment of the Purchase Price to the extent such characterization is
proper and permissible under relevant Tax authorities, including court
decisions, statutes, regulations and administrative promulgations.
(e) The indemnification obligations of the parties set forth in this Article
XI shall survive until the expiration of the applicable statute of limitations
relating to the Taxes that are the subject of the indemnification obligation.
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<PAGE>
ARTICLE XII
MISCELLANEOUS
12.01. NOTICES. All notices, requests, demands, claims and other
communications hereunder shall be in writing. Any notice, request, demand,
claim, or other communication hereunder shall be deemed duly given (i) if
personally delivered, when so delivered, (ii) if mailed, two (2) Business Days
after having been sent by registered or certified mail, return receipt
requested, postage prepaid and addressed to the intended recipient as set forth
below, (iii) if given by telex or telecopier, once such notice or other
communication is transmitted to the telex or telecopier number specified below
and the appropriate answer back or telephonic confirmation is received, provided
that such notice or other communication is promptly thereafter mailed in
accordance with the provisions of clause (ii) above or (iv) if sent through an
overnight delivery service in circumstances to which such service guarantees
next day delivery, the day following being so sent:
If to Seller or any Entertainment Company:
Metromedia International Group, Inc.
c/o Metromedia Company
215 East 67th Street
New York, New York 10021
Attention: President
Facsimile: 212-535-3541
with copies to:
Metromedia International Group, Inc.
One Metromedia Plaza
East Rutherford, New Jersey 07073
Attention: General Counsel
Facsimile: 201-531-2803
and
Paul, Weiss, Rifkind, Wharton & Garrison
1285 Avenue of the Americas
New York, New York 10019
Attention: James M. Dubin, Esq.
Facsimile: 212-757-3990
If to Buyer:
P&F Acquisition Corp.
2500 Broadway Street
Fifth Floor
Santa Monica, California 90404
Attention: General Counsel
Facsimile: 310-449-3011
with a copy to:
Gibson, Dunn & Crutcher LLP
333 S. Grand Avenue
Los Angeles, California 90071
Attention: Bruce D. Meyer, Esq.
Facsimile: 213-229-7520
47
<PAGE>
Any party may give any notice, request, demand, claim or other communication
hereunder using any other means (including ordinary mail or electronic mail),
but no such notice, request, demand, claim or other communication shall be
deemed to have been duly given unless and until it actually is received by the
individual for whom it is intended. Any party may change the address to which
notices, requests, demands, claims and other communications hereunder are to be
delivered by giving the other parties notice in the manner herein set forth.
12.02. AMENDMENTS; NO WAIVERS.
(a) Any provision of this Agreement may be amended or waived if, and only
if, such amendment or waiver is in writing and signed, in the case of an
amendment, by all parties hereto, or in the case of a waiver, by the party
against whom the waiver is to be effective.
(b) No waiver by a party of any default, misrepresentation or breach of
warranty or covenant hereunder, whether intentional or not, shall be deemed to
extend to any prior or subsequent default, misrepresentation or breach of
warranty or covenant hereunder or affect in any way any rights arising by virtue
of any prior or subsequent occurrence. No failure or delay by a party in
exercising any right, power or privilege hereunder shall operate as a waiver
thereof nor shall any single or partial exercise thereof preclude any other or
further exercise thereof or the exercise of any other right, power or privilege.
The rights and remedies herein provided shall be cumulative and not exclusive of
any rights or remedies provided by law.
12.03. CONSTRUCTION.
(a) The language used in this Agreement will be deemed to be the language
chosen by the parties hereto to express their mutual intent, and no rule of
strict construction shall be applied against either party. Any reference to any
Applicable Law shall be deemed also to refer to all rules and regulations
promulgated thereunder, unless the context requires otherwise. Whenever required
by the context, any gender shall include any other gender, the singular shall
include the plural and the plural shall include the singular. The words
"herein," "hereof," "hereunder," and words of similar import refer to the
Agreement as a whole and not to a particular section. Whenever the word
"including" is used in this Agreement, it shall be deemed to mean "including,
without limitation," "including, but not limited to" or other words of similar
import such that the items following the word "including" shall be deemed to be
a list by way of illustration only and shall not be deemed to be an exhaustive
list of applicable items in the context thereof.
(b) The parties hereto intend that each representation, warranty, and
covenant contained herein shall have independent significance. If any party has
breached any representation, warranty or covenant contained herein in any
respect, the fact that there exists another representation, warranty or covenant
relating to the same subject matter (regardless of the relative levels of
specificity) that the party has not breached shall not detract from or mitigate
the fact that the party is in breach of the first representation, warranty or
covenant.
12.04. EXPENSES. Except as otherwise provided herein, all costs and
expenses incurred in connection with this Agreement shall be paid by the party
incurring such cost or expense.
12.05. SUCCESSORS AND ASSIGNS. This Agreement shall be binding upon and
inure to the benefit of the parties hereto and their respective successors and
permitted assigns. No party hereto may assign either this Agreement or any of
its rights, interests or obligations hereunder without the prior written
approval of each other party, which approval shall not be unreasonably withheld.
12.06. GOVERNING LAW. This Agreement shall be construed in accordance with
and governed by the internal laws (without reference to choice or conflict of
laws) of the State of New York.
12.07. COUNTERPARTS; EFFECTIVENESS. This Agreement may be signed in any
number of counterparts, each of which shall be an original, with the same effect
as if the signatures thereto and hereto were upon
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<PAGE>
the same instrument. This Agreement shall become effective when each party
hereto shall have received a counterpart hereof signed by the other parties
hereto.
12.08. ENTIRE AGREEMENT. This Agreement (including the Schedules and
Exhibits referred to herein which are hereby incorporated by reference)
constitutes the entire agreement between the parties with respect to the subject
matter hereof and supersedes all prior agreements, understandings and
negotiations, both written and oral, between the parties with respect to the
subject matter of this Agreement. Neither this Agreement nor any provision
hereof is intended to confer upon any Person other than the parties hereto any
rights or remedies hereunder.
12.09. CAPTIONS. The captions herein are included for convenience of
reference only and shall be ignored in the construction or interpretation
hereof. All references to an Article or Section include all subparts thereof.
12.10. SEVERABILITY. If any provision of this Agreement, or the
application thereof to any Person, place or circumstance, shall be held by a
court of competent jurisdiction to be invalid, unenforceable or void, the
remainder of this Agreement and such provisions as applied to other Persons,
places and circumstances shall remain in full force and effect only if, after
excluding the portion deemed to be unenforceable, the remaining terms shall
provide for the consummation of the transactions contemplated hereby in
substantially the same manner as originally set forth at the later of the date
this Agreement was executed or last amended.
12.11. FORUM; ATTORNEYS' FEES. Any action or proceeding commenced under
this Agreement shall be brought solely in the federal or state courts located in
the States of New York or California. In any action commenced hereunder, the
prevailing party shall be entitled to recover its attorneys' fees and costs from
the non-prevailing party in such action or proceeding. The parties agree that in
any action or claim for Damages brought by Buyer against Seller for a breach of
any representation or warranty by Seller or Orion in Article III (other than
those representations and warranties set forth in Sections 3.01, 3.02, 3.03,
3.04, 3.17, 3.23, 3.24 and 3.26), Seller shall not be obligated to make any
payments to Buyer until the aggregate amount of Damages so incurred exceeds
Fifteen Million Dollars ($15,000,000), whereupon Seller shall be liable for all
such Damages in excess of Fifteen Million Dollars ($15,000,000) up to a maximum
amount equal to the Purchase Price.
12.12. CUMULATIVE REMEDIES. The rights, remedies, powers and privileges
herein provided are cumulative and not exclusive of any rights, remedies, powers
and privileges provided by law.
12.13. THIRD PARTY BENEFICIARIES. No provision of this Agreement shall
create any third party beneficiary rights in any Person, including any employee
of Buyer or employee or former employee of any Seller or any Affiliate thereof
(including any beneficiary or dependent thereof).
12.14. KNOWLEDGE. Whenever "KNOWLEDGE," "TO THE KNOWLEDGE OF," "HAS
RECEIVED NO NOTICE" OR "IS NOT AWARE" (and all variants and derivatives thereof)
is used with respect to any Person, it means the actual knowledge of such
Person, after reasonable inquiry. Notwithstanding the foregoing, the foregoing
terms, when applied to Seller or the Entertainment Companies, shall mean the
actual knowledge, after reasonable inquiry, of any and all officers,
shareholders or directors of Seller or any Entertainment Company.
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<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Stock Purchase
Agreement to be duly executed by their respective authorized officers as of the
day and year first above written.
METROMEDIA INTERNATIONAL GROUP, INC.
By: /s/ STUART SUBOTNICK
-----------------------------------------
Name: Stuart Subotnick
Title: President and Chief Executive
Officer
ORION PICTURES CORPORATION
By: /s/ SILVIA KESSEL
-----------------------------------------
Name: Silvia Kessel
Title: Senior Executive Vice President
P&F ACQUISITION CORP.
By: /s/ FRANK G. MANCUSO
-----------------------------------------
Name: Frank G. Mancuso
Title: Chairman and Chief Executive
Officer
<PAGE>
APPENDIX B
STOCKHOLDERS AGREEMENT
This AGREEMENT, dated April 27, 1997 (this "Agreement"), by and among
METROMEDIA INTERNATIONAL GROUP, INC., a Delaware corporation ("Seller"), P&F
ACQUISITION CORP., a Delaware corporation ("Buyer"), and each of the other
parties signatory hereto (each, a "Stockholder" and, collectively, the
"Stockholders").
W I T N E S S E T H:
WHEREAS, concurrently herewith, Seller, Orion Pictures Corporation
("Orion"), and Buyer are entering into a Letter of Intent (the "Letter of
Intent") contemplating the execution of a Stock Purchase Agreement, a draft of
which is attached to the Letter of Intent as Exhibit A (such Stock Purchase
Agreement, in the form in which it may be executed by the parties and as it may
be amended, supplemented or modified thereby shall hereinafter be referred to as
the "Stock Purchase Agreement;" capitalized terms used and not defined herein
have the respective meanings ascribed to them in the Stock Purchase Agreement),
pursuant to which Buyer will acquire from Seller all of the issued and
outstanding stock of Orion (the "Stock Purchase");
WHEREAS, each of the Stockholders Beneficially Owns (as defined herein) the
number of shares, par value $.01 per share, of common stock of Seller ("Seller
Common Stock") set forth opposite such Stockholder's name on Schedule I hereto
(the "Shares");
WHEREAS, as an inducement and a condition to entering into the Stock
Purchase Agreement, Buyer has required that the Stockholders agree, and the
Stockholders have agreed, to enter into this Agreement;
NOW, THEREFORE, in consideration of the foregoing and the mutual premises,
representations, warranties, covenants and agreements contained herein, the
parties hereto hereby agree as follows:
1. PROVISIONS CONCERNING SELLER COMMON STOCK. Each Stockholder hereby
agrees that at any meeting of the holders of Seller Common Stock, however
called, or in connection with any written consent of the holders of Seller
Common Stock, such Stockholder shall vote (in the case of Shares for which
the Stockholder has exclusive voting and dispositive power) or cause to be
voted (in the case of Shares which the Stockholder "Beneficially Owns" (as
defined below) but for which the Stockholder does not have exclusive voting
and dispositive power) the Shares held of record or Beneficially Owned (as
defined below) by such Stockholder, whether heretofore owned or hereafter
acquired, (i) in favor of approval of the Stock Purchase Agreement and any
actions required in furtherance thereof and hereof; (ii) against any action
or agreement that would result in a breach in any respect of any covenant,
representation or warranty or any other obligation or agreement of Seller or
Orion under the Stock Purchase Agreement (after giving effect to any
materiality or similar qualifications contained therein); and (iii) except
as permitted by the Stock Purchase Agreement or as otherwise agreed to in
writing in advance by Buyer, against the following actions (other than the
Stock Purchase and the transactions contemplated by the Stock Purchase
Agreement): (A) any extraordinary corporate transaction, such as a merger,
consolidation or other business combination involving Orion or any of the
Entertainment Companies; (B) a sale, lease, license, transfer or disposition
of any assets outside the ordinary course of business or any which in the
aggregate are material to Orion and its Subsidiaries (other than Landmark)
taken as a whole, or a reorganization, recapitalization, dissolution or
liquidation of Seller or Orion; (C) (1) any change in a majority of the
persons who constitute the board of directors of the Seller; (2) any change
in the present capitalization of Orion or any of its Subsidiaries or any
amendment of the Certificate of Incorporation or By-Laws of Orion or any of
its Subsidiaries; (3) any other material change in the corporate structure
or business of Orion or any of its Subsidiaries; or (4) any other action
which, in the case of each of the matters referred to in clauses C (1), (2),
(3) or (4) is intended, or could reasonably be expected, to impede,
interfere with, delay, postpone, or materially adversely affect the Stock
Purchase and the transactions contemplated by this Agreement and the Stock
Purchase Agreement. Such Stockholder shall not enter into any agreement
<PAGE>
or understanding with any Person (as defined below) the effect of which
would be inconsistent or violative of the provisions and agreements
contained in Section 1 or 2 hereof. For purposes of this Agreement,
"Beneficially Own" or "Beneficial Ownership" with respect to any securities
shall mean having "beneficial ownership" of such securities (as determined
pursuant to Rule 13d-3 under the Securities Exchange Act of 1934, as amended
(the "Exchange Act")), including pursuant to any agreement, arrangement or
understanding, whether or not in writing. Without duplicative counting of
the same securities by the same holder, securities Beneficially Owned by a
Person shall include securities Beneficially Owned by all other Persons with
whom such Person would constitute a "group" within the meaning of Section
13(d)(3) of the Exchange Act. For purposes of this Agreement, "Person" shall
mean an individual, corporation, partnership, joint venture, association,
trust, unincorporated organization or other entity.
2. OTHER COVENANTS, REPRESENTATIONS AND WARRANTIES. Each Stockholder
hereby represents and warrants to Parent and Buyer as follows:
(a) OWNERSHIP OF SHARES. On the date hereof, the Shares set forth
opposite such Stockholder's name on Schedule I hereto constitute all of
the Shares owned of record or Beneficially Owned by such Stockholder.
Schedule I hereto correctly indicates those Shares that are Beneficially
Owned and held of record by such Stockholder and those shares that are
Beneficially Owned by such Stockholder but not held of record by such
Stockholder. Schedule I discloses the number of Shares Beneficially Owned
by the Stockholder for which the Stockholder shares voting or dispositive
power with another Person and identifies such other Person or Persons.
Except as referenced in the preceding sentence and Schedule I, such
Stockholder has sole voting power and sole power to issue instructions
with respect to the matters set forth in Section 1 hereof, sole power of
disposition, sole power to demand appraisal rights and sole power to
agree to all of the matters set forth in this Agreement, in each case
with respect to all of the Shares set forth opposite such Stockholder's
name on Schedule I hereto, with no limitations, qualifications or
restrictions on such rights.
(b) POWER; BINDING AGREEMENT. Such Stockholder has the legal
capacity, power and authority to enter into and perform all of such
Stockholder's obligations under this Agreement. The execution, delivery
and performance of this Agreement by such Stockholder will not violate
any other agreement to which such Stockholder is a party including,
without limitation, any voting agreement, stockholder agreement or voting
trust. This Agreement has been duly and validly executed and delivered by
such Stockholder and constitutes a valid and binding agreement of such
Stockholder, enforceable against such Stockholder in accordance with its
terms. There is no beneficiary or holder of a voting trust certificate or
other interest of any trust of which such Stockholder is trustee who is
not a party to this Agreement and whose consent is required for the
execution and delivery of this Agreement or the consummation by such
Stockholder of the transactions contemplated hereby. If such Stockholder
is married and such Stockholder's Shares constitute community property,
this Agreement has been duly authorized, executed and delivered by, and
constitutes a valid and binding agreement of, such Stockholder's spouse,
enforceable against such person in accordance with its terms.
(c) NO CONFLICTS. No filing with, and no permit, authorization,
consent or approval of, any state or federal public body or authority is
necessary for the execution of this Agreement by such Stockholder or the
consummation by such Stockholder of the transactions contemplated hereby.
None of the execution and delivery of this Agreement by such Stockholder,
the consummation by such Stockholder of the transactions contemplated
hereby or compliance by such Stockholder with any of the provisions
hereof shall (1) result in a violation or breach of, or constitute (with
or without notice or lapse of time or both) a default (or give rise to
any third party right of termination, cancellation, material modification
or acceleration) under any of the terms, conditions or provisions of any
note, bond, mortgage, indenture, license, contract, commitment,
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<PAGE>
arrangement, understanding, agreement or other instrument or obligation
of any kind to which such Stockholder is a party or by which such
Stockholder or any of such Stockholder's properties or assets may be
bound, or (2) violate any order, writ, injunction, decree, judgment,
order, statute, rule or regulation applicable to such Stockholder or any
of such Stockholder's properties or assets.
(d) NO FINDER'S FEES. Other than existing financial advisory and
investment banking arrangements and agreements between Seller and
Donaldson, Lufkin & Jennrette Securities Corp., which have been disclosed
in writing to Buyer, no broker, investment banker, financial adviser or
other person is entitled to any broker's, finder's, financial adviser's
or other similar fee or commission in connection with the transactions
contemplated by the Stock Purchase Agreement based upon arrangements made
by or on behalf of such Stockholder or any of its Affiliates (or than
Seller and its Subsidiaries) or, to the knowledge of such Stockholder,
Seller or any of its Subsidiaries.
(e) OTHER POTENTIAL ACQUIRORS. Such Stockholder (i) shall immediately
cease any existing discussions or negotiations, if any, with any parties
conducted heretofore with respect to any acquisition of all or any
material portion of the assets of, or any equity interest in, Orion or
its Subsidiaries (other than Landmark) or any business combination with
Orion or its Subsidiaries (other than Landmark), in his, her or its
capacity as such, and (ii) from and after the date hereof until
termination of the Stock Purchase Agreement, unless and until Seller is
permitted to take such actions under Section 5.08 of the Stock Purchase
Agreement, shall not, in such capacity, directly or indirectly, initiate,
solicit or knowingly encourage (including by way of furnishing nonpublic
information or assistance), or take any other action to facilitate
knowingly, any inquiries or the making of any proposal that constitutes,
or may reasonably be expected to lead to, any such transaction or
acquisition, or agree to or endorse any such transaction or acquisition,
or authorize or permit any of such Stockholder's directors, officers,
stockholders, employees or agents to do so, and such Stockholder shall
promptly notify Buyer of any proposal and shall provide a copy of any
such written proposal and a summary of any oral proposal to Buyer
immediately after receipt thereof (and shall specify the material terms
and conditions of such proposal and identify the person making such
proposal) and thereafter keep Buyer promptly advised of any development
with respect thereto.
(f) RESTRICTION ON TRANSFER, PROXIES AND NON-INTERFERENCE. Except as
contemplated by the Stock Purchase Agreement, such Stockholder shall not,
directly or indirectly: (i) offer for sale, sell, transfer, tender,
pledge, encumber, assign or otherwise dispose of, or enter into any
contract, option or other arrangement or understanding with respect to or
consent to the offer for sale, sale, transfer, tender, pledge,
encumbrance, assignment or other disposition of, any or all of such
Stockholder's Shares or any interest therein; (ii) grant any proxies or
powers of attorney with respect to the subject matter of this Agreement,
deposit any Shares into a voting trust or enter into a voting agreement
with respect to any Shares; or (iii) take any action that would make any
representation or warranty of such Stockholder contained herein untrue or
incorrect or have the effect of preventing or disabling such Stockholder
from performing such Stockholder's obligations under this Agreement.
(g) RELIANCE BY BUYER. Such Stockholder understands and acknowledges
that Buyer is entering into the Letter of Intent, and will enter into the
Stock Purchase Agreement, in reliance upon such Stockholder's execution
and delivery of this Agreement.
3. FURTHER ASSURANCES. From time to time, at the other party's request
and without further consideration, each party hereto shall execute and
deliver such additional documents and take all such further lawful action as
may be necessary or desirable to consummate and make effective, in the most
expeditious manner practicable, the transactions contemplated by this
Agreement.
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<PAGE>
4. STOP TRANSFER, RESTRICTIVE LEGEND. (a) Each Stockholder agrees with,
and covenants to, Buyer that such Stockholder shall not request that Seller
register the transfer (book-entry or otherwise) of any certificate or
uncertificated interest representing any of such Stockholder's Shares,
unless such transfer is made in compliance with this Agreement. In the event
of a stock dividend or distribution, or any change in the Seller's Common
Stock by reason of any stock dividend, split-up, recapitalization,
combination, exchange of Shares or the like, the term "Shares" shall be
deemed to refer to and include the Shares as well as all such stock
dividends and distributions and any shares into which or for which any or
all of the Shares may be changed or exchanged.
(b) Upon the written request of Buyer, all certificates representing
any of such Stockholder's Shares shall contain the following legend:
"The securities represented by this certificate, including certain
voting and transfer rights with respect thereto, are subject to
the terms of a Stockholders Agreement, dated April 27, 1997, among
Metromedia International Group, Inc., P&F Acquisition Corp. and
Orion Pictures Corporation, a copy of which is on file in the
principal office of the Issuer."
5. TERMINATION. Except as otherwise provided herein, the covenants and
agreements contained herein with respect to the Shares shall terminate upon
the later of (a) September 30, 1997, or (b) ninety (90) days after the date
of the meeting of Seller's stockholders held for the purpose of approving
and adopting the Stock Purchase Agreement and the transactions contemplated
thereby (provided that, if no such meeting is held prior to September 30,
1997, the covenants and agreements contained herein with respect to the
Shares shall terminate on September 30, 1997).
6. STOCKHOLDER CAPACITY. No person executing this Agreement who is or
becomes during the term hereof a director of the Seller makes any agreement
or understanding herein in his or her capacity as such director. Each
Stockholder signs solely in his or her capacity as the record and/or
beneficial owner of such Stockholder's Shares.
7. MISCELLANEOUS.
(a) ENTIRE AGREEMENT. This Agreement, the Letter of Intent and the
Stock Purchase Agreement constitute the entire agreement between the
Parties with respect to the subject matter hereof and supersede all other
prior agreements and understandings, both written and oral, between the
parties with respect to the subject matter hereof.
(b) CERTAIN EVENTS. Each Stockholder agrees that this Agreement and
the obligations hereunder shall attach to such Stockholder's Shares and
shall be binding upon any person or entity to which legal or beneficial
ownership of such Shares shall pass, whether by operation of law or
otherwise, including, without limitation, such Stockholder's heirs,
guardians, administrators or successors. Notwithstanding any transfer of
Shares, the transferor shall remain liable for the performance of all
obligations under this Agreement of the transferor.
(c) ASSIGNMENT. This Agreement shall not be assigned by operation of
law or otherwise by any Stockholder without the prior written consent of
Buyer or by Buyer without the prior written consent of each Stockholder;
provided that Buyer may assign, in its sole discretion, its rights and
obligations hereunder to any direct or indirect wholly owned subsidiary
thereof, but no such assignment shall relieve such party of its
obligations hereunder if such assignee does not perform such obligations.
(d) AMENDMENTS, WAIVERS, ETC. This Agreement may not be amended,
changed, supplemented, waived or otherwise modified or terminated, with
respect to any one or more Stockholders, except upon the execution and
delivery of a written agreement executed by Buyer and such affected
Stockholder or Stockholders; provided that Schedule I hereto may be
supplemented by
4
<PAGE>
Buyer by adding the name and other relevant information concerning any
Stockholder of Seller who agrees to be bound by the terms of this
Agreement without the agreement of any other party hereto, and thereafter
such added Stockholder shall be treated as a "Stockholder" for all
purposes of this Agreement.
(e) NOTICES. All notices, requests, claims, demands and other
communications hereunder shall be in writing and shall be given (and
shall be deemed to have been duly received if so given) by hand delivery,
telegram, telex or telecopy, or by mail (registered or certified mail,
postage prepaid, return receipt requested) or by any courier service,
such as Federal Express, providing proof of delivery. All communications
hereunder shall be delivered to the respective parties at the following
addresses:
<TABLE>
<S> <C>
If to Seller or any Stockholder: c/o Metromedia Company
215 East 67th Street
New York, New York 10021
Attention: President
Facsimile: (212) 535-3541
If to: Metro-Goldwyn-Mayer Inc.
2500 Broadway Street
Santa Monica, California 90404
Attention: General Counsel
Facsimile: (310) 449-3011
with a copy to: Gibson, Dunn & Crutcher
333 South Grand Avenue
Los Angeles, California 90071-3197
Attention: Bruce D. Meyer, Esq.
Facsimile: (213) 229-7520
</TABLE>
or to such other address as the person to whom notice is given may have
previously furnished to the others in writing in the manner set forth
above.
(f) SEVERABILITY. Whenever possible, each provision or portion of any
provision of this Agreement will be interpreted in such manner as to be
effective and valid under applicable law but if any provision or portion of
any provision of this Agreement is held to be invalid, illegal or
unenforceable in any respect under any applicable law or rule in any
jurisdiction, such invalidity, illegality or unenforceability will not
affect any other provision or portion of any provision in such jurisdiction,
and this Agreement will be reformed, construed and enforced in such
jurisdiction as if such invalid, illegal or unenforceable provision or
portion of any provision had never been contained herein.
(g) SPECIFIC PERFORMANCE. Each of the parties hereto recognizes and
acknowledges that a breach by it of any covenants or agreements contained in
this Agreement will cause the other party to sustain damages for which it
would not have an adequate remedy at law for money damages, and therefore
each of the parties hereto agrees that in the event of any such breach the
aggrieved party shall be entitled to the remedy of specific performance of
such covenants and agreements and injunctive and other equitable relief in
addition to any other remedy to which it may be entitled, at law or in
equity.
(h) REMEDIES CUMULATIVE. All rights, powers and remedies provided under
this Agreement or otherwise available in respect hereof at law or in equity
shall be cumulative and not alternative, and the exercise of any thereof by
any party shall not preclude the simultaneous or later exercise of any other
such right, power or remedy by such party.
(i) NO WAIVER. The failure of any party hereto to exercise any right,
power or remedy provided under this Agreement or otherwise available in
respect hereof at law or in equity, or to insist upon compliance by any
other party hereto with its obligations hereunder, and any custom or
practice of the
5
<PAGE>
parties at variance with the terms hereof, shall not constitute a waiver by
such party of its right to exercise any such or other right, power or remedy
or to demand such compliance.
(j) NO THIRD PARTY BENEFICIARIES. This Agreement is not intended to be
for the benefit of, and shall not be enforceable by, any person or entity
who or which is not a party hereto.
(k) GOVERNING LAW. This Agreement shall be governed and construed in
accordance with the laws of the State of Delaware, without giving effect to
the principles of conflicts of law thereof.
(l) DESCRIPTIVE HEADINGS. The descriptive headings used herein are
inserted for convenience of reference only and are not intended to be part
of or to affect the meaning or interpretation of this Agreement.
(m) COUNTERPARTS. This Agreement may be executed in counterparts, each
of which shall be deemed to be an original, but all of which, taken
together, shall constitute one and the same Agreement.
6
<PAGE>
IN WITNESS WHEREOF, Seller, Buyer, each Stockholder have caused this
Agreement to be duly executed as of the day and year first above written.
METROMEDIA INTERNATIONAL GROUP, INC.
By: /s/ SILVIA KESSEL
-----------------------------------------
Silvia Kessel
EXECUTIVE VICE PRESIDENT
P&F ACQUISITION CORP.
By: /s/ DAVID G. JOHNSON
-----------------------------------------
David G. Johnson
EXECUTIVE VICE PRESIDENT
/s/ JOHN W. KLUGE
-----------------------------------------
John W. Kluge
/s/ STUART SUBOTNICK
-----------------------------------------
Stuart Subotnick
METROMEDIA COMPANY
By: /s/ STUART SUBOTNICK
-----------------------------------------
Stuart Subotnick
PRESIDENT
MET TELLCELL, INC.
By: /s/ STUART SUBOTNICK
-----------------------------------------
Stuart Subotnick
PRESIDENT
7
<PAGE>
SCHEDULE I
STOCKHOLDERS AGREEMENT
<TABLE>
<S> <C>
Metromedia Company............................................................... 7,989,206
John W. Kluge.................................................................... 2,605,449
Stuart Subotnick................................................................. 231,225
Met Tellcell, Inc................................................................ 4,426,249
</TABLE>
<PAGE>
APPENDIX C
DONALDSON, LUFKIN & JENRETTE
Donaldson, Lufkin & Jenrette Securities Corporation
277 Park Avenue, New York, New York 10172 - (212) 692-3000
June 18, 1997
Board of Directors
Metromedia International Group, Inc.
One Meadowlands Plaza
East Rutherford, New Jersey 07073-2137
Dear Sirs:
You have requested our opinion as to the fairness from a financial point of
view to Metromedia International Group, Inc. (the "Company") of the
consideration to be received by the Company pursuant to the terms of the Stock
Purchase Agreement dated as of May 2, 1997 (the "Agreement"), among the Company,
the Company's wholly owned subsidiary, Orion Pictures Corporation ("Orion" and
together with all of its direct and indirect subsidiaries other than the
Landmark Theater Group and each of its subsidiaries, the "Entertainment
Companies"), and P&F Acquisition Corp. (the "Buyer"), pursuant to which the
Buyer will purchase all of the capital stock of Orion (the "Transaction").
You have advised us that pursuant to the Agreement, the Buyer will pay the
Company for the Entertainment Companies an amount in cash equal to $573 million,
less the Existing Indebtedness of the Entertainment Companies, and assume such
Existing Indebtedness of the Entertainment Companies (the "Purchase
Consideration"). You have also advised us that Orion will transfer the assets of
the Landmark Theater Group and each of its subsidiaries to the Company prior to
the consummation of the Transaction.
In arriving at our opinion, we have reviewed the Agreement, including
exhibits thereto, as well as financial and other information that was publicly
available or furnished to us by the Company including information provided
during discussions with the Company's management. Included in the information
provided during discussions with management were certain internal financial
analyses and forecasts of the Entertainment Companies for the fiscal years
ending December 31, 1997 through 2002 prepared by the Company's management. In
addition, we have compared certain financial data of the Entertainment Companies
with various other companies whose securities are traded in public markets,
reviewed prices paid in certain other business combinations and conducted such
other financial studies, analyses and investigations as we deemed appropriate
for purposes of this opinion. We were not requested to, nor did we, solicit the
interest of any other party in purchasing the Entertainment Companies.
In rendering our opinion, we have relied upon and assumed the accuracy and
completeness of all of the financial and other information that was available to
us from public sources, that was provided to us by the Company or its
representatives, or that was otherwise reviewed by us. With respect to the
financial analysis and forecasts supplied to us, we have assumed that they have
been reasonably prepared on the basis reflecting the best currently available
estimates and judgments of the management of the Company as to the future
operating and financial performance of the Entertainment Companies. We have not
assumed any responsibility for making an independent evaluation of the
Entertainment Companies' assets and
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liabilities or for making any independent verification of any of the information
reviewed by us. We have relied as to certain legal matters on advice of counsel
to the Company.
Our opinion is necessarily based on economic market, financial and other
conditions as they exist on, and on the information made available to us as of,
the date of this letter. It should be understood that, although subsequent
developments may affect this opinion, we do not have any obligation to update,
revise or reaffirm this opinion. Our opinion does not address the Board's
decision to proceed with the Transaction. Our opinion does not constitute a
recommendation to any stockholder as to how such stockholder should vote on the
proposed transaction.
Donaldson, Lufkin & Jenrette Securities Corporation ("DLJ"), as part of its
investment banking services, is regularly engaged in the valuation of businesses
and securities in connection with mergers, acquisitions, underwritings, sales
and distributions of listed and unlisted securities, private placements and
valuations for estate, corporate and other purposes. DLJ has performed
investment banking and other services for the Company in the past and has been
compensated for such services. Over the past two years, DLJ has advised the
Company with respect to its merger with Orion, MCEG Sterling, Inc. and
Metromedia International Telecommunications, Inc. in November 1995; advised the
Company with respect to its acquisitions of The Samuel Goldwyn Company and
Motion Picture Corporation of America in July 1996; and lead-managed a $202.4
million offering of the Company's common stock in July 1996, for each of which
DLJ received usual and customary compensation. In addition, DLJ is currently
acting as lead-manager with respect to the Company's proposed $125 million
convertible preferred stock offering. DLJ also owns 131,453 shares of the
Company's Common Stock, of which 63,852 shares are subject to a make-whole
arrangement with the Company.
Based upon the foregoing and other factors as we deem relevant, we are of
the opinion that the Purchase Price to be received by the Company is fair to the
Company from a financial point of view.
Very truly yours,
DONALDSON, LUFKIN & JENRETTE
SECURITIES CORPORATION
By: /s/ Warren C. Woo
Warren C. Woo
Managing Director
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EXHIBIT 1
<PAGE>
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- --------------------------------------------------------------------------------
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM 10-K/A
AMENDMENT NO. 1
(MARK ONE)
/X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the fiscal year ended December 31, 1996
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 (NO FEE REQUIRED)
For the transition period from ______ to ______
Commission File Number 1-5706
------------------------
METROMEDIA INTERNATIONAL GROUP, INC.
(Exact name of registrant, as specified in its charter)
------------------------------
<TABLE>
<S> <C>
DELAWARE 58-0971455
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
</TABLE>
------------------------
ONE MEADOWLANDS PLAZA, EAST RUTHERFORD, NEW JERSEY 07073-2137
(Address and zip code of principal executive offices)
(201) 531-8000
(Registrant's telephone number, including area code)
------------------------------
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
<TABLE>
<S> <C>
TITLE OF EACH CLASS NAME OF EACH EXCHANGE
ON WHICH REGISTERED
Common Stock, $1.00 par value American Stock Exchange
Pacific Stock Exchange
9 1/2% Subordinated Debentures, due August 1, 1998 New York Stock Exchange
10% Subordinated Debentures, due October 1, 1999 New York Stock Exchange
</TABLE>
------------------------
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
None
------------------------
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes /X/ No / /
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K.
The aggregate market value of voting stock of the registrant held by
nonaffiliates of the registrant at February 28, 1997 computed by reference to
the last reported sale price of the Common Stock on the composite tape on such
date was $507,383,400.
The number of shares of Common Stock outstanding as of February 28, 1997 was
66,157,971.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Definitive Proxy Statement to be used in connection with the
Registrant's 1997 Annual Meeting of Stockholders are incorporated by reference
into Part III of this Annual Report on Form 10-K.
- --------------------------------------------------------------------------------
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<PAGE>
PART I
ITEM 1. BUSINESS
METROMEDIA INTERNATIONAL GROUP, INC.
Metromedia International Group, Inc. ("MMG" or "the Company") is a global
communications, entertainment and media company engaged in two strategic
businesses: (i) the development and operation of communications businesses,
including wireless cable television, AM/FM radio, paging, cellular
telecommunications, international toll calling and trunked mobile radio, in
Eastern Europe, the republics of the former Soviet Union, the People's Republic
of China (the "PRC") and other selected emerging markets, through its
Communications Group ( the "Communications Group") and (ii) the production and
worldwide distribution in all media of motion pictures, television programming
and other filmed entertainment and the exploitation of its library of over 2,200
feature film and television titles, through its Entertainment Group (the
"Entertainment Group"). Each of these businesses currently operates on a stand
alone basis, pursuing distinct business plans designed to capitalize on the
growth opportunities within their individual industries. As these industries
continue to converge worldwide, the Company expects to be able to capitalize on
synergies resulting from its position as a diversified company with significant
operations in communications, entertainment and media services.
During 1996, the Company experienced significant development in both its
Communications and Entertainment Groups. For example, aggregate subscribers of
the Communications Group's joint ventures various services at the end of the
1996 fiscal year was 120,596, representing a growth of approximately 130% over
the 1995 year-end total of 52,360 subscribers. The Communications Group's
financial results for December 31 include the Group's joint ventures for the 12
months ending September 30th. In addition, during 1996, the Entertainment Group
increased its feature film production, acquisition and distribution as it
released 13 feature films and announced plans to release approximately 17
feature films in 1997.
In addition to its Communications and Entertainment Groups, the Company also
owns two nonstrategic businesses: Snapper, Inc. ("Snapper"), a wholly-owned
subsidiary of the Company, and its investment in RDM Sports Group, Inc.
(formerly known as Roadmaster Industries, Inc.) ("RDM"), each of which the
Company owned prior to the November 1, 1995 Merger (as defined below) and the
subsequent shift in its business focus to a global communications, entertainment
and media company. Snapper manufactures Snapper-Registered Trademark- brand
premium-priced power lawnmowers, lawn tractors, garden tillers, snowthrowers and
related parts and accessories. RDM, which is listed on the New York Stock
Exchange, is a leading sporting goods manufacturer of which the Company owns
approximately 19.2 million shares, approximately 39%, of the outstanding shares.
Following the consummation of the November 1 Merger (as defined below), the
Company publicly announced that it was actively exploring a sale of both Snapper
and its investment in RDM, and as a result, for accounting purposes, both assets
were classified as assets held for sale and the results of operations for both
assets were not consolidated with the Company's consolidated results of
operations for the period from November 1, 1995 through October 31, 1996. The
Company has decided not to continue to pursue its previously adopted plan to
dispose of Snapper and to actively manage Snapper to maximize its long-term
value. As of November 1, 1996, the Company has included Snapper's operating
results in the consolidated results of operations of the Company for the
two-month period ended December 31, 1996. (see "Business--Snapper"). The Company
continues to pursue opportunities for a sale of its investment in RDM. In
addition, the Company, consistent with its fiduciary duty to stockholders,
evaluates opportunities as they arise to maximize stockholder value by disposing
of other assets.
The Company was organized in 1929 under Pennsylvania law and reincorporated in
1968 under Delaware law. On November 1, 1995, as a result of the mergers of
Orion Pictures Corporation ("Orion") and Metromedia International
Telecommunications, Inc. ("MITI") with and into wholly-owned subsidiaries of
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the Company and the merger of MCEG Sterling Incorporated ("Sterling") with and
into the Company (collectively, the "November 1 Merger"), the Company changed
its name from "The Actava Group Inc." to "Metromedia International Group, Inc."
The Company's principal executive offices are located at One Meadowlands Plaza,
East Rutherford, New Jersey 07073-2137, telephone: (201) 531-8000.
DESCRIPTION OF BUSINESS GROUPS
In addition to the other information contained in this Form 10-K, the following
factors should be considered carefully in evaluating the Company and its
business. Certain statements set forth below under this caption constitute
"Forward-Looking Statements" within the meaning of the Private Securities
Litigation Reform Act of 1995. See "Special Note Regarding Forward-Looking
Statements" on page 56 relating to such statements.
For a complete description of the consolidated financial statements of the
Company, see Part IV.
THE COMMUNICATIONS GROUP
The Communications Group was founded in 1990 to take advantage of the growing
demand for modern communications services in Eastern Europe and the republics of
the former Soviet Union and in other selected emerging markets and launched its
first operating system in 1992. The Communications Group's markets generally
have large populations, with high density and strong economic potential, but
lack reliable and efficient communications services. At December 31, 1996, the
Communications Group owned interests in and participated with partners in the
management of joint ventures that had 29 operational systems, consisting of 9
wireless cable television systems, 6 AM/FM radio stations, 9 paging systems, 1
international toll calling service and 4 trunked mobile radio systems. In
addition, the Communications Group has interests in and participates with
partners in the management of joint ventures (the "Joint Ventures") that, as of
December 31, 1996, had 6 pre-operational systems consisting of 1 wireless cable
television system, 1 paging system, 2 cellular telecommunication systems, 1
trunked mobile radio system and 1 company providing sales, financing and service
for wireless local loop equipment, each of which the Company believes will be
operational during 1997. The Communications Group generally owns approximately
50% of the Joint Ventures in which it invests. The Company's objective is to
establish the Communications Group as a major multiple-market provider of modern
communications services in Eastern Europe, the republics of the former Soviet
Union, the PRC and other selected emerging markets.
The Company's Communications Group's Joint Ventures experienced significant
growth in 1996. Total subscribers for the Communications Group's Joint Ventures
at the end of the 1996 fiscal year was 120,596 compared with 52,360 at year end
1995, which represents an increase of approximately 130%. The Communications
Group's financial results for December 31 include the Group's Joint Ventures for
the 12 months ending September 30th.
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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/
MARKETS HOUSEHOLDS (MM) AGGREGATE
PRE-OPERATIONAL OPERATIONAL AT AT SUBSCRIBERS AT
MARKETS AT DECEMBER 31, DECEMBER 31,(1) DECEMBER 31,
COMMUNICATIONS DECEMBER 31, ------------------------ -------------------- --------------------
SERVICE 1996 1996 1995 1996 1995 1996 1995
- ----------------------------------------- ------------------- ----- ----- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
Wireless Cable Television................ 1(2) 9 7 9.5 7.2 69,118 37,900
AM/FM Radio.............................. -- 6 5 23.8 22.2 n/a n/a
Paging(3)................................ 1(4) 9 6 89.5 73.3 44,836 14,460
Cellular Telecommunications.............. 2(5) -- -- 8.2 -- n/a n/a
International Toll Calling(6)............ -- 1 1 5.5 5.5 n/a n/a
Trunked Mobile Radio(7).................. 1(8) 4(8) -- 36.2 -- 6,642 --
Wireless Local Loop(9)................... 1 -- -- 72.6 10) -- n/a n/a
</TABLE>
- ------------------------
(1) Target population is provided for paging, telephony and trunked mobile radio
systems and target households is provided for wireless cable television
systems and radio stations.
(2) After December 31, 1996, one of the Communications Group's Joint Ventures
acquired a wired network adding approximately 37,000 subscribers.
(3) Target population for the Communications Group's paging Joint Ventures
included the total population in the jurisdictions where such Joint Ventures
are licensed to provide services. In many markets, however, the
Communications Group's paging system currently only covers the capital city
and is expanding into additional cities.
(4) Since December 31, 1996, the Communications Group has commenced a paging
operation in Vienna, Austria, which was licensed to provide paging services
nationwide.
(5) The Communications Group owns 23.6% of Baltcom GSM which subsequent to
December 31, 1996 completed construction and launched commercial service of
a national cellular telecommunications system in Latvia. The Communications
Group also owns 34.3% of a Joint Venture that holds a license and has
recently begun construction of a nationwide cellular telecommunications
system in Georgia.
(6) Provides international toll calling services between Georgia and the rest of
the world and is the only Intelstat-designated representative in Georgia to
provide such services.
(7) Target population for the Communications Group's trunked mobile radio
systems includes total population in the jurisdictions where such Joint
Ventures are licensed to provide services. In many markets, the
Communications Group's systems are only operational in major cities.
(8) Since December 31, 1996, the Communications Group has commenced trunked
mobile radio services in Almaty and Atyrau, Kazakstan.
(9) The Communications Group owns a 60% interest in a pre-operational Joint
Venture in China that provides telecommunications equipment, financing,
network planning, installation and maintenance services.
(10) Indicates population of the Hebei and Tianjin provinces in China in which
the Communications Group's Joint Venture has tested it equipment.
LICENSES
The Communications Group's operations are subject to governmental regulation in
its markets and its operations require certain governmental approvals. There can
be no assurance that the Communications
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Group will obtain necessary approvals to operate additional wireless cable
television, wireless telephony or paging systems or radio broadcast stations in
any of the markets in which it is seeking to establish its businesses.
The licenses pursuant to which the Communications Group's businesses operate are
issued for limited periods, including certain licenses which are renewable
annually. Certain of these licenses expire over the next several years. Two of
the licenses held by the Communications Group have recently expired, although
the Communications Group has been permitted to continue operations while the
reissuance is pending. The Communications Group has applied for renewals and
expects new licenses to be issued. Five other licenses held or used by the
Communications Group will expire during 1997. While there can be no assurance on
this matter, based on past experience, the Communications Group expects that all
of these licenses will be renewed. For most of the licenses held or used by the
Communications Group, no statutory or regulatory presumption exists for renewal
by the current license holder, and there can be no assurance that such licenses
will be renewed upon the expiration of their current terms. The Communications
Group's partners in these ventures have not advised the Communications Group of
any reason such licenses would not be renewed. The failure of such licenses to
be renewed may have a material adverse effect on the Communications Group.
Additionally, certain of the licenses pursuant to which the Communications
Group's businesses operate contain network build-out milestone clauses. The
failure to satisfy such milestones could result in the loss of such licenses
which may have a material adverse effect on the Communications Group.
In addition to its existing projects and licenses, the Communications Group
continues to explore a number of investment opportunities in wireless telephony
systems in certain markets in Eastern Europe, including Romania, the republics
of the former Soviet Union, including Kazakstan, the PRC and other selected
emerging markets, and has installed test systems in certain of these selected
markets. The Communications Group acquired or obtained access to the right to
offer its services under a total of 16 new licenses to provide its various
services in 1996 in both new and existing markets.
In February 1997, the Communications Group, through Metromedia Asia Corporation
("MAC"), acquired Asian America Telecommunications Corporation ("AAT"), a
company which owns interests in and participates in the management of two
separate joint ventures in the PRC, and which has entered into agreements with
China United Telecommunications Corporation ("China Unicom") to (i) construct
and develop a local telephone network for up to 1,000,000 lines in the Sichuan
province in which the Communications Group will utilize fixed wireless local
loop technology and (ii) construct and develop a wireless GSM system for up to
50,000 subscribers in the City of Ningbo. As a result of the consummation of the
acquisition of AAT, the Communications Group owns 57% of MAC.
STRATEGIES
The Communications Group intends to expand its subscriber and customer bases, as
well as its revenues and cash flows, by (i) completing the build-out of existing
license areas; (ii) utilizing low cost wireless technology; (iii) growing the
subscriber base in existing license areas; (iv) pursuing additional licenses in
existing markets; and (v) obtaining new licenses.
The use of wireless technologies has allowed and will continue to allow the
Communications Group to build-out its existing and future license areas more
rapidly and at a lower cost than the construction of comparable wired networks.
Many of the cities where the Communications Group has wireless licenses
significantly limit wireline construction above and/or underground.
Since its formation in 1990, the Communications Group has been investing in
joint ventures to obtain communications licenses in emerging markets. Since the
consummation of the Company's offering of 18.4 million shares of common stock in
July 1996, the Company has accelerated the construction and marketing of its
communications systems. In 1996, the Company expanded the build-out of its
paging operations in Uzbekistan by adding several cities as part of its
long-term plan to provide nationwide paging service.
4
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The Communications Group believes it will continue to add subscribers by (i)
targeting each demographic group in its markets with customized communications
services; (ii) cross-marketing and bundling communications services to existing
customers; (iii) providing technologically-advanced services and a high level of
services to its customers; (iv) providing new and targeted programming on its
radio stations to increase its advertising revenue and (v) opportunistically
acquiring additional existing systems in its service areas and in other
strategic areas to increase its subscriber base.
The Communications Group is pursuing opportunities to provide additional
communications services in regions in which it currently operates. Recently, for
example, the Communications Group launched commercial service of GSM
telecommunications in Latvia where it already provides wireless cable
television, paging and radio broadcasting services. This strategy enables the
Communications Group to leverage its existing infrastructure and to capitalize
on marketing opportunities by bundling its services. The Communications Group
believes that it has several competitive advantages that will enable it to
obtain licenses in these markets, including: (i) established relationships with
local strategic partners and local governments; (ii) a proven track record of
handling and operating systems and (iii) a fundamental understanding of the
regions' political, economic and cultural issues.
The Communications Group is actively pursuing investments in joint ventures to
obtain new licenses for wireless communications services in markets in which it
presently does not have any licenses. The Communications Group is targeting
emerging markets with strong economic potential, but which lack adequate
communications services. In evaluating whether to enter a new market, the
Communications Group assesses, among other factors, (i) the potential demand for
the Communications Group's services and the availability of competitive
services; (ii) the strength of local partners; and (iii) the political, social
and economic environment. The Communications Group has identified several
attractive opportunities in Eastern Europe and the Pacific Rim. Recently, for
example, the Communications Group began to provide paging services in Austria,
radio broadcasting in Prague, Czech Republic. In February 1997, the
Communications Group, through MAC acquired AAT, which owns interests in and
participates in the management of joint ventures which have agreements to
provide wireless telephone equipment and services in certain provinces of the
PRC. The Communications Group owns 57% of MAC.
The Communications Group has experienced significant growth since its inception
and continues to pursue additional investments in a variety of communications
businesses in both existing and additional markets. The Group's growth strategy
requires the Company to expend significant capital to enable the Communications
Group to continue to develop its existing operations and to invest in additional
ventures. There can be no assurance that the Company will have the funds
necessary to support the current needs of the Communications Group's current
investments or any of the Communications Group's additional opportunities or
that the Communications Group will be able to obtain financing from third
parties. If such financing is unavailable, the Group may not be able to further
develop existing ventures and the number of additional ventures in which it
invests may be significantly curtailed. See Item 7--Management's Discussion and
Analysis of Financial Condition and Results of Operations, Liquidity and Capital
Resources.
WIRELESS CABLE TELEVISION
GENERAL. The Communications Group commenced offering wireless cable television
services in 1992 with the launch by two of its Joint Ventures of Kosmos TV in
Moscow, Russia ("Kosmos") and Baltcom TV in Riga, Latvia ("Baltcom"). The
Communications Group currently has interests in joint ventures which offer
wireless cable television services in 10 markets in Eastern Europe and the
republics of the former Soviet Union with 69,118 subscribers at December 31,
1996, an increase of approximately 82% from December 31, 1995. In addition, the
Communications Group has an interest in a joint venture which is licensed to
provide wireless cable television service and is building a system in St.
Petersburg, Russia and in January 1997, one of the Communications Group's Joint
Ventures acquired an existing wired network system in Romania, adding a total of
approximately 37,000 connected subscribers. The Communications Group believes
that there is a growing demand for multi-channel television services in each of
the markets
5
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where its Joint Ventures are operating, which is driven by several factors
including: (i) the lack of quality television and alternative entertainment
options in these markets; (ii) the growing demand for Western-type entertainment
programming; and (iii) the increase in disposable income in these markets which
is raising the demand for entertainment services.
TECHNOLOGY. Each of the Communications Group's wireless television Joint
Ventures utilizes microwave multipoint distribution system ("MMDS") technology.
The Communications Group believes that MMDS is the most attractive technology to
utilize for multi-channel television services in these markets because (i) the
initial construction costs of an MMDS system generally are lower than wireline
cable or direct-to-home ("DTH") satellite transmission; (ii) the time required
to construct a wireless cable network is significantly less than the time
required to build a standard wireline cable television network covering a
comparably sized service area; (iii) the obstacles to obtaining the required
permits and rights-of-way to construct wired networks in the Communications
Group's markets are substantial; (iv) the high communications tower typically
utilized by the MMDS network combined with the high density of multi-family
dwelling units in these markets gives the MMDS networks very high line of sight
("LOS") penetration; and (v) the wide bandwidth of the spectrum typically
licensed by each of the Communications Group's Joint Ventures gives each system
the ability to broadcast a wide variety of attractive international and
localized programming.
In each system operated by the Communications Group's Joint Ventures, encrypted
multichannel signals are broadcast in all directions from a transmission tower
which, in the case of such Joint Ventures systems, is typically the highest
structure in the city and, as a result, has very high LOS penetration.
Specialized compact receiving antenna systems, installed by the Communications
Group on building rooftops as part of the system, receive the multiple channel
signals transmitted by the transmission tower antennae and convert and route the
signals to a set-top converter and a television receiver via a coaxial cabling
system within the building. In each city where the Communications Group provides
or expects to provide service, a substantial percentage of the population lives
in large, multi-dwelling apartment buildings. This infrastructure significantly
reduces installation costs and eases penetration of wireless cable television
services into a city, because a single MMDS receiving location can bring service
to numerous apartment buildings housing a large number of people. In order to
take advantage of such benefits, in many areas the Communications Group is
internally wiring buildings so that it can serve all of the apartment dwellers
in such buildings through one microwave receiving location. The set-top
converter descrambles the signal and is also used as a channel selector to
augment televisions having a limited number of channels. The Communications
Group generally utilizes the same equipment across its wireless cable television
systems which enables it to realize purchasing efficiencies in the build-out of
its networks.
In two cities in which the Communications Group's Joint Ventures operate
wireless cable television systems, Bucharest, Romania and Chisinau, Moldova,
where local cable television companies have been able to construct large wired
networks, its Joint Ventures have also purchased wired networks and are in the
process of integrating the wired operations with their wireless systems. The
Communications Group believes that in these markets, the integration of these
wired networks into its Communications Group's wireless operations will enable
the Communications Group to build its subscriber base while delivering high
quality, premium services to existing subscribers.
PROGRAMMING. The Communications Group believes that programming is a critical
component in building successful wireless cable television systems. The
Communications Group currently offers a wide variety of programming including
English, French, German and Russian programming, some of which is dubbed or
subtitled into the local language. In order to maximize penetration and revenues
per subscriber, the cable television Joint Ventures generally offer multiple
tiers of service including, at a minimum, a "lifeline" service, a "basic"
service and a "premium" service. Generally, the lifeline service provides
programming of local off-air channels and an additional two to four channels
with a varied mixture of European or American sports, music, international news
and general entertainment. The basic and premium services
6
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generally include the channels which make up the lifeline service, as well as an
additional number of satellite channels and a movie channel that offers recent
and classic movies.
In most of its markets, the Communications Group offers subscribers different
tiers of programming with a variety of channels. The content of each programming
tier varies from market to market, but generally include channels such as MTV,
Eurosport, NBC Super Channel, Bloomberg TV, Cartoon Network/TNT, BBC World, CNN,
SKY News/Discovery Channel and the Adult Channel. Each tier also offers
localized programming.
In one of its markets, the Communications Group offers "pay-per-view" movies and
plans to add similar services to its program lineups in certain of its other
markets. The subscriber pays for "pay-per-view" services in advance, and the
intelligent decoders that the Communications Group uses automatically deduct the
purchase of a particular service from the amount paid in advance. In addition,
one of the Communications Group's Joint Ventures has created a movie channel,
"TV21", consisting of U.S. and European films dubbed into Russian language and
distributes this channel (dubbed in different languages) to most of the
Communications Group's other wireless cable television ventures. Centralized
dubbing and distribution of this movie channel has enabled the Communications
Group to avoid the cost of separately providing a similar movie channel in its
other markets.
The Communications Group has been able to capitalize on synergies with the
Entertainment Group by establishing the Metromedia Entertainment Network ("MEN")
programming package which it licenses to cable television companies in Romania.
MEN contains a number of subtitled channels with the main attraction being the
"Orion Film Channel," a channel containing movies primarily distributed by the
Entertainment Group. The Communications Group is currently exploring the
roll-out of MEN in certain other markets.
MARKETING. While each wireless cable television Joint Venture initially targets
its wireless cable television services toward foreign national households,
embassies, foreign commercial establishments and international and local hotels,
each system offers multiple tiers, at least one of which is targeted toward, and
within the economic reach of, a substantial and growing number of the local
population in each market. The Communications Group offers several tiers of
programming in each market and strives to price the lowest tier at a level that
is affordable to a large percentage of the population and that generally
compares in price to alternative entertainment products. The Communications
Group believes that a growing number of subscribers to local broadcast services
will demand the superior quality programming and increased viewing choices
offered by its MMDS service. Upon launching a particular service, the
Communications Group uses a combination of event sponsorships, billboard, radio
and broadcast television advertisements to increase awareness in the marketplace
about its services.
COMPETITION. Each of the Communications Group's wireless cable television
systems competes with off-the-air broadcast television stations. In addition, in
many markets there are several existing wireline cable television providers
which are generally small, undercapitalized local companies that are providing
limited programming to subscribers in limited service areas. In many of its
wireless cable television markets, it competes with providers of DTH programming
services, which offer subscribers programming directly from satellite
transponders. The Communications Group believes that it has significant
competitive advantages over DTH providers via lower cost and the ability to
offer localized programming.
AM/FM RADIO
GENERAL. The Communications Group entered the radio broadcasting business in
Eastern Europe through the acquisition of Radio Juventus in Hungary in 1994. It
operates radio stations in Eastern Europe and the republics of the former Soviet
Union and owns and operates, through joint ventures, stations in six markets.
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The Communications Group's radio broadcasting operations generally seek to
acquire underdeveloped "stick" properties (i.e., stations with insignificant
ratings and little or no positive cash flow) at attractive valuations. The
Communications Group then installs experienced radio management to improve
performance through increased marketing and focused programming. Management
utilizes its programming expertise to specifically tailor the programming of
each station utilizing sophisticated research techniques to identify
opportunities within each market and programs its stations to provide complete
coverage of a demographic or format type. This strategy allows each station to
deliver highly effective access to a target demographic and capture a higher
percentage of the radio advertising audience share.
PROGRAMMING. Programming in each of the Communications Group's AM and FM
markets is designed to appeal to the particular interests of a specific
demographic group in such markets. The Communications Group's radio programming
formats generally consist of popular music from the United States, Western
Europe, and the local region. News is delivered by local announcers in the
language appropriate to the region, and announcements and commercials are
locally produced. By developing a strong listener base comprised of a specific
demographic group in each of its markets, the Communications Group believes it
will be able to attract advertisers seeking to reach these listeners. The
Communications Group believes that the technical programming and marketing
expertise that it provides to its Joint Ventures enhances the performance of the
Joint Ventures' radio stations.
MARKETING. Radio station programming is generally targeted toward
25-to-55-year-old consumers, who are believed by management of the
Communications Group to be the most affluent in the Group's radio markets. Each
station's format is intended to appeal to the particular listening interests of
this consumer group in its market. This is intended to enable the commercial
sales departments of each Joint Venture to present to advertisers the most
desirable market for their products and services, thereby heightening the value
of the station's commercial advertising time. Advertising on these stations is
sold to local, national and international advertisers.
COMPETITION. In each of the Communications Group's existing markets, there are
either a number of stations in operation already or plans for competitive
stations to be in service shortly. As additional stations are constructed and
commence operations, the Communications Group expects to face significantly
increased competition for listeners and advertising revenues from parties with
programming, engineering and marketing expertise comparable to the
Communications Group. Other media businesses, including broadcast television,
cable television, newspapers, magazines and billboard advertising also compete
with the Communications Group's radio stations for advertising revenues.
PAGING
GENERAL. The Communications Group commenced offering radio paging services in
1994 with the launch of paging networks serving the countries of Romania and
Estonia. Paging systems are useful in these markets as a means for one-way
business/personal communications without the need for a recipient to access a
telephone network, which in many of these markets is often overloaded or
unavailable. At December 31, 1996, the Communications Group's paging Joint
Ventures were licensed to offer paging services in markets containing
approximately 89.5 million persons. The Communications Group's Joint Ventures
generally provide service in the capital or major cities in these countries and
are currently expanding the services of such operations to cover additional
areas. At December 31, 1996, the Communications Group's Joint Ventures paging
service operations had an aggregate of approximately 44,836 subscribers, from
14,460 subscribers at December 31, 1995, an increase of approximately 210%.
The Communications Group offers several types of paging services. Substantially
all of the Group's subscribers choose alphanumeric pagers, which emit a variety
of tones and display as many as 63 characters. Subscribers may also purchase
additional services, such as paging priority, group calls and other options. The
Group provides a choice of pagers, which are typically purchased by the
subscriber or leased
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for a small monthly fee. The Communications Group also provides 24-hour operator
service with operators who are capable of taking and sending messages in several
languages.
TECHNOLOGY. Paging is a one-way wireless messaging technology which uses an
assigned frequency and a specific pager identifier to contact a paging customer
within a geographic service area. Each customer who subscribes to a paging
service is assigned a specific pager number. Transmitters broadcast the
appropriate signal or message to the subscriber's pager, which has been preset
to monitor a designated radio frequency. Each pager has a unique number
identifier, or "cap code," which allows it to pick up only those messages sent
to that pager. The pager signals the subscriber through an audible beeping
signal or an inaudible vibration and displays the message on the subscriber's
pager. Depending on the market, the Joint Ventures offer alphanumeric pagers
which have Latin and/or Cyrillic (Slavic language) character display.
The effective signal coverage area of a paging transmitter typically encompasses
a radius of between 15 and 20 miles from each transmitter site. Obstructions,
whether natural, such as mountains, or man-made, such as large buildings, can
interfere with the signal. Multiple transmitters are often used to cover large
geographic areas, metropolitan areas containing tall buildings or areas with
mountainous terrain.
Each of the Communications Group's paging Joint Ventures use either terrestrial
radio frequency ("RF") control links that originate from one broadcast
transmitter which is controlled by a local paging terminal and broadcast to each
of the transmitters or to a satellite uplink controlled by the paging terminal,
which transmits to a satellite and downlinks to a receiving dish adjacent to
each of the transmitters. Once a message is received by each transmitter in a
simulcast market, they in turn broadcast the paging information using the paging
broadcast frequency. The RF control link frequency is different from the paging
broadcast frequency. For non-contiguous regional coverage, either telephone
lines or microwave communication links are also used in lieu of an RF control
link or satellite link.
MARKETING. Paging services are targeted toward people who spend a significant
amount of time outside of their offices, have a need for mobility or are
business people without ready access to telephones. The Communications Group
targets its paging services primarily to local businesses, the local police, the
military, and expatriates. Paging provides an affordable way for local
businesses to communicate with employees in the field. Subscribers are charged a
monthly fee which entitles the subscriber to receive an unlimited number of
pages per month.
COMPETITION. In some of the Communications Group's paging markets, the
Communications Group has experienced and expects to continue to experience
competition from existing small, local, paging operators who have limited areas
of coverage, and, in a few cases, from paging operators established by Western
European and United States investors with substantial experience in paging. The
Communications Group believes it competes effectively against these companies
with its high quality, reliable, 24-hour service. The Communications Group does
not have or expect to have exclusive franchises with respect to its paging
operations and may therefore face more significant competition in its markets in
the future from highly capitalized entities seeking to provide similar services.
CELLULAR TELECOMMUNICATIONS
OVERVIEW. The Communications Group owns a 23.6% interest in Baltcom GSM, which
has recently completed construction and launched commercial service of a
national cellular telephone system in Latvia. The Communications Group also owns
a 34.3% interest in Magticom, a joint venture that holds a license for and has
recently begun construction on a national cellular telephone system in the
country of Georgia. The Communications Group is partnered in these ventures with
Western Wireless, a leading U.S. cellular provider. The Communications Group
believes that there is a large demand for cellular telephone service in each of
Latvia and Georgia due to the limited supply and poor quality of wireline
telephone service in these markets, as well as the rapidly growing demand for
the mobility offered by cellular telephone service. Landline telephone
penetration is approximately 25% in Latvia and 9% in Georgia. The demand for
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reliable and mobile telephone service is increasing rapidly and the pace is
expected to continue as commerce in these regions continues to experience rapid
growth.
In addition, through AAT, the Communications Group has entered into a joint
venture agreement with Ningbo United Telecommunications Investment Co., Ltd. to
(i) finance and assist China Unicom, in the construction of an advanced GSM
cellular telephone network; and (ii) provide consulting and management support
services to China Unicom in its operation of such network within the City of
Ningbo, PRC. This project will have a capacity of up to 50,000 subscribers.
Construction of the project has recently been completed and the Joint Venture
has begun to market the network to subscribers. This Communications Group's
Joint Venture is entitled to 73% of the distributed cash flow, as defined in the
joint venture agreement, from the network for a 15-year period.
TECHNOLOGY. The Communications Group's cellular telephone network in Latvia has
been constructed and the telephone network in Georgia is being constructed using
GSM technology. GSM is the standard for cellular service throughout Western
Europe, which will allow the Communications Group's customers to "roam"
throughout the region. GSM's mobility is a significant competitive advantage
compared to competing Advanced Mobile Phone System ("AMPS") services which
cannot offer roaming service in most neighboring countries in Europe or Nordic
Mobile Telephone ("NMT") services which are based on what the Communications
Group believes is an older and less reliable technology.
MARKETING. The Communications Group targets its cellular telephony services
toward individuals, corporations and other organizations with a need for
mobility, ready access to a high quality voice transmission service and the
ability to conduct business outside of the workplace or home. The Communications
Group sells cellular phones at a small mark-up to cost. This pass-through
strategy encourages quick market penetration and early acceptance of cellular
telephony as a desirable alternative to fixed, land-based telephony systems. The
Communications Group intends to market its cellular telephony service to
customers of its existing wireless cable television and paging services in both
Latvia and Georgia. The Group believes that this database of names will be
useful in marketing its cellular telephony services, as these are customers who
already have exhibited an interest in modern communications services. In
addition, these Joint Ventures intend to market these services by providing a
comprehensive set of packages with different service features which permit the
subscriber to choose the package that most closely fits his or her needs.
COMPETITION. Baltcom GSM's primary competitor in Latvia is Latvia Mobile
Telecom ("LMT"), which is partly owned by a state-owned enterprise. LMT
commenced service in 1995 and currently has approximately 20,000 subscribers.
LMT operates a second system using the older, less efficient NMT technology that
the Communications Group believes will pose less of a competitive threat than
LMT's GSM system. The Communications Group believes that its primary competitors
in Georgia will be Geocell, a Georgian-Turkish joint venture that recently
launched commercial service using a GSM system, as well as an existing smaller
provider of cellular telephony service which uses the AMPs technology in its
network.
The Communications Group also faces competition from the primary provider of
telephony services in each of its markets, which are the national PTTs. However,
given the low telephone penetration rates in these markets and the
underdeveloped landline telephone system infrastructure, the Communications
Group believes that cellular telephony provides an attractive alternative to
customers who need fast, reliable and quality telephone service.
INTERNATIONAL TOLL CALLING
GENERAL. The Communications Group owns approximately 30% of Telecom Georgia.
Telecom Georgia handles all international calls inbound to and outbound from the
Republic of Georgia to the rest of the world. Telecom Georgia has made
interconnect arrangements with several international long distance carriers such
as Sprint and Telespazio of Italy. For every international call made to the
Republic of
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Georgia, a payment will be due to Telecom Georgia by the interconnect carrier
and for every call made from the Republic of Georgia to another country, Telecom
Georgia will bill its subscribers and pay a destination fee to the interconnect
carrier.
Since Telecom Georgia commenced operations, long distance traffic in and out of
Georgia has increased dramatically as Telecom Georgia has expanded the number of
available international telephone lines. Incoming call traffic increased from
approximately 200,000 minutes per month in 1993 to the current rate of 1,000,000
minutes per month, and outgoing call traffic increased from approximately
100,000 minutes per month in 1993 to the current rate of 230,000 minutes.
Telecom Georgia has instituted several marketing programs in order to maintain
this growth.
COMPETITION. The Communications Group does not currently face any competition
in the international long distance business in Georgia as Telcom Georgia is the
only entity licensed to handle all international call traffic in and out of
Georgia.
TRUNKED MOBILE RADIO
GENERAL. The Communications Group currently owns interests in joint ventures
which operate 4 trunked mobile radio services in Europe and certain republics of
the former Soviet Union. The Group's Joint Ventures serviced an aggregate of
6,642 subscribers at December 31, 1996. In March 1997, the Communications Group
launched trunked mobile radio services in Kazakstan. Trunked mobile radio
systems provide mobile voice communications among members of user groups and
interconnection to the public switched telephone network and are commonly used
by construction teams, security services, taxi companies, service organizations
and other groups with a need for significant internal communications. Trunked
mobile radio allows such users to communicate with members of a closed user
group without incurring the expense or delay of the public switched telephone
network, and also provides the ability to provide dispatch services (i.e. one
sender communicating to a large number of users on the same network). In many
cases, the Communications Group's trunked mobile radio systems are also
connected to the public switched telephone network, thus providing some or all
of the users the flexibility of communicating outside the closed user group. In
many niche markets, trunked mobile radio has significant advantages over
cellular telephony or the public switch telephone network.
COMPETITION. The Communications Group faces competition from other trunked
mobile radio service providers and from private networks in all of the markets
in which it operates. Trunked mobile radio also faces competition from cellular
providers, especially for users who need access to the public switched telephone
network for most of their needs, pagers for users who need only one-way
communication and private branch exchanges (PBXs), where users do not need
mobile communications.
DEVELOPMENT OPPORTUNITIES
WIRELESS TELEPHONY. The Communications Group is currently exploring a number of
investment opportunities in wireless local loop telephony systems in certain
countries in Eastern Europe, the republics of the former Soviet Union, the PRC
and other selected emerging markets, and has installed test systems in certain
of these markets. The Communications Group believes that the wireless local loop
telephony it is using is a time and cost effective means of improving the
communications infrastructure in such markets. The current telephone systems in
these markets are antiquated and overloaded, and consumers in these markets
typically must wait several years to obtain telephone service.
The fixed wireless local loop telephony the Communications Group is using offers
the current telephone service provider a rapid and cost-effective method to
expand its service base. The wireless local loop telephony system it is using
can provide telephone access to a large number of apartment dwellers through a
single microwave transceiver installed on their building. This microwave
transceiver sends signals to and from a receiver located adjacent to a central
office of the public switched telephone network where the signal is routed from
or into such network. This system eliminates the need to build fixed wireline
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infrastructure between the central office and the subscriber's 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; (ii) provide financing to China Unicom in
Sichuan Provice and (iii) provide telephone consulting services to China Unicom
within Sichuan Province. With a population of over 100 million and a telephone
density rate estimated at less than 2%, the Sichuan Province project provides a
large potential market for AAT's products and services. The project involves a
20-year period of cooperation between the Communications Group's Joint Venture
and China Unicom for the development of a local telephone network in Sichuan
Province with an initial capacity of 50,000 lines, and a projected growth of up
to 1,000,000 lines within the next five years. The Communications Group expects
that the fixed wireless local loop technology it is using will be used in the
project. For its services, the Communications Group's Joint Venture is entitled
to 78% of the distributable cash flow from the network for a 20-year period for
each phase of the network developed.
While the existing wireline telephone systems in Eastern Europe and the former
Soviet Republics are often antiquated, the fact that these systems are already
well-established and operated by governmental authorities means that they are a
source of competition for the Communications Group's proposed wireless telephony
operations. In addition, one-way paging service may be a competitive alternative
which is adequate for those who do not need a two-way service, or it may be a
service that reduces wireless telephony usage among wireless telephony
subscribers. The Communications Group does not have or expect to have exclusive
franchises with respect to its wireless telephony operations and may therefore
face more significant competition in the future from highly capitalized entities
seeking to provide services similar to or competitive with those of the
Communications Group in its markets.
In certain markets, cellular telephone operators exist and represent a
competitive alternative to the Communications Group's proposed wireless local
loop telephony systems. A cellular telephone can be operated in the same manner
as a wireless loop telephone in that either type of service can simulate the
conventional telephone service by providing local and international calling from
a fixed position in its service area. However, while cellular telephony enables
a subscriber to move from one place in a city to another while using the
service, wireless local loop telephony is intended to provide fixed telephone
services which can be deployed as rapidly as cellular telephony but at a lower
cost. This lower cost makes wireless local loop telephony a more attractive
telephony alternative to a large portion of the populations in the
Communications Group's markets that do not require mobile communications. In
addition, because the wireless local loop technology the Communications Group is
using operates at 64 kilobits per second, it can be used for high speed
facsimile and data transmission in the same manner as a wired telephone system.
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The following table summarizes the Communications Group's Joint Ventures at
December 31, 1996, as well as the amounts contributed, amounts loaned and total
amounts invested in such Joint Ventures at December 31, 1996.
COMMUNICATIONS GROUP JOINT VENTURES OWNERSHIP AT DECEMBER 31, 1996
<TABLE>
<CAPTION>
MITI
OWNERSHIP AMOUNT AMOUNT TOTAL
VENTURE(1) AMOUNT CONTRIBUTED LOANED INVESTMENT(12)
- --------------------------------------------------------- ----------- ------------ ------------ --------------
<S> <C> <C> <C> <C>
CABLE
Kosmos TV (Moscow, Russia)............................... 50% $ 1,092,896 $ 8,958,521 $ 10,051,417
Baltcom TV (Riga, Latvia)................................ 50% 819,000 11,201,353 12,020,353
Ayety TV (Tbilisi, Georgia).............................. 49% 779,000 6,115,658 6,894,658
Romsat Cable TV (Bucharest, Romania)..................... 99% 681,930 1,680,263 2,362,193
Sun TV (Chisinau, Moldova)............................... 50% 400,000 3,581,459 3,981,459
Alma TV (Almaty, Kazakstan).............................. 50% 222,000 3,146,766 3,368,766
Cosmos TV (Minsk, Belarus)............................... 50% 400,000 1,580,504 1,980,504
Viginta (Vilnius, Lithuania)............................. 55% 433,781 1,029,316 1,463,097
Kamalak TV (Tashkent, Uzbekistan)........................ 50% 754,156 5,489,224 6,243,380
PAGING
Baltcom Estonia (Estonia)................................ 39% 396,150 3,895,192 4,291,342
CNM (Romania)............................................ 54% 490,000 3,709,443 4,199,443
Kamalak Paging (Tashkent, Samarkand, Bukhara and Andijan,
Uzbekistan)(2)......................................... 50%
Paging One (Tbilisi, Georgia)............................ 45% 250,000 801,000 1,051,000
Paging Ajara (Ajara, Georgia)............................ 35% 43,200 212,339 255,539
Raduga Poisk (Nizhny Novgorod, Russia)................... 45% 330,000 77,534 407,534
Alma Page (Almaty and Ust-Kamenogorsk, Kazakstan)(3)..... 50%
Baltcom Plus (Latvia).................................... 50% 250,000 2,576,988 2,826,988
Pt-Page (St. Petersburg, Russia)......................... 40% 1,057,762 -- 1,057,762
RADIO
Radio Juventus (Budapest, Siofok and Khebegy, Hungary)... 100% 8,106,890 274,147 8,381,037
SAC (Moscow, Russia)..................................... 83% 630,593 2,892,258 3,522,851
Radio Katusha (St. Petersburg, Russia)................... 50% 132,528 768,663 901,191
Radio Nika (Socci, Russia)............................... 51% 223,497 119,867 343,364
Radio Skonto (Riga, Latvia).............................. 55% 302,369 227,358 529,727
Radio One (Prague, Czech Republic)....................... 80% 283,293 -- 283,293
INTERNATIONAL TOLL CALLING
Telecom Georgia (Georgia)................................ 30% 2,553,600 -- 2,553,600
TRUNKED MOBILE RADIO (4)
Belgium Trunking (Brussels and Flanders, Belgium)........ 24%
Radiomovel Telecomunicacoes (Portugal)................... 14%
Teletrunk Spain (Madrid, Valencia, Aragon and Catalonia,
Spain)................................................. 6-16%(5)
National Business Communications (Bucharest, Cluj,
Brasov, Constanta and Timisoira, Romania)(6)........... 58% 30,097 215,000 245,097
</TABLE>
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<TABLE>
<CAPTION>
MITI
OWNERSHIP AMOUNT AMOUNT TOTAL
VENTURE(1) AMOUNT CONTRIBUTED LOANED INVESTMENT(12)
- --------------------------------------------------------- ----------- ------------ ------------ --------------
<S> <C> <C> <C> <C>
PRE-OPERATIONAL
Teleplus (St. Petersburg, Russia)(Cable)(7).............. 45% 553,705 -- 553,705
Paging One Services (Austria)(Paging)(8)................. 100% 1,007,434 1,048,004 2,055,438
Spectrum (Kazakstan)(Trunk Mobile)(9).................... 31% 36,050 -- 36,050
Baltcom GSM (Latvia)(Cellular)(10)....................... 24% 7,883,112 -- 7,883,112
Magticom (Georgia)(Cellular)(11)......................... 34% 2,450,000 -- 2,450,000
Metromedia-Jinfeng (Wireless Local Loop)(13)............. 60% 3,018,762 -- 3,018,762
</TABLE>
- ------------------------
(1) The parenthetical notes the area of operations for the operational Joint
Ventures and the area for which the Joint Venture is licensed for the
pre-operational joint ventures.
(2) The Communications Group's cable and paging services in Uzbekistan are
provided by the same company, Kamalak TV. All amounts contributed and loaned
to Kamalak TV are listed under that Joint Venture's entry for cable.
(3) The Company's cable and paging services in Kazakstan are provided by or
through the same company, Alma TV. All amounts contributed and loaned to
Alma TV are listed under that Joint Venture's entry for cable.
(4) Most of the Company's ownership of the trunked mobile radio ventures is
through Protocall Ventures, Ltd., a United Kingdom company in which the
Communications Group has 56% ownership. The Communications Group's interest
in Protocall Ventures, Ltd. was purchased for $2,500,000. As of December 31,
1996, the Communications Group had provided Protocall Ventures, Ltd.
$2,384,742 in credit to fund its operations. This chart does not separately
list amounts contributed or loaned to the trunked mobile radio Joint
Ventures by Protocall Ventures, Ltd.
(5) The Communications Group's trunk mobile radio operations in Spain are
provided through 4 Joint Ventures of Protocall Ventures, Ltd. The Company's
ownership of these Joint Ventures ranges from 6-16%.
(6) Amounts contributed and loaned are amounts contributed and loaned to
National Business Communications directly by the Communications Group.
(7) Teleplus was created in November 1996.
(8) Paging One Services launched commercial paging service in Vienna, Austria in
February 1997.
(9) Spectrum launched commercial trunked mobile radio service in Almaty and
Atyrau, Kazakstan in March 1997.
(10) Baltcom GSM launched commercial GSM cellular service in Latvia in March
1997.
(11) The Communications Group's interest in Magticom was registered in October
1996.
(12) The total investment does not include any incurred losses.
(13) Metromedia-Jinfeng is a pre-operational Joint Venture that plans to provide
telecommunications equipment, financing, network planning, installation and
maintenance services to telecommunications operations in China.
After deciding to obtain an interest in a particular communications business,
the Communications Group generally enters into discussions with the appropriate
ministry of communications or local parties which have interests in
communications properties in a particular market. If the negotiations are
successful, a joint venture agreement is entered into and is registered, and the
right to use frequency licenses is contributed to the joint venture by the
Communications Group's local partner or is allocated by the
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<PAGE>
appropriate governmental authority to the joint venture. In some cases, the
Communications Group owns or acquires interests in entities (including
competitors) that are already licensed and are providing service.
Generally, the Communications Group owns approximately 50% of the equity in a
joint venture with the balance of such equity being owned by a local entity,
many times a government-owned enterprise. Each joint venture's day-to-day
activities are managed by a local management team selected by its board of
directors or its shareholders. The operating objectives, business plans, and
capital expenditures of a joint venture are approved by the joint venture's
board of directors, or in certain cases, by its shareholders. In most cases, an
equal number of directors or managers of the joint venture are selected by the
Communications Group and its local partner. In other cases, a differing number
of directors or managers of the joint venture may be selected by the
Communications Group on the basis of the percentage ownership interest of the
Communications Group in the joint venture.
In many cases, the credit agreement pursuant to which the Communications Group
loans funds to a joint venture provides the Communications Group with the right
to appoint the general manager of the joint venture and to approve unilaterally
the annual business plan of the joint venture. These rights continue so long as
amounts are outstanding under the credit agreement. In other cases, such rights
may also exist by reason of the Communications Group's percentage ownership
interest in the joint venture or under the terms of the joint venture's
governing instruments.
The Communications Group's Joint Ventures are limited liability entities which
are permitted to enter into contracts, acquire property and assume and undertake
obligations in their own names. Because the Joint Ventures are limited liability
companies, their equity holders have limited liability to the extent of their
investment. Under the Joint Venture agreements, each of the Communications Group
and the local Joint Venture partner is obligated to make initial capital
contributions to the Joint Venture. In general, a local Joint Venture partner
does not have the resources to make cash contributions to the Joint Venture. In
such cases, the Communications Group has established or plans to establish an
agreement with the Joint Venture whereby, in addition to cash contributions by
the Communications Group, each of the Communications Group and the local partner
makes in-kind contributions (usually communications equipment in the case of the
Communications Group and frequencies, space on transmitting towers and office
space in the case of the local partner), and the Joint Venture signs a credit
agreement with the Communications Group pursuant to which the Communications
Group loans the venture certain funds. Prior to repayment of such funds, the
Joint Ventures are significantly limited or prohibited from distributing profits
to their shareholders. Typically, such credit agreements provide for interest
payments to the Company at rates ranging generally from prime to prime plus 6%
and for payments of interest and principal from 90% of the Joint Ventures'
available cash flow. As of December 31, 1996, the Communications Group had
obligations to fund (i) an additional $5.5 million to the equity of its Joint
Ventures (or to complete the payment of shares purchased by the Communications
Group) and (ii) up to an additional $18.9 million to fund the various credit
lines the Communications Group has extended to its Joint Ventures. The
Communications Group's funding commitments under such credit lines are
contingent upon its approval of the Joint Ventures' business plans. To the
extent that the Communications Group does not approve a Joint Venture's business
plan, the Communications Group is not required to provide funds to such Joint
Venture under the credit line. The distributions (including profits) from the
Joint Venture to the Communications Group and the local partner are made on a
pro-rata basis in accordance with their respective ownership interests.
In addition to loaning funds to the Joint Ventures, the Communications Group
provides certain services to many of the Joint Ventures, for which it charges
the Joint Ventures a management fee. The Communications Group often does not
require start-up Joint Ventures to reimburse it for certain services that it
provides such as engineering advice, assistance in locating programming, and
assistance in ordering equipment. As each Joint Venture grows, the
Communications Group institutes various payment mechanisms to have each Joint
Venture reimburse it for such services when they are provided. The failure of
the
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Communications Group to obtain reimbursement of such services will not have a
material impact on its results of operations.
Under existing legislation in certain of the Communications Group's markets,
distributions from a Joint Venture to its partners are subject to taxation. The
laws in the Communications Group's markets vary widely with respect to the tax
treatment of distributions to Joint Venture partners and such laws have also
recently been revised significantly in many of the Communications Group's
markets. There can be no assurance that such laws will not continue to undergo
major changes in the future which may have a significant negative impact on the
Communications Group and its operations.
THE ENTERTAINMENT GROUP
OVERVIEW
The Company's Entertainment Group is one of the largest independent producers
and distributors of motion picture and television product in the United States
and one of the few entertainment companies, other than the major motion picture
studios and their affiliates that is capable of distributing entertainment
product in all media worldwide. The Company also holds a valuable library of
over 2,200 feature film and television titles, including Academy
Award-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, GUYS AND
DOLLS and THE BEST YEARS OF OUR LIVES. This library provides the Company with a
stable stream of revenues and cash flow to support, in part, its various
production operations and other activities. The Entertainment Group is a
well-established, full-service distributor of motion picture and television
product with access to all significant domestic and international markets. The
Entertainment Group distributes feature films produced or acquired by it to
domestic theatres and distributes motion pictures and television entertainment
product in the domestic home video and television markets through its in-house
distribution divisions and subsidiaries. Internationally, the Entertainment
Group primarily distributes its feature films and other product through a
combination of output deals and other distribution deals with third party
licensees and subdistributors.
Through its Orion-Registered Trademark-, Orion Classics-Registered Trademark-
and Goldwyn-Registered Trademark- labels, the Entertainment Group produces and
acquires a full range of commercial films with well-defined target audiences
with the Entertainment Group's portion of the production cost generally ranging
from $5.0 million to $10.0 million per picture. The Entertainment Group's
management has significant experience in the production of motion picture and
television entertainment of this type and was responsible for producing the box
office successes BEVERLY HILLS NINJA, DUMB AND DUMBER and the Academy
Award-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 the Landmark Theatre Corporation, which management believes is
the leading specialty theater group in the United States, consisting of 50
motion picture theaters with a total of 138 screens at December 31, 1996.
PRODUCTION AND ACQUISITION OF FEATURE FILMS
The Entertainment Group focuses on producing or acquiring commercial and
specialized films with well-defined target audiences and marketing campaigns, at
costs lower than those for feature films at the major motion picture studios.
The Entertainment Group believes it will successfully control costs and increase
returns by carefully selecting projects that: (i) are based on exploitable
concepts, such as action-adventure and specialized motion pictures; (ii) are
aimed at and cost-effectively marketed to specific niche audiences; (iii) employ
affordable, well-recognized or emerging talent; and (iv) fit within
pre-established cost/ performance criteria. The Entertainment Group also
currently plans to avoid peak seasonal release periods such as early summer,
Christmas and other holidays, when competition for screens is most intense
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<PAGE>
and marketing costs are highest. This strategy is based on management's success
with producing such films as BEVERLY HILLS NINJA and the Entertainment Group's
1996 release BIG NIGHT as well as its feature films, MUCH ADO ABOUT NOTHING, THE
MADNESS OF KING GEORGE and EAT DRINK MAN WOMAN.
The Entertainment Group intends to produce or acquire and release an average of
approximately 10-15 theatrical features per year, in which the Company's portion
of the production cost will generally range from $5.0 million to $10.0 million.
The Company also expects to spend on average, between $3.5 million and $10.0
million on print and advertising costs for feature films it produces or
acquires. The Company's acquisition program contemplates output arrangements
with producers and the acquisition of existing catalogs, as well as film-by-film
acquisitions. In addition, in order to expand its production capabilities and
minimize its exposure to the performance of any particular film, the Company
intends to finance a significant portion of each film's budget by "pre-selling"
or pre-licensing foreign distribution rights. Furthermore, certain of the
Company's executives will, on behalf of the Company, enter into "producer-
for-hire" agreements with other studios for which the Company and such
executives will receive a fee. See "--United States Motion Picture Industry
Overview--Motion Picture Production and Financing" and "-- Motion Picture
Distribution" below. The Entertainment Group believes that its ability to
successfully produce or acquire and distribute a significant number of feature
films each year will enhance the marketability of its existing library as it
markets these films with films already in the library.
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<PAGE>
DISTRIBUTION AND RELEASE OF FEATURE FILMS AND OTHER PRODUCT
THEATRICAL. The Entertainment Group's existing distribution system enables it
to release the feature films it produces or acquires in all media in all
significant domestic and international marketplaces, through its in-house
domestic theatrical, television and home video distribution divisions and its
international distribution division. The Entertainment Group believes that its
full-service distribution system is a significant asset which gives it an
advantage over other independent film companies which must generally rely upon
one of the major motion picture studios to release their product theatrically
and in other outlets such as home video. In addition, this distribution system
allows the Entertainment Group to acquire, at low and sometimes no cost,
entertainment product produced by third parties who generally bear most or all
of the financial risk of producing the feature film, but who lack the
distribution system to release the product in some or all of the domestic media.
In addition, in certain of these "rent-a-system" arrangements, the third party
producer will also advance the print and advertising costs for each such film,
thereby further limiting the Entertainment Group's financial exposure in a film.
For example, during 1996, the Entertainment Group theatrically released a number
of films produced by Live Entertainment for which it was paid a percentage
distribution fee, including two feature films, THE ARRIVAL and THE SUBSTITUTE,
both of which grossed in excess of $10.0 million in the U.S. theatrical market.
Live Entertainment bore all of the production and distribution costs of such
films. Although there can be no assurance that the Entertainment Group will be
successful in attracting these types of transactions on these terms, it plans to
continue to enter into similar "rent-a-system" transactions in the future. In
addition, the Entertainment Group intends to continue to co-produce (with
limited financial exposure to the Entertainment Group) larger budget movies with
major studios. For example, in 1996, Goldwyn produced, in conjunction with Walt
Disney Pictures, THE PREACHER'S WIFE, starring Denzel Washington and Whitney
Houston and directed by Penny Marshall, which was released in December 1996, and
had a gross profit participation in the film. Also in 1996, Goldwyn announced an
agreement with New Line Cinema for the production of a remake of the SECRET LIFE
OF WALTER MITTY.
The Entertainment Group films are released under the
Orion-Registered Trademark-, Orion Classics-Registered Trademark- and
Goldwyn-Registered Trademark- labels. Orion markets primarily mainstream
commercial films, Goldwyn produces and acquires specialized and "arthouse"
motion pictures with crossover potential and Orion Classics focuses on
specialized and "arthouse" pictures. During 1996, the Entertainment Group
released 13 pictures including, I SHOT ANDY WARHOL, BIG NIGHT, ANGELS & INSECTS,
THE SUBSTITUTE and THE ARRIVAL.
During 1997, the Entertainment Group plans to release approximately 17 pictures
in the U.S. theatrical market. Its widest releases in 1997 are expected to be
EIGHT HEADS IN A DUFFLE BAG, a comedy starring Joe Pesci, which will be
distributed to between 1,500 and 1,800 screens nationwide, and GANG RELATED, a
police action thriller starring Jim Belushi, Dennis Quaid, and the late Tupac
Shakur in his last screen performance.
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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 Oleg Menshikov Sergei An Academy Orion Classics
Mountains(1) Bodrov, Jr. Award-Registered Trademark-
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 Samuel A taut noir story of a seasoned Goldwyn
L. Jackson John C. gambler whose friendship with a
Reilly Phillip Baker young man is threatened by a dark
Hall secret from his past.
March 7 City of Harvey Keitel Stephen A hard-edged film-noir thriller Orion
Industry(1) Dorff Timothy Hutton concerning two brothers, small
Famke Janssen time L.A. 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 woman Goldwyn
Peter Outerbridge who has a particular fascination
with life and death. A romance
with an obsessive medical student
threatens to expose her secret
passion and redefine the bounds
of love.
April 18 Eight Heads in a Joe Pesci A raucous comedy about a mob bag Orion
Duffle Bag(3) David Spade man whose luggage containing
Kristy Swanson eight human heads, crucial proof
George Hamilton of a recent hit, gets switched at
Dyan Cannon the airport and goes south of the
Andy Comeau border with a family vacationing
in Mexico.
May Rough Magic(2) Bridget Fonda Russell A romantic adventure involving Goldwyn
Crowe magic, mysticism and Mexico.
Jim Broadbent
D.W. Moffet
Paul Rodriguez
</TABLE>
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<PAGE>
<TABLE>
<CAPTION>
EXPECTED RELEASE
RELEASE DATE TITLE CAST DESCRIPTION LABEL
- --------------- ------------------ ---------------------- --------------------------------- ----------------
<S> <C> <C> <C> <C>
August Paperback Anthony LaPaglia Gia A story of star-crossed lovers Goldwyn
Romance(1) Carides who find themselves thrown
together in a madcap adventure
reminiscent of the classic '30's
romantic comedies.
Summer Ulee's Gold(4) Peter Fonda Patricia A Jonathan Demme (Academy Orion
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 of Goldwyn
Bronson Pinchot an adorable puppy who gets lost
David Odgen Stiers in the wild Australian outback.
Blythe Danner Befriended by exotic animals,
Joan Rivers Napoleon overcomes his fears and
discovers the magic of nature.
September 7 Gang Related(4) Jim Belushi An exciting, thought- provoking Orion
Tupac Shakur thriller about two detectives in
Lela Rochan a metropolitan police department
Dennis Quaid who get in over their heads when
James Earl Jones 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 Kansas.
Paul Rudd When a drifter with a mysterious
Jeremy Davies past comes to the feedlot of a
Kate Capshaw sultry, black widow figure with a
strangely withdrawn son, family
secrets and painful truths are
revealed as a trio of damaged
souls search for love and
respect, desperately trying to
connect.
</TABLE>
20
<PAGE>
<TABLE>
<CAPTION>
EXPECTED RELEASE
RELEASE DATE TITLE CAST DESCRIPTION LABEL
- --------------- ------------------ ---------------------- --------------------------------- ----------------
<S> <C> <C> <C> <C>
Fall The Big Red(5) Johnathon Schaech A twisted road comedy by the Goldwyn
director of Adventures of
Priscilla, Queen of the Desert, a
con-artist escapes a deal gone
wrong in New York and winds up in
the Australian outback in a
strange town, whose inhabitants
are an oddball collection of
misfits.
Fall Best Men(3) Drew Barrymore A film about five lifelong Orion
Dean Cain friends in a nowhere town headed
Luke Wilson for the buddies' wedding whose
Sean Patrick Flanery lives take a major detour as they
Andy Dick find themselves holding up a bank
Mitchell Whitfield in a rebellious search for
Fred Ward independence.
TBA Storefront Robyn Hitchcock A concert/performance film Orion Classics
Hitchcock(4) showcasing the singular 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 Billy Zane A film-noir potboiler, set in the Orion Classics
the fireworks(1) Gina Gershon 1950's, based on one of master
Sheryl Lee crime writer Jim Thompson's most
Rue McClanahan riveting stories, involving
sexual perversity, dysfunctional
family ties, greed and lust.
TBA I Love You... Julie Davis A bold and sexy romantic comedy Goldwyn
Don't Touch Me(1) about a young woman's attempt to
reconcile her need for love and
desire for sex. Critically
acclaimed directorial debut of
Julie Davis.
</TABLE>
21
<PAGE>
<TABLE>
<CAPTION>
EXPECTED RELEASE
RELEASE DATE TITLE CAST DESCRIPTION LABEL
- --------------- ------------------ ---------------------- --------------------------------- ----------------
<S> <C> <C> <C> <C>
TBA Music From Brenda Blethyn A comedy which follows a Orion
Another Jude Law man's search for his one
Room(3) Jennifer Tilly true love, whose birth he
Martha Plimpton assisted in as a 5 year
Jon Tenney old.
Jeremy Piven
</TABLE>
- ------------------------
(1) All domestic media, limited term
(2) Domestic theatrical only
(3) All domestic media, in perpetuity
(4) All media worldwide, in perpetuity
(5) All media worldwide, except Australia, in perpetuity
HOME VIDEO. The Entertainment Group distributes its own product and product
produced by third parties in the United States and Canada through its in-home
video division. In addition to releasing its new product to which it owns home
video rights, the Entertainment Group will continue to exploit titles from its
existing library, including previously released rental titles, re-issued titles
and initially released titles, in the expanding sell-through and premium market
sectors and through arrangements with mail-order and other selected licensees.
In addition to distribution in the traditional videocassette sector, the
Entertainment Group also intends to pursue opportunities to distribute its
library in video discs (see "--United States Motion Picture Industry Overview"
and "--Emerging Technologies" below) emerging multimedia formats. The
Entertainment Group provides exclusive distribution services for Major League
Baseball Properties home video product and the Fox-Lorber catalog of foreign
language and specialty films both of which the Entertainment Group believes it
was able to attract because of its existing home video distribution system.
PAY-PER-VIEW, PAY TELEVISION, BROADCAST AND BASIC CABLE TELEVISION AND OTHER
ANCILLARY MARKETS. The Entertainment Group currently licenses its new product
and product from its film and television library to both domestic and foreign
pay-per-view, pay television, broadcast and basic cable television and other
ancillary markets worldwide. The Entertainment Group has historically been
successful in selling its library titles to the free and pay television and home
video markets worldwide. The Entertainment Group believes that pay and free
television markets are expected to continue to experience significant growth,
primarily as a result of technological advances and the expansion of the
multi-channel television industry worldwide, permitting it to market its titles
in new geographic markets. With an extensive library which contains a variety of
film and television titles, the Entertainment Group believes it is
well-positioned to benefit from this anticipated increase in demand for
programming. In addition, the Entertainment Group believes that its increased
production and acquisition of feature films will enable it to better exploit its
extensive library in these markets as it is able to license such new product
together with existing titles from its film and television library. To date, the
Entertainment Group has licensed its product with domestic pay television
programmers both through output deals with pay cable providers such as Showtime
and HBO and through distribution deals with a variety of television services.
The emergence of digital compression, video-on-demand, DTH and other new
technologies is expected to increase the worldwide demand for entertainment
programming largely by increasing existing transmission capabilities and by
increasing the percentage of the population which can access multi-channel
television systems.
FOREIGN MARKETS. The Entertainment Group distributes its new product in which
it retains rights and its existing library in traditional media and established
markets outside of the United States and Canada to the extent of its rights,
while actively pursuing new areas of exploitation. The Entertainment Group
intends
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<PAGE>
to market its library in (i) new international markets in which the
multi-channel television industry has recently emerged or is in the early stages
of development, and (ii) territories which have not been reached by privatized
free television, cable television, home video and other traditional media, but
where the industry is expected to develop in the future. The Entertainment Group
will also explore opportunities to acquire and distribute new product in
overseas markets, adding value to the library. Other strategies include the
acquisition of foreign language programming for foreign distribution in
combination with the English language library product.
LANDMARK THEATRE GROUP
The Entertainment Group believes that its Landmark Theatre Group with, at
December 31, 1996, 138 screens in 50 theaters, is the largest exhibitor of
specialized motion picture and art films in the United States. The operation of
these theaters provides the Entertainment Group with relatively stable cash
flows and allows the Entertainment Group to participate in revenues from the
exhibition of its films as well as films produced and distributed by others. The
Entertainment Group 's strategy is to (i) expand in existing and new major
markets through internal growth and acquisitions; (ii) upgrade and multiplex
existing locations where there is demand for additional screens; and (iii)
maximize revenue and cash flow from its existing theaters by capitalizing on the
large demand for art and specialty films in the U.S. by continuing to reduce
operating and overhead costs as a percentage of revenue.
The Entertainment Group currently operates theaters in 18 cities in California,
Colorado, Louisiana, Massachusetts, Minnesota, Ohio, Texas, Washington and
Wisconsin. The Entertainment Group emphasizes the exhibition of specialized
motion pictures and art films and commercial films with literary and artistic
components which appeal to the specialized film audience. The seating capacity
for all theaters operated by the Entertainment Group is approximately 39,000, of
which 56% is in theaters located in California. The following table summarizes
the location and number of theaters and screens operated by the Entertainment
Group:
<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
23
<PAGE>
theaters than commercial films produced by the major studios. Exhibitors of
wide-release films typically must commit a substantial percentage of its screens
to a small number of films. The Entertainment Group typically show approximately
30 to 40 different films on its screens at any given time. In the normal course
of its business, the Entertainment Group actively pursues opportunities to
acquire or construct new 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 film libraries, as well as production capabilities and
significantly broader access to production, distribution and exhibition
opportunities. Many of the Entertainment Group's competitors have substantially
greater assets and resources. By reason of their resources, these competitors
may have access to programming that would not generally be available to the
Entertainment Group and may also have the ability to market programming more
extensively than the Entertainment Group.
Distributors of theatrical motion pictures compete with one another for access
to desirable motion picture screens, especially during the summer, holiday and
other peak movie-going seasons, and several of the Entertainment Group's
competitors in the theatrical motion picture distribution business have become
affiliated with owners of chains of motion picture 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,
the Entertainment Group faces direct competition in each market from local or
regional exhibitors of specialized motion pictures and art films. To a lesser
degree, the Entertainment Group also competes with other types of motion picture
exhibitors. Other organizations, including the national and regional circuits,
major studios, production companies, television networks and cable companies are
or may become involved in the exhibition of films comparable to the type of
films exhibited by the Entertainment Group. Many of these companies have greater
financial and other resources than the Entertainment Group. As a result of new
theater development and conversion of single-screen theaters to multiplexes,
there are an increasing number of motion picture screens in the geographic areas
in which the Entertainment Group operates. At the same time, many motion picture
exhibitors have been merging or consolidating their operations, resulting in
fewer competitors with an increased number of motion picture screens competing
for the available pictures. This combination of factors may tend to increase
competition for films that are popular with the general public. The
Entertainment Group also competes with national and regional circuits and
independent exhibitors with respect to attracting patrons and acquiring new
theaters.
UNITED STATES MOTION PICTURE INDUSTRY OVERVIEW
The United States motion picture industry encompasses the production and
theatrical exhibition of feature-length motion pictures and the subsequent
distribution of such pictures in home video, television and other ancillary
markets. The industry is dominated by the major studios, including Universal
Pictures, Warner Bros. (including New Line Cinema), Twentieth Century Fox, Sony
Pictures Entertainment (including Columbia Pictures, Tri-Star Pictures and Sony
Classics), Paramount Pictures and The Walt Disney Company (including Buena
Vista, Touchstone Pictures, Hollywood Pictures and Miramax), and MGM (including
United Artists) which historically have produced and distributed the majority of
theatrical
24
<PAGE>
motion pictures released annually in the United States. The major studios
generally own their production studios and have national or worldwide
distribution organizations. Major studios typically release films with
production costs ranging from $20 million to $50 million or more and provide a
continual source of motion pictures to the nation's theater exhibitors.
In recent years, "independent" motion picture production companies played an
important role in the production of motion pictures for the worldwide feature
film market. The independents do not own production studios and have more
limited distribution capabilities than the major studios, often distributing
their product through "majors." Independents typically produce fewer motion
pictures at substantially lower average production costs than major studios.
Several of the more prominent independents, including Miramax and New Line, were
acquired by large entertainment companies, giving them access to greater
financial resources.
MOTION PICTURE PRODUCTION AND FINANCING. The production of a motion picture
begins with the screenplay adaptation of a popular novel or other literary work
acquired by the producer or the development of an original screenplay having its
genesis in a story line or scenario conceived of or acquired by the producer. In
the development phase, the producer typically seeks production financing and
tentative commitments from a director, the principal cast members and other
creative personnel. A proposed production schedule and budget also are prepared
during this phase.
Upon completing the screenplay and arranging financial commitments,
pre-production of the motion picture begins. In this phase, the producer (i)
engages creative personnel to the extent not previously committed; (ii)
finalizes the filming schedule and production budget; (iii) obtains insurance
and secures completion guarantees; (iv) if necessary, establishes filming
locations and secures any necessary studio facilities and stages; and (v)
prepares for the start of actual filming. Principal photography, the actual
filming of the screenplay, may extend from six to twelve weeks or more,
depending upon such factors as budget, location, weather and complications
inherent in the screenplay.
Following completion of principal photography, the motion picture is edited,
optical, dialogue, music and any special effects are added, and voice, effects
and music sound tracks and picture are synchronized during post-production. This
results in the production of the negative from which the release prints of the
motion picture are made.
The cost of a theatrical motion picture produced by an independent production
company for limited distribution ranges from approximately $4 million to $10
million as compared with an average of approximately $30 million for commercial
films produced by major studios for wide release. Production costs consist of
acquiring or developing the screenplay, film studio rental, cinematography,
post-production costs and the compensation of creative and other production
personnel. Distribution expenses, which consist primarily of the costs of
advertising and release prints, are not included in direct production costs and
vary widely depending on the extent of the release and nature of the promotional
activities.
Independent and smaller production companies generally avoid incurring
substantial overhead costs by hiring creative and other production personnel and
retaining the other elements required for pre-production, principal photography
and post-production activities on a project-by-project basis. Unlike the major
studios, the independents and smaller production companies also typically
finance their production activities from discrete sources. Such sources include
bank loans, pre-sales, co-productions, equity offerings and joint ventures.
Independents generally attempt to complete their financing of a motion picture
production prior to commencement of principal photography, at which point
substantial production costs begin to be incurred and must be paid.
Pre-sales are used by independent film companies and smaller production
companies to finance all or a portion of the direct production costs of a motion
picture, thereby limiting such companies' financial exposure to the project.
Pre-sales consist of fees paid to the producer by third parties in return for
the right to exhibit the motion picture when completed in theaters or to
distribute it in home video, television,
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<PAGE>
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.
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.
26
<PAGE>
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.
FOREIGN MARKETS. In addition to their domestic distribution activities, some
motion picture distributors generate revenues from distribution of motion
pictures in foreign theaters, home video, television and other foreign markets.
There has been a dramatic increase in recent years in the worldwide demand for
filmed entertainment. This growth is largely due to the privatization of
television stations, introduction of direct broadcast satellite services, growth
of home video and increased cable penetration. In many foreign markets, a film
company may also enter into a pre-sale distribution arrangement whereby a third
party distributor in a foreign territory pays an advance to the film company
equal to a specified percentage of a film's budget. The third party distributor
is responsible for all marketing and distribution costs in such territory,
recoups its advance, costs, a fee and a portion of the film receipts and pays an
overage to the film company. Under this type of arrangement, the third party
distributor is responsible for any shortfalls in recoupment. In these
arrangements, the third party distributor receives most distribution rights to
films in their territory for a period of years. Some arrangements contain
carve-outs of television rights which the film company then sells directly to
television programmers (sometimes in a separate similar arrangement). These
arrangements provide film companies with upside potential through participations
in overages. In an alternative arrangement in other foreign markets, a third
party distributor will fund all marketing and distribution expenses up front,
but the film company is responsible for reimbursing such expenditures if they
are not recouped by the third party distributor through film receipts. The third
party distributor sells the film to theatrical exhibitors, video stores and
sometimes television programming outlets in the territory. The distributor
receives a small fee on the film's gross receipts, recoups its marketing and
distribution expenses and remits the balance of the receipts to the film
company.
PAY TELEVISION. Pay television allows cable television subscribers to view HBO,
Cinemax, Showtime, The Movie Channel, Encore and other pay television network
programming offered by cable system operators for a monthly subscription fee.
The pay television networks acquire a substantial portion of their programming
from motion picture distributors.
BROADCAST AND BASIC CABLE TELEVISION. Broadcast television allows viewers to
receive, without charge, programming broadcast over the air by affiliates of the
major networks (ABC, CBS, NBC and Fox), independent television stations and
cable and satellite networks and stations. In certain areas, viewers may
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<PAGE>
receive the same programming via cable transmission for which subscribers pay a
basic cable television fee. Broadcasters or cable systems operators pay fees to
distributors for the right to air programming a specified number of times.
OTHER MARKETS. Revenues also may be derived from the distribution of motion
pictures to airlines, schools, libraries, hospitals and the military, licensing
of rights to perform musical works and sound recordings embodied in a motion
picture, and rights to manufacture and distribute games, dolls, clothing and
similar commercial articles derived from characters or other elements of a
motion picture.
EMERGING TECHNOLOGIES
VIDEO-ON-DEMAND. Perhaps the most important advance in the last five years has
been the development of the video-on-demand technology through the creation of
digital video compression. Digital compression involves the conversion of the
analog television signal into digital form and the compression of more than one
video signal into one standard channel for delivery to customers. Compression
technology will be applied not only to cable but to satellite and over-the-air
broadcast transmission systems. This offers the opportunity to dramatically
expand the capacity of current transmission systems which is expected to create
demand for the Company's product.
DVD. Another new technology that has emerged is digital variable disc or "DVD."
DVD is an MPEG-encoded, multi-layered, high-density compact disc. Similar in
size to an audio compact disc ("CD"), DVDs can hold up to four two-hour movies
but take up less space than a videotape and do not degrade over time. Just as
CDs have replaced records as the dominant medium for prerecorded music, DVD is
expected to become a widely-accepted format for home video programming. The
Company believes that it will experience additional demand for its library
product, particularly sell-through product, as DVD equipment becomes more
prevalent.
DTH. Direct to Home. Recently, a number of international, well-capitalized
companies have launched DTH systems in the United States (such as Direct TV,
USSB, ASkyB) and in other major markets, including Japan (such as Direct TV,
Perfect TV, and JSkyB). Each of these systems will require programming for their
multi-channel systems, thereby creating additional demand for the Entertainment
Group's library.
SNAPPER
Snapper manufactures Snapper-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 the dealers and distributors prior to this selling
season, the largest volume of sales to the ultimate consumer are made
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<PAGE>
during this time. The main sales revenues during the late fall and winter
periods are related to snowthrower shipments. Snapper has an agreement with a
financial institution which makes floor-plan financing for Snapper products
available to dealers. This agreement provides financing for dealer inventories
and accelerates cash flow to Snapper. Under the terms of this agreement, a
default in payment by one of the dealers on the program is non-recourse to
Snapper. If there is a default by a dealer and the equipment is retained in the
dealer inventory, Snapper is obligated to repurchase any such new and unused
equipment.
Snapper also makes available, through General Electric Credit Corporation, a
retail customer revolving credit plan. This credit plan allows consumers to pay
for Snapper products. Consumers also receive Snapper credit cards which can be
used to purchase additional Snapper products.
Snapper manufactures its products in McDonough, Georgia at facilities totaling
approximately 1,000,000 square feet. Excluding engines and tires, Snapper
manufactures a substantial portion of the component parts for its products. Most
of the parts and material for Snapper's products are commercially available from
a number of sources.
During the three years ended December 31, 1996, Snapper has spent an average of
$3.0 million per year for research and development. Although it holds several
design and mechanical patents, Snapper is not dependent upon such patents, nor
does it believe that patents play an important role in its business. Snapper
does believe, however, that the registered trademark
Snapper-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 garden equipment include The Toro Company, Lawn-Boy (a product of
The Toro Company), Sears, Roebuck and Co., Deere and Company, Ariens Company,
Honda Corporation, Murray Ohio Manufacturing, American Yard Products, Inc., MTD
Products, Inc. and Simplicity Manufacturing, Inc.
INVESTMENT IN RDM SPORTS GROUP, INC. ("RDM")
In December 1994, the Company acquired 19,169,000 shares of RDM common stock, or
approximately 39% of the outstanding RDM common stock, in exchange for all of
the issued and outstanding capital stock of four of its wholly-owned
subsidiaries (the "Exchange Transaction"). RDM, through its operating
subsidiaries, is a leading manufacturer of fitness equipment and toy products in
the United States. RDM's common stock is listed on the New York Stock Exchange.
As of December 31, 1996, the closing price per share of RDM common stock was
$1 1/4 and the quoted market value of the Company's investment in Roadmaster was
approximately $24.0 million. As disclosed in Amendment No. 1 to its Schedule 13D
relating to RDM, filed with the SEC on March 1, 1996, MMG intends to dispose of
its investment in RDM.
In connection with the Exchange Transaction, the Company, RDM and certain
officers of RDM entered into a Shareholders Agreement pursuant to which, among
other things, the Company obtained the right to designate four individuals to
serve on RDM's nine-member Board of Directors, subject to certain reductions.
In addition, the Shareholders Agreement generally grants RDM a right of first
refusal with respect to any proposed sale by the Company of any shares of RDM
common stock received by the Company in the Exchange Transaction for as long as
the MMG-designated Directors have been nominated and elected to the Board of
Directors of RDM. Such right of first refusal will not, however, apply to any
proposed sale, transfer or assignment of such shares to any persons who would,
after consummation of such transaction, own less than 10% of the outstanding
shares of RDM common stock or to any sale of such shares pursuant
29
<PAGE>
to a registration statement filed under the Securities Act, provided the Company
has used its reasonable best efforts not to make any sale pursuant to such
registration statement to any single purchaser or "Acquiring Person" who would
own 10% or more of the outstanding shares of RDM common stock after the
consummation of such transaction. "Acquiring Person" generally is defined in the
Shareholders Agreement to mean any person or group which together with all
affiliates is the beneficial owner of 5% or more of the outstanding shares of
RDM common stock.
Also in connection with the Exchange Transaction, the Company and RDM entered
into a Registration Rights Agreement (the "Registration Rights Agreement") under
which RDM agreed to register such shares ("Registrable Stock") at the request of
the Company or its affiliates or any transferee who acquires at least 1,000,000
shares of the RDM common stock issued to the Company in the Exchange
Transaction. Under the Registration Rights Agreement, registration may be
required at any time during a ten-year period beginning as of the closing date
of the Exchange Transaction (the "Registration Period") by the holders of at
least 50% of the Registrable Stock if a "long-form" registration statement
(i.e., a registration statement on Form S-1, S-2 or other similar form) is
requested or by the holders of Registrable Stock with a value of at least
$500,000 if a "short-form registration statement (i.e., a registration statement
on Form S-3 or other similar form) is requested. RDM is required to pay all
expenses incurred (other than the expenses of counsel, if any, for the holders
of Registrable Stock, the expenses of underwriter's counsel, and underwriting
fees) for any two registrations requested by the holders of Registrable Stock
during the Registration Period. RDM will become obligated to pay the expenses of
up to two additional registrations if RDM is not eligible to use a short-form
registration statement to register the Registrable Stock at any time during the
Registration Period. All other registrations will be at the expense of the
holders of the Registrable Stock. RDM will have the right at least once during
each twelve-month period to defer the filing of a demand registration statement
for a period of up to 90 days after request for registration by the holders of
the requisite number of shares of Registrable Stock. The Company has requested
that RDM register its shares of RDM common stock pursuant to the terms of the
Registration Rights Agreement.
ENVIRONMENTAL PROTECTION
Snapper's manufacturing plant is subject to federal, state and local
environmental laws and regulations. Compliance with such laws and regulations
has not, and is not expected to, materially affect Snapper's competitive
position. Snapper's capital expenditures for environmental control facilities,
its incremental operating costs in connection therewith and Snapper's
environmental compliance costs were not material in 1996 and are not expected to
be material in future years.
The Company has agreed to indemnify a former subsidiary of the Company for
certain obligations, liabilities and costs incurred by the subsidiary arising
out of environmental conditions existing on or prior to the date on which the
subsidiary was sold by the Company in 1987. Since that time, the Company has
been involved in various environmental matters involving property owned and
operated by the subsidiary, including clean-up efforts at landfill sites and the
remediation of groundwater contamination. The costs incurred by the Company with
respect to these matters have not been material during any year through and
including the fiscal year ended December 31, 1996. As of December 31, 1996, the
Company had a remaining reserve of approximately $1.3 million to cover its
obligations to its former subsidiary. During 1995, the Company was notified by
certain potentially responsible parties at a superfund site in Michigan that the
former subsidiary may also be a potentially responsible party at the superfund
site. The former subsidiary's liability, if any, has not been determined, but
the Company believes that such liability will not be material.
The Company, through a wholly-owned subsidiary, owns approximately 17 acres of
real property located in Opelika, Alabama (the "Opelika Property"). The Opelika
Property was formerly owned by Diversified Products Corporation, a former
subsidiary of the Company ("DP"), and was transferred to a wholly-owned
subsidiary of the Company in connection with the Exchange Transaction. DP
previously used the Opelika Property as a storage area for stockpiling cement,
sand, and mill scale materials needed for or resulting
30
<PAGE>
from the manufacture of exercise weights. In June 1994, DP discontinued the
manufacture of exercise weights and no longer needed to use the Opelika Property
as a storage area. In connection with the Exchange Transaction, RDM and the
Company agreed that the Company, through a wholly-owned subsidiary, would
acquire the Opelika Property, together with any related permits, licenses, and
other authorizations under federal, state and local laws governing pollution or
protection of the environment. In connection with the closing of the Exchange
Transaction, the Company and RDM entered into an Environmental Indemnity
Agreement (the "Indemnity Agreement") under which the Company agreed to
indemnify RDM for costs and liabilities resulting from the presence on or
migration of regulated materials from the Opelika Property. The Company's
obligations under the Indemnity Agreement with respect to the Opelika Property
are not limited. The Indemnity Agreement does not cover environmental
liabilities relating to any property now or previously owned by DP except for
the Opelika Property.
On January 22, 1996, the Alabama Department of Environmental Management ("ADEM")
wrote a letter to the Company stating that the Opelika Property contains an
"unauthorized dump" in violation of Alabama environmental regulations. The
letter from ADEM requires the Company to present for ADEM's approval a written
environmental remediation plan for the Opelika Property. The Company has
retained an environmental consulting firm to develop an environmental
remediation plan for the Opelika Property. In 1997, the Company received the
consulting firm's report. The Company has conducted a grading and capping in
accordance with plan and has reported to ADEM that the work was completed and
the Company will undertake to monitor the property on a quarterly basis. Since
quarterly testing will be conducted, the Company believes that the reserves of
approximately $1.8 million will be adequate to cover any further cost of
remediation if required.
EMPLOYEES
As of March 7, 1997, the Company had approximately 2,600 regular employees.
Approximately 1,000 of the employees are part-time employees in the
Entertainment Group's theater business. In addition, approximately 850 employees
were represented by unions under collective bargaining agreements. In general,
the Company believes that its employee relations are good.
Certain of the Entertainment Group's subsidiaries are signatories to various
agreements with unions that operate in the entertainment industry. In addition,
a substantial number of the artists and talent and crafts people involved in the
motion picture and television industry are represented by trade unions with
industry-wide collective bargaining agreements.
SEGMENT AND GEOGRAPHIC DATA
Business segment data and information regarding the Company's foreign revenues
by geographic area are included in notes 8 and 13 of the "notes to consolidated
financial statements" included in Item 8 hereof.
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ITEM 2. PROPERTIES
The following table contains a list of the Company's principal properties.
<TABLE>
<CAPTION>
NUMBER
------------------------
<S> <C> <C> <C>
DESCRIPTION OWNED LEASED LOCATION
- ------------------------------------------------------------ ----------- ----------- ---------------------------------
The Entertainment Group:
Office space................................................ -- 4 Los Angeles, California
Sales office................................................ -- 1 New York, New York
The Communications Group:
Office space................................................ -- 1 Stamford, Connecticut
Office space................................................ -- 1 Moscow, Russia
Office space................................................ -- 1 Vienna, Austria
Office space................................................ -- 1 Hong Kong
Office space................................................ -- 1 New York, New York
General Corporate:..........................................
Office space................................................ -- 1 East Rutherford, New Jersey
Snapper:
Manufacturing plant......................................... 1 -- McDonough, Georgia
Distribution facility....................................... -- 1 McDonough, Georgia
Distribution facility....................................... -- 1 Dallas, Texas
Distribution facility....................................... -- 1 Greenville, Ohio
</TABLE>
Three of Orion's offices will be combined into one facility during 1997. Of
Landmark's 50 theaters, four and one-half are owned and the remainder are
located in leased or subleased premises. Landmark owns the Seven Gables Theatre,
the Crest Theatre, the Guild Theatres and a one-half interest in the Harvard
Exit Theatre, all in Seattle, Washington, and it owns the Sacramento Inn Theater
in Sacramento, California. The leased and subleased theaters have remaining
terms ranging from two months to 30 years or more and, in some cases, renewal
options for additional periods of from five to 20 years. The renewal options
generally provide for increased rent. Rent is sometimes calculated as a
percentage of sales or profits, subject to an annual minimum. Assuming the
exercise of all the options, ten leases will expire between January 1, 1997 and
December 31, 1998 and the balance thereafter.
The Company's management believes that the facilities listed above are generally
adequate and satisfactory for their present usage and are generally well
utilized.
ITEM 3. LEGAL PROCEEDINGS
FUQUA INDUSTRIES, INC. SHAREHOLDER LITIGATION
Between February 25, 1991 and March 4, 1991, three lawsuits were filed against
the Company (formerly named Fuqua Industries, Inc.) in the Delaware Chancery
Court. On May 1, 1991, these three lawsuits were consolidated by the Delaware
Chancery Court in re Fuqua Industries, Inc. Shareholders Litigation, Civil
Action No. 11974. The named defendants are certain current and former members of
the Company's Board of Directors and certain former members of the Board of
Directors of Intermark, Inc. ("Intermark"). Intermark is a predecessor to Triton
Group Ltd., which at one time owned approximately 25% of the outstanding shares
of the Company's Common Stock. The Company was named as a nominal defendant in
this lawsuit. The action was brought derivatively in the right of and on behalf
of the Company and purportedly was filed as a class action lawsuit on behalf of
all holders of the Company's Common Stock other than the defendants. The
complaint alleges, among other things, a long-standing pattern and
32
<PAGE>
practice by the defendants of misusing and abusing their power as directors and
insiders of the Company by manipulating the affairs of the Company to the
detriment of the Company's past and present stockholders. The complaint seeks
(i) monetary damages from the director defendants, including a joint and several
judgment for $15.7 million for alleged improper profits obtained by Mr. J.B.
Fuqua in connection with the sale of his shares in the Company to Intermark;
(ii) injunctive relief against the Company, Intermark and its former directors,
including a prohibition against approving or entering into any business
combination with Intermark without specified approval; and (iii) costs of suit
and attorneys' fees. On December 28, 1995, the plaintiffs filed a consolidated
second amended derivative and class action complaint, purporting to assert
additional facts in support of their claim regarding an alleged plan, but
deleting their prior request for injunctive relief. On January 31, 1996, all
defendants moved to dismiss the second amended complaint and filed a brief in
support of that motion. A hearing regarding the motion to dismiss was held on
November 6, 1996; the decision relating to the motion is pending.
MICHAEL SHORES V. SAMUEL GOLDWYN COMPANY
On May 20, 1996 a purported class action lawsuit against Goldwyn and its
directors was filed in the Superior Court of the State of California for the
County of Los Angeles in Michael Shores v. Samuel Goldwyn Company. et al., case
no. BC 150360. In the complaint, plaintiff alleged that Goldwyn's Board of
Directors breached its fiduciary duties to the stockholders of Goldwyn by
agreeing to sell Goldwyn to the Company at a premium, yet providing Mr. Samuel
Goldwyn, Jr., the Samuel Goldwyn Family Trust and Mr. Meyer Gottlieb with
additional consideration, and sought to enjoin consummation of the Goldwyn
Merger. The Company believes that the suit is without merit and intends to
vigorously defend such action.
INDEMNIFICATION AGREEMENTS
In accordance with Section 145 of the General Corporation Law of the State of
Delaware, pursuant to the Company's Restated Certificate of Incorporation, the
Company has agreed to indemnify its officers and directors against, among other
things, any and all judgments, fines, penalties, amounts paid in settlements and
expenses paid or incurred by virtue of the fact that such officer or director
was acting in such capacity to the extent not prohibited by law.
LITIGATION RELATING TO THE NOVEMBER 1 MERGER
Three stockholder suits relating to the November 1 Merger were filed in the
Delaware Chancery Court prior to the consummation of such mergers. Set forth
below is a brief description of the status of such litigations.
Jerry Krim v. John W. Kluge, Silvia Kessel, Joel R. Packer, Michael I. Sovern,
Raymond L. Steele, Stuart Subotnick, Arnold L. Wadler, Stephen Wertheimer,
Leonard White and Orion Pictures Corporation (Delaware Chancery Court, C.A. No.
13721); complaint filed September 2, 1994. Orion and each of its directors were
named as defendants in this purported class action lawsuit, which alleged that
Orion's Board of Directors failed to use the required care and diligence in
considering the November 1 Merger and sought to enjoin the consummation of such
merger. The lawsuit further alleged that as a result of the actions of Orion's
directors, Orion's stockholders would not receive the fair value of Orion's
assets and business in exchange for their Orion Common Stock in the November 1
Merger.
Harry Lewis v. John W. Kluge, Leonard White, Stuart Subotnick, Silvia Kessel,
Joel R. Packer, Michael I. Sovern, Raymond L. Steele, Arnold L. Wadler, Stephen
Wertheimer, The Actava Group, Inc. and Orion Pictures Corp. (Delaware Chancery
Court, C.A. No. 14234); complaint filed April 17, 1995. Orion, each of its
directors and Actava were named in this purported class action lawsuit which was
filed after the execution of the initial merger agreement relating to the
November 1 Merger. The complaint contained similar allegations and sought
similar relief to the KRIM case described above.
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<PAGE>
On January 22, 1996, the parties to these two lawsuits executed a Memorandum of
Understanding embodying a tentative settlement agreement. In the tentative
settlement agreement, the plaintiffs accept the September 27, 1995 amended and
restated merger agreement relating to the November 1 Merger as full settlement
of all claims that were asserted or could have been asserted in such
litigations. Counsel for the plaintiffs concluded confirmatory discovery during
1996 and entered into a stipulated and agreement of complaints settlement and
released dated January 24, 1997. On January 31, 1997, the court ordered a
settlement hearing regarding the settlement to be held on April 23, 1997 to
determine the fairness, reasonableness and adequacy of the settlement, whether
the action should be class action and whether the court should approve the
settlement. On March 11, 1997, the Company mailed to the members of the class a
notice of pending class action along with the proposed settlement to afford
class members the ability to opt out of the class.
James F. Sweeney, Trustee of Frank Sweeney Defined Benefit Plan Trust v. John D.
Phillips, Frederick B. Beilstein, III, John E. Aderhold, Michael B. Cahr, J.M.
Darden, III, John P. Imlay, Jr., Clark A. Johnson, Anthony F. Kopp, Richard
Nevins, Carl E. Sanders, Orion Picture Corporation, International Telcell, Inc.,
Metromedia International, Inc. and MCEG Sterling Inc. (Delaware Chancery Court,
C.A. No. 13765); complaint filed September 23, 1994. This class action lawsuit
was filed by stockholders of the Company (then known as The Actava Group, Inc.)
against the Company and its directors, and against each of Orion, MITI and
Sterling, the other parties to the November 1 Merger. The complaint alleges that
the terms of the November 1 Merger constitute an overpayment by the Company for
the assets of Orion and, accordingly, would result in a waste of the Company's
assets. The complaint further alleges that Orion, MITI and Sterling each
knowingly aided, abetted and materially assisted the Company's directors in
breach of their fiduciary duties to the Company's stockholders. On November 23,
1994, the Company and its directors filed a motion to dismiss the complaint. The
plaintiff never responded to the motion to dismiss. On February 22, 1996,
however, the plaintiff filed a status report with the Court of Chancery in
Delaware indicating that the case is moot but that the plaintiff intends to
pursue an application for fees and expenses. The parties entered into a
settlement, which was approved by the court concerning the application for fees,
which was filed in April 1996. In October, 1996 the Company notified the
provisional class of the settlement and provided such persons the opportunity to
object to the dismissal of the case or the settlement concerning the fees.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of the Company's stockholders, through the
solicitation of proxies or otherwise, during the fourth quarter of the year
ended December 31, 1996.
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<PAGE>
EXECUTIVE OFFICERS OF THE COMPANY
Each of the executive officers of the Company have served in their respective
capacities since the consummation of the November 1 Merger. Each executive
officer shall, except as otherwise provided in the Company's By-Laws, hold
office until his or her successor shall have been chosen and qualify.
<TABLE>
<CAPTION>
POSITION
NAME AGE OFFICE HELD SINCE
- ----------------------------------- --- ----------------------------------- -----------------------------------
<S> <C> <C> <C>
John W. Kluge...................... 82 Chairman November 1995
Stuart Subotnick................... 55 Vice Chairman, President and Chief November 1995 (Vice
Executive Officer Chairman)
December 1996 (President and
Chief Executive Officer)
Silvia Kessel...................... 46 Executive Vice President, Chief November 1995
Financial Officer and Treasurer
Arnold L. Wadler................... 53 Executive Vice President, General November 1995
Counsel and Secretary
Robert A. Maresca.................. 62 Senior Vice President (Chief November 1995
Accounting Officer)
</TABLE>
MR. KLUGE has served as Chairman of the Board of Directors of the Company since
November 1, 1995 and as Chairman of the Board of Orion since 1992. In addition,
Mr. Kluge has served as Chairman and President of Metromedia Company
("Metromedia") and its predecessor-in-interest, Metromedia, Inc. for over five
years. Mr. Kluge is also a director of The Bear Stearns Companies, Inc.,
Occidental Petroleum Corporation and Conair Corporation. Mr. Kluge is Chairman
of the Company's Executive Committee.
MR. SUBOTNICK has served as Vice Chairman of the Board of Directors of the
Company since the November 1, 1995 and President and Chief Executive Officer
since December 4, 1996 and as Vice Chairman of the Board of Orion since November
1992. In addition, Mr. Subotnick has served as Executive Vice President of
Metromedia and its predecessor-in-interest, Metromedia, Inc., for over five
years. Mr. Subotnick is also a director of Carnival Cruise Lines, Inc. and RDM
Sports Group, Inc. Mr. Subotnick is Chairman of the Audit Committee and a member
of the Executive and Nominating Committees of the Company.
MS. KESSEL has served as Executive Vice President, Chief Financial Officer and
Treasurer since August 29, 1996 and as Senior Vice President, Chief Financial
Officer and Treasurer of MMG since November 1, 1995 and as Executive Vice
President of Orion since January 1993, Senior Vice President of Metromedia since
1994 and President of Kluge & Company since January 1994. Prior to that time,
Ms. Kessel served as Senior Vice President of Orion from June 1991 to November
1992 and Managing Director of Kluge & Company (and its predecessor) from April
1990 to January 1994. Ms. Kessel is also a director of RDM Sports Group, Inc.
Ms. Kessel is a member of the Nominating Committee of the Company.
MR. WADLER has served as Executive Vice President, General Counsel and Secretary
since August 29, 1996 and Senior Vice President, General Counsel and Secretary
since November 1, 1995, as a Director of Orion since 1991 and as Senior Vice
President, Secretary and General Counsel of Metromedia and its
predecessor-in-interest, Metromedia, Inc., for over five years. Mr. Wadler is
Chairman of the Nominating Committee of the Company.
MR. MARESCA has served as a Senior Vice President and Chief Accounting Officer
of the Company since November 1, 1995. Mr. Maresca has served as a Senior Vice
President-Finance of Metromedia and its predecessor-in-interest, Metromedia,
Inc. for over five years.
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<PAGE>
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS.
Since November 2, 1995, the Common Stock has been listed and traded on the
American Stock Exchange and the Pacific Stock Exchange (the "AMEX" and "PSE",
respectively) under the symbol "MMG" and "MIG", respectively. Prior to November
2, 1995, the Common Stock was listed and traded on both the New York Stock
Exchange (the "NYSE") and the PSE under the symbol "ACT." The following table
sets forth the quarterly high and low closing sales prices per share for the
Company's Common Stock according to the NYSE Composite Tape for the period from
January 1, 1995 through November 1, 1995 and the quarterly high and low closing
sales prices per share of the Company's Common Stock as reported by the AMEX
from November 2, 1995 through the present.
<TABLE>
<CAPTION>
MARKET PRICE OF COMMON STOCK
------------------------------------------
<S> <C> <C> <C> <C>
1996 1995
-------------------- --------------------
QUARTERS ENDED HIGH LOW HIGH LOW
- --------------------------------------------------------------------------------- --------- --------- --------- ---------
March 31......................................................................... $ 14 1/4 $ 11 1/2 $ 11 $ 8 3/4
June 30.......................................................................... 16 5/8 12 1/4 13 3/8 8 5/8
September 30..................................................................... 12 1/2 9 1/2 19 1/8 13 1/4
December 31...................................................................... 12 1/8 8 7/8 18 7/8 13 1/4
</TABLE>
Holders of Common Stock are entitled to such dividends as may be declared by the
Board of Directors and paid out of funds legally available for the payment of
dividends. The Company has not paid a dividend to its stockholders since the
dividend declared in the fourth quarter of 1993, and has no plans to pay cash
dividends on the Common Stock in the foreseeable future. The Company intends to
retain earnings to finance the development and expansion of its businesses. The
decision of the Board of Directors as to whether or not to pay cash dividends in
the future will depend upon a number of factors, including the Company's future
earnings, capital requirements, financial condition, and the existence or
absence of any contractual limitations on the payment of dividends. The
Company's ability to pay dividends is limited because the Company operates as a
holding company, conducting its operations solely through its subsidiaries.
Certain of the Company's subsidiaries' existing credit arrangements contain, and
it is expected that their future arrangements will similarly contain,
substantial restrictions on dividend payments to the Company by such
subsidiaries. See Item 7--"Management's Discussion and Analysis of Financial
Condition and Results of Operations."
As of March 24, 1997, there were approximately 7,790 record holders of Common
Stock. The last reported sales price for the Common Stock on such date was $
9 7/16 per share as reported by the American Stock Exchange.
36
<PAGE>
ITEM 6. SELECTED FINANCIAL DATA
SELECTED FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
YEARS ENDED
DECEMBER 31 YEARS ENDED FEBRUARY 28
---------------------- ----------------------------------
<S> <C> <C> <C> <C> <C>
1996 1995(1) 1995 1994 1993
---------- ---------- ---------- ---------- ----------
Statement of Operations Data
Revenues............................................. $ 201,755 $ 138,970 $ 194,789 $ 175,713 $ 222,318
Equity in losses of Joint Ventures................... (11,079) (7,981) (2,257) (777) --
Loss from continuing operations before discontinued
operations and extraordinary item.................. (94,433) (87,024) (69,411) (132,530) (72,973)
Loss from discontinued operations.................... (16,305) (293,570) -- -- --
Loss before extraordinary item....................... (110,738) (380,594) (69,411) (132,530) (72,973)
Net income (loss).................................... (115,243) (412,976) (69,411) (132,530) 250,240
Loss from continuing operations before discontinued
operations and extraordinary item per common
share.............................................. (1.74) (3.54) (3.43) (7.71) (19.75)
Loss before extraordinary item per common share...... (2.04) (15.51) (3.43) (7.71) (19.75)
Net income (loss) per common share................... (2.12) (16.83) (3.43) (7.71) 67.74
Weighted average common shares entering into
computation of per-share amounts................... 54,293 24,541 20,246 17,188 3,694
Dividends per common share........................... -- -- -- -- --
BALANCE SHEET DATA (AT END OF PERIOD)
Total assets......................................... 944,740 599,638 391,870 520,651 704,356
Notes and subordinated debt.......................... 459,059 304,643 237,027 284,500 325,158
</TABLE>
- ------------------------
(1) The consolidated financial statements for the twelve months ended December
31, 1995 include two months for Orion (January and February 1995) that were
included in the February 28, 1995 consolidated financial statements. The
revenues and net loss for the two month duplicate period are $22.5 million
and $11.4 million, respectively.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion should be read in conjunction with the Company's
consolidated financial statements and related notes thereto and the "Business"
section included as Item 1 herein.
GENERAL
On November 1, 1995 (the "Merger Date"), Orion, MITI, the Company and MCEG
Sterling Incorporated ("Sterling") consummated the November 1 Merger. In
connection with the November 1 Merger, the Company changed its name from "The
Actava Group Inc." ("Actava") to "Metromedia International Group, Inc." ("MMG").
For accounting purposes only, Orion and MITI have been deemed to be the joint
acquirers of Actava and Sterling. The acquisition of Actava and Sterling has
been accounted for as a reverse acquisition. As a result of the reverse
acquisition, the historical financial statements of the Company for periods
prior to the November 1 Merger are the combined financial statements of Orion
and MITI, rather than Actava's.
37
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (CONTINUED)
The operations of Actava and Sterling have been included in the accompanying
consolidated financial statements from November 1, 1995, the date of
acquisition. During 1995, the Company adopted a formal plan to dispose of
Snapper, Inc. ("Snapper"), a wholly-owned subsidiary of the Company, and as a
result, Snapper was classified as an asset held for sale and the results of its
operations were not included in the consolidated results of operations of the
Company from November 1, 1995 to October 31, 1996. Subsequently, the Company
announced its intention not to continue to pursue its previously adopted plan to
dispose of Snapper and to actively manage Snapper to maximize its long term
value to the Company. The operations of Snapper are included in the accompanying
consolidated financial statements as of November 1, 1996. In addition, at
November 1, 1995 the Company's investment in RDM Sports Group, Inc. (formerly
Roadmaster Industries, Inc., "RDM") was deemed to be a non-strategic asset and
is included in the accompanying consolidated financial statements as a
discontinued operation and an asset held for sale. The Company intends to
dispose of its RDM stock during 1997.
The business activities of the Company consist of three business segments: (i)
the development and operation of communications businesses, which include
wireless cable television, paging services, radio broadcasting, and various
types of telephony services, (ii) the production and distribution in all media
of motion pictures, television programming and other filmed entertainment
product and the exploitation of its library of over 2,200 feature film and
television titles and (iii) the manufacture of lawn and garden products through
Snapper.
COMMUNICATIONS GROUP
The Company, through the Communications Group, is the owner of various interests
in Joint Ventures that are currently in operation or planning to commence
operations in certain republics of the former Soviet Union and in Eastern
European and other emerging markets.
The Joint Ventures currently offer wireless cable television, radio paging
systems, radio broadcasting, and various types of telephony services including
trunked mobile radio, international toll calling and wireless telephony
services. Joint ventures are principally entered into with governmental agencies
or ministries under the existing laws of the respective countries.
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 Juventus, Radio Skonto, Romsat, SAC/Radio 7, Vilnius
Cable and Protocall Ventures Ltd., and its subsidiaries. The following table
lists the Communications Group's majority owned and controlled Joint Ventures at
September 30, 1996:
<TABLE>
<CAPTION>
POPULATION/HH
COVERED (MM)
JOINT VENTURE BUSINESS MARKET 1996(1)
- --------------------------- --------------------------- --------------------------------------- -----------------
<S> <C> <C> <C>
CNM Paging Paging Bucharest, Romania 23.0
Radio Juventus Radio Budapest, Hungary 3.5
Radio Skonto Radio Riga, Latvia 0.9
SAC/Radio 7 Radio Moscow, Russia 12.0
Romsat Cable TV Bucharest, Romania 0.9
Vilnius Cable Cable TV Vilnius, Lithuania 2.0
Protocall Ventures Trunked Mobile Radio Belgium, Portugal, Romania, Spain 33.7
</TABLE>
- ------------------------
(1) Information for Romsat and Vilnius Cable are households covered. All other
information is for population covered.
38
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (CONTINUED)
Investments in other companies and joint ventures which are not majority owned,
or in which the Communications Group does not control, but exercises significant
influence, have been accounted for using the equity method. Investments of the
Communications Group or its consolidated subsidiaries over which significant
influence is not exercised are carried under the cost method. See note 8 to the
consolidated financial statements, "Investments in and Advances to Joint
Ventures", for these Joint Ventures and their summary financial information.
ENTERTAINMENT GROUP
The Entertainment Group consists of Orion and, as of July 2, 1996, Goldwyn and
MPCA and their respective subsidiaries. Until November 1, 1995, Orion operated
under certain agreements entered into in connection with the terms of its
Modified Third Amended Joint Consolidated Plan of Reorganization (the "Plan"),
which severely limited the Entertainment Group's ability to finance and produce
additional feature films. Therefore, the Entertainment Group's primary activity
prior to the November 1 Merger was the ongoing distribution of its library of
theatrical motion pictures and television programming. The Entertainment Group
believes the lack of a continuing flow of newly-produced theatrical product
while operating under the Plan adversely affected its results of operations. As
a result of the removal of the restrictions on the Entertainment Group to
finance, produce, and acquire entertainment products in connection with the
November 1 Merger, the Entertainment Group has begun to produce, acquire, and
release new theatrical product. In addition, the Entertainment Group operates a
movie theater circuit.
Theatrical motion pictures are produced initially for exhibition in theaters in
the United States and Canada. Foreign theatrical exhibition generally begins
within the first year after initial release. Home video distribution in all
territories usually begins six to twelve months after theatrical release in that
territory, with pay television exploitation beginning generally six months after
initial home video release. Exhibition of the Company's product on network and
on other free television outlets begins generally three to five years from the
initial theatrical release date in each territory.
SNAPPER
Snapper 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. Snapper also manufactures a line of commercial lawn and turf equipment
under the Snapper brand. Snapper provides lawn and garden products through
distribution channels to domestic and foreign retail markets.
The following table sets forth the operating results and financial condition of
the Company's entertainment, communications and lawn and garden products
segments.
39
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (CONTINUED)
METROMEDIA INTERNATIONAL GROUP
SEGMENT INFORMATION
MANAGEMENT'S DISCUSSION AND ANALYSIS TABLE
(IN THOUSANDS)
<TABLE>
<CAPTION>
CALENDAR YEAR CALENDAR YEAR FISCAL YEAR
1996 1995 1995
------------- ------------- -----------
<S> <C> <C> <C>
Entertainment Group:
Net revenues......................................................... $ 165,164 $ 133,812 $ 191,244
Cost of sales and rentals and operating expenses..................... (139,307) (132,951) (187,477)
Selling, general and administrative.................................. (24,709) (24,049) (22,888)
Depreciation and amortization........................................ (5,555) (694) (767)
------------- ------------- -----------
Loss from operations................................................. (4,407) (23,882) (19,888)
------------- ------------- -----------
Communications Group:
Net revenues......................................................... 14,047 5,158 3,545
Cost of sales and rentals and operating expenses..................... (1,558) -- --
Selling, general and administrative.................................. (37,463) (26,803) (19,067)
Depreciation and amortization........................................ (6,403) (2,101) (1,149)
------------- ------------- -----------
Loss from operations................................................. (31,377) (23,746) (16,671)
------------- ------------- -----------
Snapper:
Net Revenues......................................................... 22,544 -- --
Cost of sales and rental and operating expenses...................... (20,699) -- --
Selling, general and administrative.................................. (9,954) -- --
Depreciation and amortization........................................ (1,256) -- --
------------- ------------- -----------
Loss from operations................................................. (9,365) -- --
------------- ------------- -----------
Corporate Headquarters and Eliminations:
Net revenues......................................................... -- -- --
Cost of sales and rental and operating expenses...................... -- -- --
Selling, general and administrative.................................. (9,355) (1,109) --
Depreciation and amortization........................................ (18) -- --
------------- ------------- -----------
Loss from operations................................................. (9,373) (1,109) --
------------- ------------- -----------
Consolidated--Continuing Operations:
Net revenues......................................................... 201,755 138,970 194,789
Cost of sales and rentals and operating expenses..................... (161,564) (132,951) (187,477)
Selling, general and administrative.................................. (81,481) (51,961) (41,955)
Depreciation and amortization........................................ (13,232) (2,795) (1,916)
------------- ------------- -----------
Loss from operations................................................. (54,522) (48,737) (36,559)
------------- ------------- -----------
Interest expense....................................................... (36,256) (33,114) (32,389)
Interest income........................................................ 8,838 3,575 3,094
Provision for income taxes............................................. (1,414) (767) (1,300)
Equity in losses of Joint Ventures..................................... (11,079) (7,981) (2,257)
Discontinued operations................................................ (16,305) (293,570) --
Extraordinary item..................................................... (4,505) (32,382) --
------------- ------------- -----------
Net loss............................................................... $ (115,243) $ (412,976) $ (69,411)
------------- ------------- -----------
------------- ------------- -----------
</TABLE>
40
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (CONTINUED)
MMG CONSOLIDATED--RESULTS OF OPERATIONS
YEAR ENDED DECEMBER 31, 1996 COMPARED TO YEAR ENDED DECEMBER 31, 1995.
During the year ended December 31, 1996 ("calendar 1996"), the Company reported
a loss from continuing operations of $94.4 million, a loss from discontinued
operations of $16.3 million and a loss on extinguishment of debt of $4.5
million, resulting in a net loss of $115.2 million. This compares to a loss from
continuing operations of $87.0 million, a loss from discontinued operations of
$293.6 million and a loss on extinguishment of debt of $32.4 million, resulting
in a net loss of $413.0 million for the year ended December 31, 1995 ("calendar
1995"). The loss from continuing operations increased by $7.4 million as a
result of increases in the operating losses at the Communications Group,
corporate overhead and the consolidation of Snapper losses as of November 1,
1996, which were partially offset by a decrease in the operating losses at the
Entertainment Group.
The calendar 1996 loss from discontinued operations and extraordinary item are
attributable to the writedown of the investment in RDM to its net realizable
value and the loss associated with the refinancing of the Orion debt facility as
part of the Goldwyn and MPCA acquisition, respectively.
The calendar 1995 loss from discontinued operations represents the writedown of
the portion of the purchase price of the Company allocated to Snapper on
November 1, 1995 to its net realizable value.
The extraordinary loss relating to the early extinguishment of debt in calendar
1995 was a result of the repayment and termination of the Plan debt, which was
refinanced with funds provided under the Old Orion Credit Facility (see note 9)
and a non-interest bearing promissory note from the Company, and to the
charge-off of the unamortized discount associated with such obligations.
Interest expense increased $3.1 million for calendar 1996. The increase in
interest expense was primarily due to the interest on the debt at corporate
headquarters for twelve months in calendar 1996 as compared to two months in
calendar 1995. This increase was partially offset by the reduction in interest
expense for the Communications Group since the funding of their operations is
from MMG and for the Entertainment Group due principally to lower interest rates
on their outstanding debt balance for each respective period. The average
interest rates on average debt outstanding of $363.3 million and $254.8 million
in calendar 1996 and calendar 1995, were 10.0% and 11.4%, respectively.
Interest income increased $5.3 million principally as a result of funds invested
at corporate headquarters and increased interest resulting from increased
borrowings under the Communications Group's credit facilities with its Joint
Ventures for their operating and investing cash requirements.
YEAR ENDED DECEMBER 31, 1995 COMPARED TO YEAR ENDED FEBRUARY 28, 1995
During calendar 1995, the Company reported a loss from continuing operations of
$87.0 million, a loss from discontinued operations of $293.6 million and a loss
on extinguishment of debt of $32.4 million, resulting in a net loss of $413.0
million. This compares to a net loss of $69.4 million for the year ended
February 28, 1995 ("fiscal 1995"), all of which came from continuing operations.
The loss from continuing operations increased by $17.6 million from calendar
1995 as compared to fiscal 1995, primarily as a result of an increase in the
Communications Group's operating loss in calendar 1995.
The effect of the acquisitions of Actava and Sterling on calendar 1995 results
of operations was to increase revenues by $198,000, to increase selling, general
and administrative expenses by $1.6 million, and to increase interest expense by
$2.2 million.
41
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (CONTINUED)
The calendar 1995 loss from discontinued operations represents the writedown of
the portion of the purchase price of the Company allocated to Snapper in the
November 1 Merger to its net realizable value.
The extraordinary loss relating to the early extinguishment of debt in calendar
1995 was a result of the repayment and termination of the Plan debt, which was
refinanced with funds provided under the Old Orion Credit Facility (see note 9)
and a non-interest bearing promissory note from MMG, and to the charge-off of
the unamortized discount associated with such obligations.
Interest expense increased by $700,000 to $33.1 million in calendar 1995 due to
increased borrowings by the Communications Group to finance operations and
investment activities of its Joint Ventures and two months of interest on the
debt at corporate headquarters as part of the November 1 Merger, partially
offset by lower debt levels at the Entertainment Group. The average interest on
average debt outstanding of $254.8 million and $245.2 million in calendar 1995
and fiscal 1995, were 11.4% and 10.9% respectively.
Interest income increased $500,000 to $3.6 million in calendar 1995 due
principally to interest charged by the Communications Group to the Joint
Ventures for credit facilities.
ENTERTAINMENT GROUP--RESULTS OF OPERATIONS
YEAR ENDED DECEMBER 31, 1996 COMPARED TO YEAR ENDED DECEMBER 31,1995.
REVENUES
Total revenues for calendar year 1996 were $165.2 million, an increase of $31.4
million or 23% from calendar year 1995.
Revenues increased during calendar 1996, reflecting the additional revenues
associated with the acquisitions of Goldwyn and MPCA ("Acquired Businesses"),
including revenues from the theatrical exhibition business. This increase was
partially offset by the decrease in revenues in home video and pay television,
which resulted from the Entertainment Group's reduced theatrical release
schedule. Although the Entertainment Group released 13 pictures theatrically
during calendar 1996, several of these titles had limited releases and/or were
acquired solely for domestic theatrical distribution and consequently will
generate little or no ancillary revenues. The Entertainment Group anticipates
that its reduced theatrical release schedule during the last few years, as well
as the acquisition of limited distribution rights for certain current titles,
will continue to have an adverse effect on its ancillary revenues.
Theatrical revenues for calendar 1996 were $20.3 million, an increase of $15.6
million or 332% from the previous year. Such increase was due to the theatrical
release of 13 pictures during calendar 1996 compared to three theatrical
releases in calendar 1995.
Domestic home video revenues for calendar 1996 were $30.9 million, a decrease of
$9.1 million or 23% from the previous year. The decrease in domestic home video
revenue is due primarily to a reduction in rental units sold for calendar 1996
video releases as compared to calendar 1995 video releases.
Home video subdistribution revenues for calendar 1996 were $8.3 million, an
increase of $4.4 million or 113% from calendar 1995. These revenues are
generated primarily in the foreign marketplace through a subdistribution
arrangement with Sony Pictures Entertainment, Inc. ("Sony"). The increase for
calendar 1996 was due primarily to the release of the remaining titles under
this agreement in certain major territories. All 23 pictures covered by this
agreement have been released theatrically.
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
42
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (CONTINUED)
in the primary pay cable window compared to six available titles during calendar
1995. The Entertainment Group's reduced theatrical release schedule in calendar
1996, as well as limited ancillary rights to certain theatrical releases in
calendar 1996, will continue to have an adverse effect on future pay television
revenues.
Free television revenues for calendar 1996 were $55.5 million, an increase of
$1.9 million or 4% from the previous year. In both the domestic and
international marketplaces, the Entertainment Group derives significant revenue
from the licensing of free television rights. Major international contracts in
calendar 1996 that contributed to revenues include agreements with British Sky
Broadcasting, LTD for rights in the U.K., Mitsubishi Corporation for rights in
Japan and Principal Network for rights in Italy. In calendar 1995, the most
significant agreements were TV de Catalunya for rights in Spain, RTL Plus for
rights in Germany and Principal Network for rights in Italy. The Entertainment
Group's reduced theatrical release schedule while operating under the Plan has
had and will continue to have an adverse effect on free television revenues.
Film exhibition revenues for calendar 1996 were $29.6 million. As the
acquisition of this business occurred on July 2, 1996, only six months of
operations has been included in the calendar 1996 statement of operations.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses were $24.7 million in calendar
1996, an increase of $700,000 from the previous year. The increase is attributed
to the inclusion of the Acquired Businesses' selling, general and administrative
expenses for the six months ended December 31, 1996, offset almost entirely by
nonrecurring costs which include costs associated with the Plan in calendar
1995, reductions in insurance costs and 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 theater group property and equipment as
well as the amortization of the goodwill associated with the Acquired
Businesses.
OPERATING LOSS
Operating loss decreased $19.5 million in calendar 1996 to $4.4 million from an
operating loss of $23.9 million in calendar 1995. Two main factors contributed
to the decreased operating loss in calendar 1996. First, calendar 1995 results
were adversely affected by approximately $15.7 million of writedowns to
estimated net realizable value of the carrying amounts on certain film product.
No such writedowns occurred in calendar 1996. Secondly, the theater group
acquired on July 2, 1996 contributed positively to calendar 1996 operating
results.
The Entertainment Group is likely to generate operating losses until profitable
new product is produced and released, as approximately one-half of its film
inventories are stated at estimated net realizable value and do not generate
gross profit upon recognition of revenues.
43
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (CONTINUED)
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 Orion produces or acquires significant
new product for theatrical distribution.
Domestic home video revenues for calendar 1995 were $40.0 million, a decrease of
$11.9 million or 23% from the previous year. The decrease in domestic home video
revenue was due primarily to the Entertainment Group's reduced theatrical
release schedule in calendar 1995. The Entertainment Group had available only
one of its theatrical releases for sale to the domestic home video rental market
in calendar 1995 compared to six such titles in fiscal 1995. The Entertainment
Group's reduced theatrical release schedule in both calendar 1995 and fiscal
1995 has had and will continue to have an adverse effect on home video annual
revenues until new product is available for distribution.
Home video subdistribution revenues for calendar 1995 were $3.9 million, a
decrease of $2.8 million or 42% from fiscal 1995. These revenues are primarily
generated in the foreign marketplace through a subdistribution agreement with
Sony. All 23 pictures covered by this agreement have been released theatrically.
The Entertainment Group's reduced theatrical release schedule in calendar 1995
and fiscal 1995 has negatively impacted home video subdistribution revenues and
will continue to do so in the future until the Entertainment Group produces or
acquires significant new product for theatrical distribution.
Pay television revenues were $31.6 million in calendar 1995, a decrease of $29.3
million or 48% from the previous year. The decrease in pay television revenues
was due to the availability of six titles during calendar 1995 in the pay cable
market compared to eleven titles during fiscal 1995. The Entertainment Group's
reduced theatrical release schedule in calendar 1995 and fiscal 1995 will
continue to have an adverse effect on future pay television revenues.
Free television revenues for calendar 1995 were $53.6 million a decrease of $9.1
million or 15% from the previous year. In both the domestic and international
marketplaces, the Entertainment Group derives significant revenue from the
licensing of free television rights. Major international contracts in calendar
1995 that contributed to revenues were with TV de Catalunya for rights in Spain,
RTL Plus for rights in Germany and Principal Network for rights in Italy. In
fiscal 1995, the most significant licensees were TV de Catalunya, Principal
Network and Mitsubishi for rights in Japan. The Entertainment Group's reduced
theatrical release schedule while operating under the Plan has had and will
continue to have an adverse effect on free television revenues.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses increased $1.1 million to $24.0
million during calendar 1995 from $22.9 million during fiscal 1995.
DEPRECIATION AND AMORTIZATION EXPENSE
Depreciation and amortization charges for calendar 1995 were $694,000 compared
to $767,000 for fiscal 1995.
44
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (CONTINUED)
OPERATING LOSS
Operating loss increased $4.0 million in calendar 1995 to $23.9 million from an
operating loss of $19.9 million in fiscal 1995. The most significant
contributions to the Entertainment Group's fiscal 1995 operating results, which
was absent in calendar 1995, came from the recognition of significant domestic
pay television license fees pursuant to a settlement of certain litigation with
the Entertainment Group's pay television licensee, Showtime Networks, Inc. (the
"Showtime Settlement"). The calendar 1995 and fiscal 1995 results were adversely
affected by writedowns to estimated net realizable value of the carrying amounts
on certain film product totaling approximately $15.7 million for calendar 1995
compared to writedowns for fiscal 1995 totaling approximately $17.1 million. In
addition, approximately two-thirds of the Entertainment Group's film inventories
were stated at estimated realizable value and did not generate gross profit upon
recognition of revenues.
THE COMMUNICATIONS GROUP--RESULTS OF OPERATIONS
YEAR ENDED DECEMBER 31, 1996 COMPARED TO YEAR ENDED DECEMBER 31, 1995.
REVENUES
Revenues increased to $14.0 million for calendar 1996 from $5.2 million for
calendar 1995. Revenues of unconsolidated Joint Ventures for calendar 1996 and
1995 appear in note 8 to the consolidated financial statements. The growth in
revenue of the consolidated Joint Ventures has resulted primarily from an
increase in radio operations in Hungary, paging service operations in Romania
and an increase in management and licensing fees. Revenue from radio operations
increased to $9.4 million for calendar 1996 from $3.9 million for calendar 1995.
Radio paging services generated revenues of $2.9 million for calendar 1996 as
compared to $700,000 for calendar 1995. Management fees and licensing fees
increased to $1.8 million for calendar 1996 from $600,000 for calendar 1995. In
1995, the Communications Group 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 Communications Group applied this method from October
1, 1994 the net effect on the results of operations would not have been
material.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses increased by $10.7 million or 40%
for calendar 1996 as compared to calendar 1995. The increase relates principally
to the hiring of additional staff and additional expenses associated with the
increase in the number of Joint Ventures and the need for the Communications
Group to support and assist the operations of the Joint Ventures, as well as
additional staffing at the radio stations and radio paging operations.
DEPRECIATION AND AMORTIZATION EXPENSE
Depreciation and amortization expense increased to $6.4 million for calendar
1996. The increase is attributed principally to the amortization of goodwill in
connection with the November 1 Merger.
EQUITY IN LOSSES OF JOINT VENTURES
The Communications Group accounts for the majority of its Joint Ventures under
the equity method of accounting since it generally does not exercise control of
these ventures. Under the equity method of accounting, the Communications Group
reflects the cost of its investments, adjusted for its share of the
45
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (CONTINUED)
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 Ventures, Ltd., which included five new trunked mobile radio ventures
and increased the loss by $600,000. Further, a loss of $500,000 was incurred in
connection with the expansion of radio operations. The Communications Group's
paging ventures in Estonia and Riga and cable venture in Tblisi were responsible
for $600,000, $900,000 and $1.0 million, respectively, of the increased loss.
These losses were attributable to increased costs associated with promotional
discount campaigns at the paging ventures, which resulted ultimately in
increased subscribers, and a writedown of older receivable balances at the cable
venture. Losses were offset by an increase in equity in income of $1.2 million
realized at the Communications Group's telephony venture in Tblisi.
Revenues generated by unconsolidated Joint Ventures were $43.8 million for
calendar 1996 as compared to $19.3 million for calendar 1995.
SUBSCRIBER GROWTH
Many of the Joint Ventures are in early stages of development and consequently
ordinarily generate operating losses in the first years of operation. The
Communications Group believes that subscriber growth is an appropriate indicator
to evaluate the progress of the subscriber based businesses. The following table
presents the aggregate telephony, paging and cable TV Joint Ventures subscriber
growth:
<TABLE>
<CAPTION>
WIRELESS
CABLE TV PAGING TELEPHONY
----------- --------- -----------
<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 United
States ("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
46
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (CONTINUED)
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
Communications Group.
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 Communications Group 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 Communications Group applied this method from
October 1, 1994, revenues would have increased over the revenues reported but
the net effect on the results of operations would not have been material.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses increased by $7.7 million or 41% in
calendar 1995 as compared to calendar 1994. The increases relate principally to
the hiring of additional staff and additional expenses associated with the
increase in the number of Joint Ventures and the need for the Communications
Group to support and assist the operations of the Joint Ventures. During
calendar 1995, the Communications Group completed the staffing of its Vienna
office and opened an office in Hong Kong.
DEPRECIATION AND AMORTIZATION EXPENSE
Depreciation and amortization expense increased to $2.1 million for calendar
1995 from $1.1 million for calendar 1994.
EQUITY IN LOSSES OF JOINT VENTURES
The Communications Group recognized equity in losses of its Joint Ventures of
approximately $8.0 million in calendar 1995 as compared to $2.3 million in
calendar 1994. The increase in losses of the Joint Ventures of $5.7 million is
primarily attributable to losses of $4.0 million incurred as part of the
expansion of its cable TV operations, and the opening of a radio station in
Moscow which resulted in a loss of $1.3 million. As of September 30, 1995, there
were six cable TV Joint Ventures in operation as compared to four in the prior
year. The Communications Group's cable TV Joint Ventures in Moscow and Riga were
responsible for $2.1 million and $1.3 million, respectively, of this increased
loss. These losses were due to one-time writedowns of older equipment and
additional expenses incurred for programming and marketing related to expanding
the services provided and ultimately increasing the number of subscribers. All
other cable TV operations, including two new Joint Ventures and the expansion of
two others that were in their second year of operations, increased losses by
$700,000. The increased loss experienced by the radio station in Moscow was
attributable to a substantial revision in its programming format and the
establishment of sales and related support staff needed to successfully compete
in the Moscow market.
47
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (CONTINUED)
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.
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.
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.
48
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (CONTINUED)
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
MMG CONSOLIDATED
YEAR ENDED DECEMBER 31, 1996 COMPARED TO YEAR ENDED DECEMBER 31, 1995.
CASH FLOWS FROM OPERATING ACTIVITIES
Cash used in operations for calendar 1996 was $16.6 million compared to cash
provided by operations of $22.1 million for calendar 1995, a decrease of $38.7
million.
The calendar 1996 net loss of $115.2 million includes a loss on discontinued
operations of $16.3 million and a loss on early extinguishment of debt of $4.5
million. The calendar 1995 net loss of $413.0 million includes a loss on
discontinued operations of $293.6 million and a loss on early extinguishment of
debt of $32.4 million. The calendar 1996 net loss, exclusive of the losses on
discontinued operations and extraordinary items, was $94.4 million compared to a
$87.0 million loss in calendar 1995.
Losses from operations include significant non-cash items of depreciation,
amortization and equity in losses of Joint Ventures. Non-cash items decreased
$25.0 million, from $115.6 million in calendar 1995 to $90.6 million in calendar
1996. The decrease in non-cash items principally relates to reduced amortization
of film costs, partially offset by increased depreciation and amortization
related to the November 1 Merger and the Goldwyn and MPCA acquisitions.
Net changes in assets and liabilities decreased cash flows from operations in
calendar 1996 and calendar 1995 by $12.8 million and $6.5 million, respectively.
After adjusting net losses for discontinued operations, extraordinary items,
non-cash items and net changes in assets and liabilities, the Company utilized
$16.6 million of cash in operations in calendar 1996 as compared to operations
providing $22.1 million of cash flow for calendar 1995.
The decrease in cash flows for 1996 generally resulted from the increased losses
in the Communications Group's consolidated and equity Joint Ventures due to the
start-up nature of these operations and increases in selling, general and
administrative expenses at the Communications Group and corporate headquarters.
Net interest expense has decreased principally due to the increase in interest
income resulting from the increase in borrowings by the Joint Ventures under the
various credit agreements with the Communications Group for their operating and
investing cash requirements and from funds invested at corporate headquarters.
49
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (CONTINUED)
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 $269.0 million for calendar 1996 was
the completion of a public offering pursuant to which the Company issued 18.4
million shares of common stock, the proceeds of which, net of transaction costs,
was $190.6 million. Of the $360.3 million in additions to long-term debt, $29.0
million was borrowed under the Old Orion Credit Facility, $200.0 million
represents the new Entertainment Group Term Loan, and $77.3 million was borrowed
under the Entertainment Group Revolving Credit Facility (see note 9). Such
borrowings were principally for the acquisition, production and distribution of
theatrical product as well as the payments on outstanding obligations. Of the
$357.3 million payments of long term debt, $152.7 million were payments of the
Old Orion Credit Facility, $87.9 million were payments on the outstanding debt
of Goldwyn and MPCA, $14.8 million were payments on the new Entertainment Group
Revolving Credit Facility, $15.0 million was payment under the new Entertainment
Group Term Loan, $28.8 million was the repayment of the revolving credit
agreement by MMG. In addition, during 1996 Snapper refinanced its credit
facility which resulted in a payment of $38.6 million on the old credit facility
and borrowings of $46.6 million on the new credit facility.
YEAR ENDED DECEMBER 31, 1995 COMPARED TO YEAR ENDED FEBRUARY 28, 1995.
CASH FLOWS FROM OPERATING ACTIVITIES
Cash provided by operating activities decreased $54.8 million or 71% from fiscal
1995 to calendar 1995.
The calendar 1995 net loss of $413.0 million includes a loss on discontinued
operations of $293.6 million and a loss on early extinguishment of debt of $32.4
million. The calendar 1995 net loss, exclusive of the losses on discontinued
operations and extraordinary items was $87.0 million compared to a $69.4 million
net loss in fiscal 1995.
Losses from operations include significant non-cash items of depreciation,
amortization and equity in losses of Joint Ventures. Non-cash items decreased
$46.0 million or 28% from $161.6 million in fiscal 1995 to $115.6 million in
calendar 1995. The decrease in non-cash items principally relates to
amortization of film costs. Net changes in assets and liabilities decreased cash
flows from operations in calendar 1995 and fiscal 1995 by $6.5 million and $15.2
million, respectively. After adjusting net losses for discontinued operations,
extraordinary items, non-cash items and net changes in assets and liabilities,
the Company's cash flow from operating activities was $22.1 million and $76.9
million in calendar 1995 and fiscal 1995, respectively.
50
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (CONTINUED)
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 by 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 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). The Entertainment
Group repaid its outstanding plan debt with $135.0 million of proceeds from the
Entertainment Group Term Loan and amounts advanced from the Company.
The remaining payments on notes and subordinated debt in calendar 1995 and
fiscal 1995 principally represent the Entertainment Group's repayments of Plan
debt under the requirements of the Plan.
In addition to the Entertainment Group Term Loan, proceeds from the issuance of
long-term debt in calendar 1995 includes the Company and Entertainment Group
borrowings under revolving credit agreements of $28.8 million and $11.9 million
respectively. Proceeds from the issuance of long-term debt in fiscal 1995
represent borrowings by the Entertainment Group and the Communications Group
from Metromedia Company.
Proceeds from the issuance of stock decreased $15.4 million from $17.7 million
in fiscal 1995 to $2.3 million in calendar 1995.
51
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (CONTINUED)
THE COMPANY
MMG is a holding company and, accordingly, does not generate cash flows. The
Entertainment Group and Snapper are restricted under covenants contained in
their respective credit agreements from making dividend payments or advances to
MMG. The Communications Group is dependent on MMG for significant capital
infusions to fund its operations and make acquisitions, as well as fulfill its
commitments to make capital contributions and loans to its Joint Ventures. Such
funding requirements are based on the anticipated funding needs of its Joint
Ventures and certain acquisitions committed to by the Company. Future capital
requirements of the Communications Group including future acquisitions will
depend on available funding from the Company and on the ability of the
Communications Group's Joint Ventures to generate positive cash flows. There can
be no assurance that the Company will have the funds necessary to support the
current needs of the Communications Group's current investments or any of the
Communications Group's additional opportunities or that the Communications Group
will be able to obtain financing from third parties. If such financing is
unavailable, the Group may not be able to further develop existing ventures and
the number of additional ventures in which it invests may be significantly
curtailed.
MMG is obligated to make principal and interest payments under its own various
debt agreements (see note 9 in the notes to the consolidated financial
statements), in addition to funding its working capital needs, which consist
principally of corporate overhead and payments on self insurance claims (see
note 1 in the notes in the consolidated financial statements). MMG does not
currently anticipate receiving dividends from its subsidiaries but intends to
use its cash on hand and proceeds from asset sales described below to meet these
cash requirements.
MMG's 9 7/8% Senior Subordinated Debentures due in 1997 require it to make
annual sinking fund payments in March of each year of $3,000,000. At December
31, 1996, $15.0 million remained outstanding under the 9 7/8% Senior
Subordinated Debentures, which was subsequently paid on March 17, 1997.
MMG's 9 1/2% Subordinated Debentures are due in 1998 and approximately $59.5
million remained outstanding at December 31, 1996. These debentures do not
require annual principal payments.
MMG's $75.0 million face value 6 1/2% Convertible Subordinated Debentures are
due in 2002. The debentures are convertible into common stock at a conversion
price of $41 5/8 per share at the holder's option and do not require annual
principal payments.
Interest on MMG's outstanding indebtedness is approximately $11.8 million for
1997.
At December 31, 1996, the Company had $82.7 million of cash on hand remaining
from the public offering of 18.4 million shares of common stock. Net proceeds
from the public offering were $190.6 million.
The Company anticipates disposing of its investment in RDM during 1997. The
carrying value of the Company's investment in RDM at December 31, 1996 was
approximately $31.2 million. However, no assurances can be given that the
Company will be able to dispose of RDM in a timely fashion and on favorable
terms.
The Company expects that it will sell either equity or debt securities in a
public or private offering during the remainder of 1997. The Company intends to
use the proceeds from the sale of these securities to finance the continued
build-out of the Communications Group's systems and for general corporate
purposes, including working capital needs of the Company and its subsidiaries,
the repayment of certain indebtedness of the Company and its subsidiaries and
potential future acquisitions. However, no assurances can be given that the
Company will be able to successfully complete the sale of its securities in a
timely fashion or on favorable terms.
52
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (CONTINUED)
Management believes that its long term liquidity needs will be satisfied through
a combination of (i) the Company's successful implementation and execution of
its growth strategy to become a global communications, media and entertainment
company, (ii) the Communications Group's Joint Ventures achieving positive
operating results and cash flows through revenue and subscriber growth and
control of operating expenses, and (iii) the Entertainment Group's ability to
generate positive cash flows sufficient to meet its planned film production
release schedule and service the new Entertainment Group Credit Facility. If the
Company is unable to successfully implement its strategy, the Company may be
required to (i) seek, in addition to the offering described above, financing
through public or private sale of debt or equity securities of the Company or
one of its subsidiaries, (ii) otherwise restructure its capitalization or (iii)
seek a waiver or waivers under one or more of its subsidiaries' credit
facilities to permit the payment of dividends to the Company.
The Company believes that it will report significant operating losses for the
year ended December 31, 1997. In addition, because its Communications Group is
in the early stages of development, the Company expects this group to generate
significant net losses as it continues to build out and market its services.
Accordingly, the Company expects to generate consolidated net losses for the
foreseeable future.
THE ENTERTAINMENT GROUP
Since the November 1 Merger, the restrictions imposed by the agreements entered
into in connection with the Plan, which hindered the Entertainment Group's
ability to produce and acquire new motion picture product, were eliminated. As a
result, the Entertainment Group has begun producing, acquiring and financing
theatrical films consistent with the covenants set forth in the credit agreement
relating to the Entertainment Group Credit Facility. The principal sources of
funds required for the Entertainment Group's motion picture production,
acquisition and distribution activities will be cash generated from operations,
proceeds from the presale of subdistribution and exhibition rights, primarily in
foreign markets, and borrowings under the Entertainment Group's Revolving Credit
Facility. In addition, the Company is exploring various off-balance sheet
financing arrangements to augment its resources.
The cost of producing theatrical films varies depending on the type of film
produced, casting of stars or established actors, and many other factors. The
industry-wide trend over recent years has been an increase in the average cost
of producing and releasing films. The revenues derived from the production and
distribution of a motion picture depend primarily upon its acceptance by the
public, which cannot be predicted, and does not necessarily correlate to the
production or distribution costs incurred. The Company will attempt to reduce
the risks inherent in its motion picture production activities by closely
monitoring the production and distribution costs of individual films and
limiting the Entertainment Group's investment in any single film.
The Entertainment Group Credit Facility consists of a $200 million Term Loan
which requires quarterly repayments of $7.5 million commencing September 1996
and a final payment of $50 million on maturity (June 30, 2001), and a Revolving
Credit Facility, which has a final maturity of June 30, 2001. For the years
ended December 31, 1997 and 1998, the Entertainment Group will be required to
make principal payments of approximately $38.4 million, and $32.5 million,
respectively, to meet the scheduled maturities of its outstanding long-term
debt.
The Entertainment Group Credit Facility contains customary covenants, including
limitations on the incurrence of additional indebtedness and guarantees, the
creation of new liens, restrictions on the development costs and budgets for new
films, limitations on the aggregate amount of unrecouped print and advertising
costs the Entertainment Group may incur, limitations on the amount of the
Entertainment Group's leases, capital and overhead expenses, (including specific
limitations on the capital expenditures of
53
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (CONTINUED)
the Entertainment Group's theatre group subsidiary) prohibitions on the
declaration of dividends or distributions by the Entertainment Group to MMG
(other than $15 million of subordinated loans which may be repaid to MMG),
limitations on the merger or consolidation of the Entertainment Group or the
sale by the Entertainment Group of any substantial portion of its assets or
stock and restrictions on the Entertainment Group's line of business, other than
activities relating to the production and distribution of entertainment product
and other covenants and provisions described above. See note 9 in the notes to
the consolidated financial statements. The Entertainment Group Credit Facility
is secured by a security interest in all of the Entertainment Group's assets and
the Revolving Credit Facility is guaranteed by the Company's largest
shareholder, Metromedia Company, and its Chairman, John W. Kluge.
At December 31, 1996, the Entertainment Group had $37.5 million available under
its $100 million Revolving Credit Facility which management intends to utilize,
together with cash generated from operations, to finance its operations in 1997.
In addition to the Entertainment Group Credit Facility and cash generated from
operations, management intends to explore such alternatives as increasing its
revolving line of credit, obtaining off-balance sheet financing, or obtaining
short term funding from MMG in order to augment its resources to finance
anticipated levels of production and distribution activities and to meet debt
obligations as they become due during 1997 and 1998.
THE COMMUNICATIONS GROUP
The Communications Group has invested significantly (in cash through capital
contributions, loans and management assistance and training) in its Joint
Ventures. The Communications Group has also incurred significant expenses in
identifying, negotiating and pursuing new wireless telecommunications
opportunities in emerging markets. The Communications Group and primarily all of
its Joint Ventures are experiencing continuing losses and negative operating
cash flow since the businesses are in the development and start up phase of
operations.
The wireless cable television, paging, fixed wireless loop telephony, GSM and
international toll calling businesses are capital intensive. The Communications
Group generally provides the primary source of funding for its Joint Ventures
both for working capital and capital expenditures, with the exception of its GSM
Joint Ventures. The GSM ventures have been funded to date on a pro-rata basis by
western sponsors, and the Communications Group has funded its pro rata share of
the GSM Joint Venture obligations. The Communications Group has and continues to
have discussions with vendors, commercial lenders and international financial
institutions to provide funding for the GSM Joint Ventures. The Communications
Group's joint venture agreements generally provide for the initial contribution
of assets or cash by the Joint Venture partners, and for the provision of a line
of credit from the Communications Group to the Joint Venture. Under a typical
arrangement, the Communications Group's Joint Venture partner contributes the
necessary licenses or permits under which the Joint Venture will conduct its
business, studio or office space, transmitting tower rights and other equipment.
The Communications Group's contribution is generally cash and equipment, but may
consist of other specific assets as required by the joint venture agreement.
Credit agreements between the Joint Ventures and the Communications Group are
intended to provide such ventures with sufficient funds for operations and
equipment purchases. The credit agreements generally provide for interest to be
accrued at rates ranging from the prime rate to the prime rate plus 6% and for
payment of principal and interest from 90% of the Joint Venture's available cash
flow, as defined, prior to any distributions of dividends to the Communications
Group or its Joint Venture partners. The credit agreements also often provide
the Communications Group the right to appoint the general director of the Joint
Venture and the right to approve the annual business plan of the Joint Venture.
Advances
54
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (CONTINUED)
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, their ability to control operating
expenses and the sale of commercial advertising time. Management's current plans
with respect to the Joint Ventures are to increase subscriber and advertiser
bases and thereby operating revenues by developing a broader band of programming
packages for wireless cable and radio broadcasting and offering additional
services and options for paging and telephony services. By offering the large
local populations of the countries in which the Joint Ventures operate desired
services at attractive prices, management believes that the Joint Ventures can
increase their subscriber and advertiser bases and generate positive operating
cash flow, reducing their dependence on the Communications Group for funding of
working capital. Additionally, advances in wireless subscriber equipment
technology are expected to reduce capital requirements per subscriber. Further
initiatives to develop and establish profitable operations include reducing
operating costs as a percentage of revenue and assisting Joint Ventures in
developing management information systems and automated customer care and
service systems. No assurances can be given that such initiatives will be
successful.
Additionally, if the Joint Ventures do become profitable and generate sufficient
cash flows in the future, there can be no assurance that the Joint Ventures will
pay dividends or return capital at any time.
The ability of the Communications Group and its consolidated and unconsolidated
Joint Ventures to establish profitable operations is also subject to special
political, economic and social risks inherent in doing business in emerging
markets such as Eastern Europe, the former Soviet Republics and other emerging
markets. These include matters arising out of government policies, economic
conditions, imposition of or changes to taxes or other similar charges by
governmental bodies, foreign exchange rate fluctuations and controls, civil
disturbances, deprivation or unenforceablility of contractual rights, and taking
of property without fair compensation.
For the year ended December 31, 1996, the Communications Group's primary source
of funds was from the Company in the form of non-interest bearing intercompany
loans.
Until the Communications Group's consolidated and unconsolidated operations
generate positive cash flow, the Communications Group will require significant
capital to fund its operations, and to make capital contributions and loans to
its Joint Ventures. The Communications Group relies on the Company to provide
the financing for these activities. The Company believes that as more of the
Communications Group's Joint Ventures commence operations and reduce their
dependence on the Communications Group for funding, the Communications Group
will be able to finance its own operations and commitments from its operating
cash flow and the Communications Group will be able to attract its own financing
from third parties. There can, however, be no assurance that additional capital
in the form of debt or equity will be available to the Communications Group at
all or on terms and conditions that are acceptable to the Company, and as a
result, the Communications Group will continue to depend upon the Company for
its financing needs.
55
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (CONTINUED)
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 operations
was due to the seasonality of sales and related cash collections and the
repurchase of distributor inventories.
Snapper's liquidity is generated from operations and borrowings. On November 26,
1996, Snapper entered into a credit agreement (the "Snapper Credit Agreement")
with AmSouth Bank of Alabama ("AmSouth"), pursuant to which AmSouth has agreed
to make available to Snapper a revolving line of credit up to $55.0 million,
upon the terms and subject to conditions contained in the Snapper Credit
Agreement (the "Snapper Revolver") for a period ending on January 1, 1999 (the
"Snapper Revolver Termination Date"). The Snapper Revolver is guaranteed by the
Company.
The Snapper Revolver contains customary covenants, including delivery of certain
monthly, quarterly and annual financial information, delivery of budgets and
other information related to Snapper. See note 9.
At December 31, 1996 Snapper was not in compliance with certain financial
covenants under the Snapper Revolver. Subsequent to December 31, 1996, Snapper
and AmSouth amended the Snapper Credit Agreement. As part of the amendment to
the Snapper Credit Agreement, AmSouth waived the covenant defaults as of
December 31, 1996. Furthermore, the amendment replaces certain existing
financial covenants with covenants regarding minimum quarterly cash flow and
equity requirements, as defined. In addition, Snapper and AmSouth have agreed to
the major terms and conditions of a $10.0 million credit facility. The closing
of the credit facility remains subject to the execution of definitive loan
documentation.
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.
Management believes that available cash on hand, borrowings from the Snapper
Revolver and Working Captial Facility, and the cash flow generated by operating
activities will provide sufficient funds for Snapper to meet its obligations.
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS.
Certain statements under the captions "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and "Business" and elsewhere in
this Form 10-K constitute "forward-looking statements" within the meaning of the
Private Securities Litigation Reform Act of 1995 (the "Reform Act"). Such
forward-looking statements involve known and unknown risks, uncertainties and
other factors which may cause the actual results, performance or achievements of
the Company, or industry results, to be materially different from any future
results, performance or achievements expressed or implied by such
forward-looking statements. Such factors include among others, general economic
and business conditions, which will, among other things, impact demand for the
Company's products and services; industry capacity, which tends to increase
during strong years of the business cycle; changes in public taste, industry
trends
56
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (CONTINUED)
and demographic changes, which may influence the exhibition of films in certain
areas; competition from other entertainment and communications companies, which
may affect the Company's ability to generate revenues; political, social and
economic conditions and laws, rules and regulations, particularly in Eastern
Europe, the former Soviet Republics, the PRC and other emerging markets, which
may affect the Company's results of operations; timely completion of
construction projects for new systems for the Joint Ventures in which the
Company has invested; developing legal structures in Eastern Europe, the former
Soviet Republics, the PRC and other emerging markets, which may affect the
Company's results of operations; cooperation of local partners for the Company's
communications investments in Eastern Europe, the former Soviet Republics and
the PRC; exchange rate fluctuations; license renewals for the Company's
communications investments in Eastern Europe, the former Soviet Republics and
the PRC; the loss of any significant customers (especially clients of the
Communications Group); changes in business strategy or development plans; the
significant indebtedness of the Company; quality of management; availability of
qualified personnel; changes in, or the failure to comply with, government
regulations; and other factors referenced in the Form 10-K.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial statements and supplementary data required under this item are
included in Item 14 of this Report.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
57
<PAGE>
PART III
The information called for by this PART III (Items 10, 11, 12 and 13) is not set
forth herein because the Company intends to file with the SEC not later than 120
days after the end of the fiscal year ended December 31, 1996 the Joint Proxy
Statement/Prospectus for the 1997 Annual Meeting of Stockholders, except that
certain of the information regarding the Company's executive officers called for
by Item 10 has been included in Part I of this Annual Report on Form 10-K under
the caption "Executive Officers of the Company." Such information to be included
in the Joint Proxy Statement/Prospectus is hereby incorporated into these Items
10, 11, 12 and 13 by this reference.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a)(1) and (a)(2) Financial Statements and Schedules
The financial statements and schedules listed in the accompanying Index
to Financial Statements are filed as part of this Annual Report on Form
10-K.
(a)(3) Exhibits
The exhibits listed in the accompanying Exhibit Index are filed as part
of this Annual Report on Form 10-K.
(b) Current Reports on Form 8-K
One (1) Current Report on Form 8-K was filed during the fourth quarter
of 1996:
(i) On December 5,1996 a Form 8-K was filed to report the resignation of
John D. Phillips as President and Chief Executive Officer of the Company and
the appointment of Stuart Subotnick as President and Chief Executive
Officer.
(ii) On February 11, 1997, a Form 8-K was filed to report the Company's
intention to actively manage the operations of its wholly-owned subsidiary,
Snapper, Inc.
58
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities and
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
METROMEDIA INTERNATIONAL GROUP, INC.
By: /s/ SILVIA KESSEL
-----------------------------------------
Silvia Kessel
EXECUTIVE VICE PRESIDENT
Dated: June 18, 1997
59
<PAGE>
METROMEDIA INTERNATIONAL GROUP, INC. AND SUBSIDIARIES
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
Report of Independent Auditors'............................................................................ F-1
Consolidated Statements of Operations for the years ended December 31, 1996, December 31, 1995 and February
28, 1995................................................................................................. F-2
Consolidated Balance Sheets as of December 31, 1996 and December 31, 1995.................................. F-3
Consolidated Statements of Cash Flows for the years ended December 31, 1996, December 31, 1995 and February
28, 1995................................................................................................. F-4
Consolidated Statements of Stockholders' Equity for the years ended December 31, 1996, December 31, 1995
and February 28, 1995.................................................................................... F-5
Notes to Consolidated Financial Statements................................................................. F-6
Consolidated Financial Statement Schedules:
I. Condensed Financial Information of Registrant...................................................... S-1
II. Valuation and Qualifying Accounts.................................................................. S-5
</TABLE>
All other schedules have been omitted either as inapplicable or not required
under the Instructions contained in Regulation S-X or because the information
included in the Consolidated Financial Statements or the Notes thereto listed
above.
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders
METROMEDIA INTERNATIONAL GROUP, INC.:
We have audited the accompanying consolidated financial statements of Metromedia
International Group, Inc. and subsidiaries as listed in the accompanying index.
In connection with our audits of the consolidated financial statements, we also
have audited the financial statement schedules as listed in the accompanying
index. These consolidated financial statements and financial statement schedules
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these consolidated financial statements and financial
statement schedules based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Metromedia
International Group, Inc. and subsidiaries as of December 31, 1996 and 1995, and
the results of their operations and their cash flows for each of the years in
the two-year period ended December 31, 1996 and for the year ended February 28,
1995, in conformity with generally accepted accounting principles. Also in our
opinion, the related financial statement schedules, when considered in relation
to the basic consolidated financial statements taken as a whole, present fairly,
in all material respects, the information set forth therein.
KPMG PEAT MARWICK LLP
New York, New York
March 27, 1997
F-1
<PAGE>
METROMEDIA INTERNATIONAL GROUP, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
YEARS ENDED
----------------------------------------
<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-2
<PAGE>
METROMEDIA INTERNATIONAL GROUP, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
1996 1995
------------ ------------
<S> <C> <C>
ASSETS:
Current Assets:
Cash and cash equivalents.......................................................... $ 91,130 $ 26,889
Short-term investments............................................................. -- 5,366
Accounts receivable:
Film, net of allowance for doubtful accounts of $11,600 at December 31, 1996 and
1995........................................................................... 30,447 27,306
Other, net of allowance for doubtful accounts of $1,691 and $313 at December 31,
1996 and 1995, respectively.................................................... 40,287 2,146
Film inventories................................................................... 66,156 59,430
Inventories........................................................................ 54,404 224
Other assets....................................................................... 8,123 6,314
------------ ------------
Total current assets........................................................... 290,547 127,675
Investments in and advances to Joint Ventures........................................ 65,447 36,934
Asset held for sale--RDM Sports Group, Inc........................................... 31,150 47,455
Asset held for sale--Snapper, Inc.................................................... -- 79,200
Property, plant and equipment, net of accumulated depreciation....................... 73,928 5,797
Film inventories..................................................................... 186,143 137,233
Long-term film accounts receivable................................................... 20,214 31,308
Intangible assets, less accumulated amortization..................................... 258,783 119,485
Other assets......................................................................... 18,528 14,551
------------ ------------
Total assets................................................................... $ 944,740 $ 599,638
------------ ------------
------------ ------------
LIABILITIES AND STOCKHOLDERS' EQUITY:
Current Liabilities:
Accounts payable................................................................... $ 25,968 $ 4,695
Accrued expenses................................................................... 108,082 96,113
Participations and residuals....................................................... 36,529 19,143
Current portion of long-term debt.................................................. 55,638 40,597
Deferred revenues.................................................................. 16,724 15,097
------------ ------------
Total current liabilities...................................................... 242,941 175,645
Long-term debt....................................................................... 403,421 264,046
Participations and residuals......................................................... 26,387 28,465
Deferred revenues.................................................................... 48,188 47,249
Other long-term liabilities.......................................................... 4,121 395
------------ ------------
Total liabilities.............................................................. 725,058 515,800
------------ ------------
Commitments and contingencies
Stockholders' equity:
Preferred Stock, authorized 70,000,000 shares, none issued......................... -- --
Common Stock, $1.00 par value, authorized 400,000,000 and 110,000,000 shares,
issued and outstanding 66,153,439 and 42,613,738 shares at December 31, 1996 and
1995, respectively............................................................... 66,153 42,614
Paid-in surplus.................................................................... 959,558 728,747
Other.............................................................................. (2,680) 583
Accumulated deficit................................................................ (803,349) (688,106)
------------ ------------
Total stockholders' equity..................................................... 219,682 83,838
------------ ------------
Total liabilities and stockholders' equity................................... $ 944,740 $ 599,638
------------ ------------
------------ ------------
</TABLE>
See accompanying notes to consolidated financial statements.
F-3
<PAGE>
METROMEDIA INTERNATIONAL GROUP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEARS ENDED
----------------------------------------
DECEMBER 31, DECEMBER 31, FEBRUARY 28,
1996 1995 1995
------------ ------------ ------------
<S> <C> <C> <C>
Operations:
Net loss............................................................. $ (115,243) $ (412,976) $ (69,411)
Adjustments to reconcile net loss to net cash provided by (used in)
operating activities:
Loss on disposal of assets held for sale............................. 16,305 293,570 --
Equity in losses of Joint Ventures................................... 11,079 7,981 2,257
Amortization of film costs........................................... 61,472 91,466 140,318
Amortization of bank guarantee....................................... -- 2,956 4,951
Amortization of debt discounts....................................... 4,850 10,436 12,153
Depreciation and amortization........................................ 13,232 2,795 1,916
Loss on early extinguishment of debt................................. 4,505 32,382 --
Changes in assets and liabilities, net of effect of acquisitions and
consolidation of Snapper:
Decrease in accounts receivable.................................... 15,211 15,114 21,575
Increase in inventories............................................ (2,697) (224) --
Increase in other assets........................................... (10,079) -- --
Decrease in accounts payable and accrued expenses.................. (621) (4,723) (3,160)
Accrual of participations and residuals............................ 34,255 18,464 25,628
Payments of participations and residuals........................... (27,362) (20,737) (32,353)
Decrease in deferred revenues...................................... (20,984) (12,269) (30,041)
Other operating activities, net.................................... (568) (2,125) 3,112
------------ ------------ ------------
Cash provided by (used in) operations............................ (16,645) 22,110 76,945
------------ ------------ ------------
Investing activities:
Proceeds from Metromedia Company notes receivable.................. -- 45,320 --
Investments in and advances to Joint Ventures...................... (40,999) (21,949) (16,409)
Distributions from Joint Ventures.................................. 3,438 784 --
Investment in film inventories..................................... (67,176) (4,684) (22,840)
Cash paid for acquisitions......................................... (2,545) -- (7,033)
Cash acquired in acquisitions...................................... 8,238 66,702 --
Additions to property, plant and equipment......................... (8,729) (3,475) (4,808)
Other investing activities, net.................................... 4,855 (6,521) 1,233
------------ ------------ ------------
Cash provided by (used in) investing activities.................. (102,918) 76,177 (49,857)
------------ ------------ ------------
Financing activities:
Proceeds from issuance of long-term debt........................... 360,252 176,938 40,278
Proceeds from issuance of common stock............................. 190,604 2,282 17,690
Payments on notes and subordinated debt............................ (357,324) (264,856) (95,037)
Proceeds from issuance of stock related to incentive plans......... 972 -- --
Payment of deferred financing costs................................ (10,700) -- --
Other financing activities, net.................................... -- 399 184
------------ ------------ ------------
Cash provided by (used in) financing activities.................. 183,804 (85,237) (36,885)
------------ ------------ ------------
Net increase (decrease) in cash and cash equivalents............... 64,241 13,050 (9,797)
Effect of change in fiscal year.................................... -- (13,583) --
Cash and cash equivalents at beginning of year..................... 26,889 27,422 37,219
------------ ------------ ------------
Cash and cash equivalents at end of year........................... $ 91,130 $ 26,889 $ 27,422
------------ ------------ ------------
------------ ------------ ------------
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
<PAGE>
METROMEDIA INTERNATIONAL GROUP, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(IN THOUSANDS, EXCEPT SHARE AMOUNTS))
<TABLE>
<CAPTION>
COMMON STOCK
-----------------------
<S> <C> <C> <C> <C> <C> <C>
NUMBER OF PAID-IN ACCUMULATED
SHARES AMOUNT SURPLUS OTHER DEFICIT TOTAL
------------ --------- ---------- --------- ------------ -----------
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-5
<PAGE>
METROMEDIA INTERNATIONAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION, DESCRIPTION OF THE BUSINESS, LIQUIDITY AND SUMMARY OF
SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION (SEE NOTE 2)
The accompanying consolidated financial statements include the accounts of
Metromedia International Group, Inc. ("MMG" or the "Company") and its
wholly-owned subsidiaries, Orion Pictures Corporation ("Orion" or the
"Entertainment Group") and Metromedia International Telecommunications, Inc.
("MITI" or the "Communications Group"). In connection with the November 1 Merger
(see note 2), Snapper, Inc. ("Snapper"), a wholly-owned subsidiary of the
Company, was included in the accompanying consolidated financial statements as
an asset held for sale. Subsequently, the Company announced its intention not to
continue to pursue its previously adopted plan to dispose of Snapper and to
actively manage Snapper to maximize its long term value. As of November 1, 1996,
the Company has consolidated Snapper and has included Snapper's operating
results for the two-month period ended December 31, 1996 in its statement of
operations (see notes 2 and 4). All significant intercompany transactions and
accounts have been eliminated.
Certain reclassifications have been made to prior year financial statements to
conform to the December 31, 1996 presentation.
DIFFERENT FISCAL YEAR ENDS
The Company reports on the basis of a December 31 year end. In connection with
the November 1 Merger discussed in note 2, Orion and MITI, for accounting
purposes only, were deemed to be the joint acquirers of the Actava Group Inc.
("Actava") in a reverse acquisition. As a result, the historical financial
statements of the Company for periods prior to the November 1 Merger are the
combined financial statements of Orion and MITI. Orion historically reported on
the basis of a February 28 year end.
The consolidated financial statements for the twelve months ended December 31,
1995 include two months for Orion (January and February 1995) that were included
in the February 28, 1995 consolidated financial statements. The revenues and net
loss for the two month duplicate period are $22.5 and $11.4 million,
respectively. The December 31, 1995 accumulated deficit has been adjusted to
eliminate the duplication of the January and February 1995 net losses.
DESCRIPTION OF THE BUSINESS
The Company is a global communications, media and entertainment company engaged
in two strategic businesses: (i) the development and operation of communications
businesses, including wireless cable television services, radio stations, paging
systems, an international toll calling service and trunked mobile radio
services, in the republics of the former Soviet Union, Eastern Europe, the
Peoples Republic of China (the "PRC"), and other selected emerging markets,
through its Communications Group and (ii) the production and worldwide
distribution in all media of motion pictures, television programming and other
filmed entertainment product and the exploitation of its library of over 2,200
film and television titles, through its Entertainment Group. Through these
individual operating businesses, the Company has established a significant
presence in many aspects of the rapidly evolving communications, media and
entertainment industries. Each of these businesses currently operates on a
stand-alone basis, pursuing distinct business plans designed to capitalize on
the growth opportunities within their individual industries.
F-6
<PAGE>
METROMEDIA INTERNATIONAL GROUP, INC.
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 and distributes edgers. The lawnmowers include
rear-engine riding mowers, front-engine riding mowers or lawn tractors, and
self-propelled and push-type walk-behind mowers. The Company also manufactures a
line of commercial lawn and turf equipment under the
Snapper-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 and any acquisitions. Such funding requirements
are based on the anticipated funding needs of its Joint Ventures and certain
acquisitions committed to by the Company. Future capital requirements of the
Communications Group, including future acquisitions, will depend on available
funding from the Company and on the ability of the Communications Group's Joint
Ventures to generate positive cash flows. There can be no assurance that the
Company will have the funds necessary to support the current needs of the
Communications Group's current investments or any of the Communications Group's
additional opportunities or that the Communications Group will be able to obtain
financing from third parties. If such financing is unavailable, the Group may
not be able to further develop existing ventures and the number of additional
ventures in which it invests may be significantly curtailed.
MMG is obligated to make principal and interest payments under its own various
debt agreements and has debt repayment requirements of $17.1 million and $60.3
million in 1997 and 1998, respectively (see note 9), in addition to funding its
working capital needs, which consist principally of corporate overhead and
payments on self insurance claims.
In the short term, MMG intends to satisfy its current obligations and
commitments with available cash on hand and the proceeds from the sale of RDM
Sports Group, Inc. (see note 5). At December 31, 1996 MMG had approximately
$82.7 million of available cash on hand. The Company anticipates disposing of
its investment in RDM Sports Group, Inc. during 1997. The carrying value of the
Company's investment in RDM Sports Group, Inc. at December 31, 1996 was $31.2
million.
Management believes that its available cash on hand and proceeds from the
disposition of its investment in RDM Sports Group, Inc., will provide sufficient
funds for the Company to meet its obligations, including the Communications
Group's funding requirements, in the short term. However, no assurances can be
given that the Company will be able to dispose of RDM Sports Group, Inc. in a
timely fashion and on favorable terms. Any delay in the sale of RDM Sports
Group, Inc. or reductions in the proceeds anticipated to be received upon this
disposition may result in the Company's inability to satisfy its obligations,
including the funding of the Communications Group during the year ended December
31, 1997. Delays in funding the Communications Group's capital requirements may
have a material adverse impact on the results of operations of the
Communications Group's Joint Ventures.
The Company expects that it will sell either equity or debt securities in a
public or private offering during the remainder of 1997. The Company intends to
use the proceeds from the sale of these securities to finance the continued
build-out of the Communications Group's systems and for general corporate
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)
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 Sports Group, Inc.,
the Company may be required to (i) attempt to obtain financing in addition to
the offering described above, through the public or private sale of debt or
equity securities of the Company or one of its subsidiaries, (ii) otherwise
restructure its capitalization, or (iii) seek a waiver or waivers under one or
more of its subsidiaries' credit facilities to permit the payment of dividends
to the Company.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
INVESTMENTS
EQUITY METHOD INVESTMENTS
Investments in other companies and Joint Ventures ("Joint Ventures") which are
not majority owned, or which the Company does not control but in which it
exercises significant influence, are accounted for using the equity method. The
Company reflects its net investments in Joint Ventures under the caption
"Investments in and advances to Joint Ventures". Generally, under the equity
method of accounting, original investments are recorded at cost and are adjusted
by the Company's share of undistributed earnings or losses of the Joint Venture.
Equity in the losses of the Joint Ventures are recognized according to the
percentage ownership in each Joint Venture until the Company's Joint Venture
partner's contributed capital has been fully depleted. Subsequently, the Company
recognizes the full amount of losses generated by the Joint Venture if it is the
principal funding source for the Joint Venture.
During the year ended February 28, 1995 ("fiscal 1995"), the Company changed its
policy of accounting for the Joint Ventures by recording its equity in their
earnings and losses based upon a three-month lag. As a result, the December 31,
1996 and 1995 consolidated statement of operations reflects twelve months of
operations through September 30, 1996 and 1995, respectively, for the Joint
Ventures and the February 28, 1995 consolidated statement of operations reflects
nine months of operations through September 30, 1994 for the Joint Ventures. The
effect of this change in accounting policy in fiscal 1995 is not material to the
consolidated financial statements.
During the year ended December 31, 1995 ("calendar 1995"), the Company changed
its policy of consolidating two indirectly owned subsidiaries by recording the
related assets and liabilities and results of operations based on a three-month
lag. As a result, the December 31, 1996 and 1995 balance sheets includes the
accounts of these subsidiaries at September 30, 1996 and 1995, respectively, and
the calendar 1995 statement of operations reflects the results of operations of
these subsidiaries for the nine months
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)
ended September 30, 1995. Had the Company applied this method from October 1,
1994, the effect on reported December 31, 1995 results would not have been
material. For the year ended December 31, 1996 ("calendar 1996") the results of
operations reflect twelve months of activity based upon a September 30 fiscal
year end of these subsidiaries.
SHORT-TERM INVESTMENTS
The Company classifies its debt and equity securities in one of three
categories: trading, available-for-sale, or held-to-maturity. Trading securities
are bought and held principally for the purpose of selling them in the near
term. Held-to-maturity securities are those securities in which the Company has
the ability and intent to hold the securities until maturity. All other
securities not classified as trading or held-to-maturity are classified as
available-for-sale.
Management determines the appropriate classification of investments as trading,
held-to-maturity or available-for-sale at the time of purchase and reevaluates
such designation as of each balance sheet date. The Company has classified all
investments as available-for-sale. Available-for-sale securities are carried at
fair value, with the unrealized gains and losses, net of tax, reported in
stockholders' equity. The amortized cost of debt securities in this category is
adjusted for amortization of premiums and accretion of discounts to maturity.
Such amortization is included in investment income. Realized gains and losses,
and declines in value judged to be other-than-temporary on available-for-sale
securities, are included in investment income. The cost of securities sold is
based on the specific identification method. Interest and dividends on
securities classified as available-for-sale are included in investment income.
At December 31, 1995 short-term investments of $5.4 million, classified as
available-for-sale, had an amortized cost that approximated fair value. The
short-term investments were sold during calendar 1996.
REVENUE RECOGNITION
THE COMMUNICATIONS GROUP
The Communications Group and its Joint Ventures' cable, paging and telephony
operations recognize revenues in the period the service is provided.
Installation fees are recognized as revenues upon subscriber hook-up to the
extent installation costs are incurred. Installation fees in excess of
installation costs are deferred and recognized over the length of the related
individual contract. The Communications Group and its Joint Ventures' radio
operations recognize advertising revenue when commercials are broadcast.
THE ENTERTAINMENT GROUP
Revenue from the theatrical distribution of films is recognized as the films are
exhibited. The Entertainment Group distributes its films to the home video
market in the United States and Canada. The Entertainment Group's home video
revenue, less a provision for returns, is recognized when the video cassettes
are shipped. Distribution of the Entertainment Group's films to the home video
markets in foreign countries is generally effected through subdistributors who
control various aspects of distribution. When the terms of sale to such
subdistributors include the receipt of nonrefundable guaranteed amounts by the
Entertainment Group, revenue is recognized when the film is available to the
subdistributors for exhibition or exploitation and other conditions of sale are
met. When the arrangements with such
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)
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.
Provision for estimated warranty costs is recorded at the time of sale and
periodically adjusted to reflect actual experience.
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-10
<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 (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
Theater 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. Theatre and other
leasehold improvements are amortized using the straight-line method over the
life of the improvements or the life of the lease, whichever is shorter.
INTANGIBLE ASSETS
Intangible assets are stated at historical cost, net of accumulated
amortization. Intangibles such as broadcasting licenses and frequency rights are
amortized over periods of 20 to 25 years. Goodwill has been recognized for the
excess of the purchase price over the value of the identifiable net assets
acquired. Such amount is amortized over 25 years using the straight-line method.
Management continuously monitors and evaluates the realizability of recorded
intangibles to determine whether their carrying values have been impaired. In
evaluating the value and future benefits of intangible assets, their carrying
value is compared to management's best estimate of undiscounted future cash
flows over the remaining amortization period. If such assets are considered to
be impaired, the impairment to be recognized is measured by the amount by which
the carrying value of the assets exceeds the fair value of the assets. The
Company believes that the carrying value of recorded intangibles is not
impaired.
IMPAIRMENT OF LONG-LIVED ASSETS
The Company adopted the provisions of Statement of Financial Accounting
Standards No. 121, ("SFAS 121") "Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to Be Disposed of," on January 1, 1996. SFAS
121 requires that long-lived assets and certain identifiable intangibles be
reviewed for impairment whenever events or changes in circumstances indicate
that the carrying amount of an asset may not be recoverable. Recoverability of
assets to be held and used is measured by a comparison of the carrying amount of
an asset to future net cash flows expected to be generated by the asset. If such
assets are considered to be impaired, the impairment to be recognized is
measured by the amount by which the carrying amount of the assets exceeds the
fair value of the assets. Assets to be disposed of are reported at the lower of
the carrying amount or fair value less costs to sell. Adoption of SFAS 121 did
not have any impact on the Company's financial position, results of operations,
or liquidity.
F-11
<PAGE>
METROMEDIA INTERNATIONAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1. BASIS OF PRESENTATION, DESCRIPTION OF THE BUSINESS, LIQUIDITY AND SUMMARY OF
SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
EARNINGS PER SHARE OF COMMON STOCK
Primary earnings per share are computed by dividing net income (loss) by the
weighted average number of common and common equivalent shares outstanding
during the year. Common equivalent shares include shares issuable upon the
assumed exercise of stock options using the treasury stock method when dilutive.
Computations of common equivalent shares are based upon average prices during
each period.
Fully diluted earnings per share are computed using such average shares adjusted
for any additional shares which would result from using end-of-year prices in
the above computations, plus the additional shares that would result from the
conversion of the 6 1/2% Convertible Subordinated Debentures (see note 9). Net
income (loss) is adjusted by interest (net of income taxes) on the 6 1/2%
Convertible Subordinated Debentures. The computation of fully diluted earnings
per share is used only when it results in an earnings per share number which is
lower than primary earnings per share.
The loss per share amounts for fiscal 1995 represent combined Orion and MITI's
common shares converted at the exchange ratios used in the November 1 Merger
(see note 2).
FAIR VALUE OF FINANCIAL INSTRUMENTS
Statement of Financial Accounting Standards No. 107 ("SFAS 107") "Disclosures
about Fair Value of Financial Instruments," requires disclosure of fair value
information about financial instruments, whether or not recognized in the
balance sheet, for which it is practicable to estimate that value. In cases
where quoted market prices are not available, fair values are based on
settlements using present value or other valuation techniques. These techniques
are significantly affected by the assumptions used, including discount rates and
estimates of future cash flows. In that regard, the derived fair value estimates
cannot be substantiated by comparison to independent markets and, in many cases,
could not be realized in immediate settlement of the instruments. SFAS 107
excludes certain financial instruments and all non-financial instruments from
its disclosure requirements. Accordingly, the aggregate fair value amounts
presented do not represent the underlying value to the Company.
The following methods and assumptions were used in estimating the fair value
disclosures for financial instruments:
CASH AND CASH EQUIVALENTS, RECEIVABLES, NOTES RECEIVABLE AND ACCOUNTS PAYABLE
The carrying amounts reported in the consolidated balance sheets for
cash and cash equivalents, current receivables, notes receivable and
accounts payable approximate fair values. The carrying value of receivables
with maturities greater than one year have been discounted, and if such
receivables were discounted based on current market rates, the fair value of
these receivables would not be materially different than their carrying
values.
SHORT-TERM INVESTMENTS
For short-term investments, fair values are based on quoted market
prices. If a quoted market price is not available, fair value is estimated
using quoted market prices for similar securities or dealer quotes.
F-12
<PAGE>
METROMEDIA INTERNATIONAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1. BASIS OF PRESENTATION, DESCRIPTION OF THE BUSINESS, LIQUIDITY AND SUMMARY OF
SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
LONG-TERM DEBT
For long-term and subordinated debt, fair values are based on quoted
market prices, if available. If the debt is not traded, fair value is
estimated based on the present value of expected cash flows. See note 9 for
the fair values of long-term debt.
INCOME TAXES
The Company accounts for deferred income taxes using the asset and liability
method of accounting. Under the asset and liability method, deferred tax assets
and liabilities are recognized for the future tax consequences attributable to
differences between the financial statement carrying amounts of existing assets
and liabilities and their respective tax bases. Deferred tax assets and
liabilities are measured using rates expected to be in effect when those assets
and liabilities are recovered or settled. The effect on deferred tax assets and
liabilities of a change in tax rates is recognized in income in the period that
includes the enactment date.
STOCK OPTION PLANS
Prior to January 1, 1996, the Company accounted for its stock option plans in
accordance with the provisions of Accounting Principles Board Opinion No. 25
("APB 25"), "Accounting for Stock Issued to Employees," and related
interpretations. As such, compensation expense would be recorded on the date of
grant only if the current market price of the underlying stock exceeded the
exercise price. On January 1, 1996, the Company adopted Statement of Financial
Accounting Standards No. 123 ("SFAS 123"), "Accounting for Stock-Based
Compensation," which permits entities to recognize as expense over the vesting
period the fair value of all stock-based awards on the date of grant.
Alternatively, SFAS 123 also allows entities to continue to apply the provisions
of APB 25 and provide pro forma net income and pro forma earnings per share
disclosures for employee stock option grants made in 1995 and future years as if
the fair-value-based method defined in SFAS 123 had been applied. The Company
has elected to continue to apply the provisions of APB 25 and provide the pro
forma disclosure requirements of SFAS 123.
PENSION AND OTHER POSTRETIREMENT PLANS
Snapper has a defined benefit pension plan covering substantially all of its
collective bargaining unit employees. The benefits are based on years of service
multiplied by a fixed dollar amount and the employee's compensation during the
five years before retirement. The cost of this program is funded currently.
Snapper also sponsors a defined benefit health care plan for substantially all
of its retirees and employees. Snapper measures the costs of its obligation
based on its best estimate. The net periodic costs are recognized as employees
render the services necessary to earn postretirement benefits.
BARTER TRANSACTIONS
In connection with its AM/FM radio broadcast business, the Company trades
commercial air time for goods and services used principally for promotional,
sales and other business activities. An asset and a liability are recorded at
the fair market value of the goods or services received. Barter revenue is
recorded
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)
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 translated into U.S.
generally accepted accounting principles and U.S. dollars in accordance with
Statement of Financial Accounting Standards No. 52 ("SFAS 52"), "Accounting for
Foreign Currency Translation".
Under SFAS 52, foreign currency assets and liabilities are generally translated
using the exchange rates in effect at the balance sheet date. Results of
operations are generally translated using the average exchange rates prevailing
throughout the year. The effects of exchange rate fluctuations on translating
foreign currency assets and liabilities into U.S. dollars are accumulated as
part of the foreign currency translation adjustment in stockholders' equity.
Gains and losses from foreign currency transactions are included in net income
in the period in which they occur.
Under SFAS 52, the financial statements of foreign entities in highly
inflationary economies are remeasured, in all cases using the U.S. dollar as the
functional currency. U.S. dollar transactions are shown at their historical
value. Monetary assets and liabilities denominated in local currencies are
translated into U.S. dollars at the prevailing period-end exchange rate. All
other assets and liabilities are translated at historical exchange rates.
Results of operations have been translated using the monthly average exchange
rates. Translation differences resulting from the use of these different rates
are included in the accompanying consolidated statements of operations. Such
differences amounted to $255,000, $54,000 and $69,000 for calendar 1996,
calendar 1995, and fiscal 1995, respectively, and were immaterial to the
Company's results of operations for each of the periods presented. In addition,
translation differences resulting from the effect of exchange rate changes on
cash and cash equivalents were immaterial and are not reflected in the Company's
consolidated statements of cash flows for each of the periods presented.
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>
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)
SELF-INSURANCE
The Company is self-insured for workers' compensation, health, automobile,
product and general liability costs for its lawn and garden operation and for
certain former subsidiaries. The self-insurance claim liability is determined
based on claims filed and an estimate of claims incurred but not yet reported.
CASH AND CASH EQUIVALENTS
Cash equivalents consists of highly liquid instruments with maturities of three
months or less at the time of purchase. Included in cash at December 31, 1996,
is approximately $1.0 million of restricted cash which represents collateral
pursuant to the terms of the Snapper Credit Agreement (see note 9).
USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of the
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Supplemental disclosure of cash flow information (in thousands):
<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>
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 in 1996,
the Company issued debt of $1.2 million and restricted common stock valued at
$3.2 million.
See note 4 regarding the consolidation of Snapper.
F-15
<PAGE>
METROMEDIA INTERNATIONAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. THE NOVEMBER 1 MERGER
On November 1, 1995, (the "Merger Date") Orion, MITI, the Company and MCEG
Sterling Incorporated ("Sterling"), consummated the mergers contemplated by the
Amended and Restated Agreement and Plan of Merger (the "Merger Agreement") dated
as of September 27, 1995. The Merger Agreement provided for, among other things,
the simultaneous mergers of each of Orion and MITI with and into OPC Merger
Corp. and MITI Merger Corp., the Company's recently-formed subsidiaries, and the
merger of Sterling with and into the Company (the "November 1 Merger"). In
connection with the November 1 Merger, the Company changed its name from The
Actava Group Inc. to Metromedia International Group, Inc.
Upon consummation of the November 1 Merger, all of the outstanding shares of the
common stock, par value $.25 per share of Orion (the "Orion Common Stock"), the
common stock, par value $.001 per share, of MITI (the "MITI Common Stock") and
the common stock, par value $.001 per share, of Sterling (the "Sterling Common
Stock") were exchanged for shares of the Company's common stock, par value $1.00
per share, pursuant to exchange ratios contained in the Merger Agreement.
Pursuant to such ratios, holders of Orion Common Stock received .57143 shares of
the Company's common stock for each share of Orion Common Stock (resulting in
the issuance of 11,428,600 shares of common stock to the holders of Orion Common
Stock), holders of MITI Common Stock received 5.54937 shares of the Company's
common stock for each share of MITI Common Stock (resulting in the issuance of
9,523,817 shares of the Company's common stock to the holders of MITI Common
Stock) and holders of Sterling Common Stock received .04309 shares of the
Company's common stock for each share of Sterling Common Stock (resulting in the
issuance of 483,254 shares of the Company's common stock to the holders of
Sterling Common Stock).
In addition, pursuant to the terms of a contribution agreement dated as of
November 1, 1995 among the Company and two affiliates of Metromedia Company
("Metromedia"), MetProductions, Inc. ("MetProductions") and Met International,
Inc. ("Met International"), MetProductions and Met International contributed to
the Company an aggregate of $37,068,303 consisting of (i) interests in a
partnership and (ii) the principal amount of indebtedness of Orion and its
affiliate, and indebtedness of an affiliate of MITI, owed to MetProductions and
Met International respectively, in exchange for an aggregate of 3,530,314 shares
of the Company's common stock.
Immediately prior to the consummation of the November 1 Merger, there were
17,490,901 shares of the Company's common stock outstanding. As a result of the
consummation of the November 1 Merger and the transactions contemplated by the
contribution agreement, the Company issued an aggregate of 24,965,985 shares of
common stock. Following consummation of the November 1 Merger and the
transactions contemplated by the contribution agreement, Metromedia Company (an
affiliate of the Company) and its affiliates (the "Metromedia Holders")
collectively held an aggregate of 15,252,128 shares of common stock (or 35.9% of
the issued and outstanding shares of common stock).
Due to the existence of the Metromedia Holders' common control of Orion and MITI
prior to consummation of the November 1 Merger, their combination pursuant to
the November 1 Merger was accounted for as a combination of entities under
common control. Orion was deemed to be the acquirer in the common control
merger. As a result, the combination of Orion and MITI was effected utilizing
historical costs for the ownership interests of the Metromedia Holders in MITI.
The remaining ownership interests of MITI were accounted for in accordance with
the purchase method of accounting based on the fair value of such ownership
interests, as determined by the value of the shares received by the holders of
such interests at the effective time of the November 1 Merger.
F-16
<PAGE>
METROMEDIA INTERNATIONAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. THE NOVEMBER 1 MERGER (CONTINUED)
For accounting purposes only, Orion and MITI were deemed to be the joint
acquirers of Actava and Sterling. The acquisition of Actava and Sterling has
been accounted for as a reverse acquisition. As a result of the reverse
acquisition, the historical financial statements of the Company for periods
prior to the November 1 Merger are those of Orion and MITI, rather than Actava.
The operations of Actava and Sterling have been included in the accompanying
consolidated financial statements from November 1, 1995, the date of
acquisition. During December 1995, the Company adopted a formal plan to dispose
of Snapper (see notes 1 and 4). In addition, the Company's investment in RDM
Sports Group, Inc. (formerly Roadmaster Industries, Inc.), was deemed to be a
non-strategic asset (see note 5).
At December 31, 1995, Snapper was included in the accompanying balance sheet in
an amount equal to the sum of estimated cash flows from the operations of
Snapper plus the anticipated proceeds from the sale of Snapper which amounted to
$79.2 million. The excess of the purchase price allocated to Snapper in the
November 1 Merger over the expected estimated cash flows from the operations and
sale of Snapper in the amount of $293.6 million has been reflected in the
accompanying consolidated statement of operations as a loss on disposal of a
discontinued operation. No income tax benefits were recognized in connection
with this loss on disposal because of the Company's losses from continuing
operations and net operating loss carryforwards.
The purchase price of Actava, Sterling and MITI minority interests, exclusive of
transaction costs, amounted to $438.9 million at November 1, 1995. The excess
purchase price over the net fair value of assets acquired amounted to $404
million at November 1, 1995, before the write-off of Snapper goodwill of $293.6
million.
Orion, MITI and Sterling were parties to a number of material contracts and
other arrangements under which Metromedia Company and certain of its affiliates
had, among other things, made loans or provided financing to, or paid
obligations on behalf of, each of Orion, MITI and Sterling. On November 1, 1995
such indebtedness, financing and other obligations of Orion, MITI and Sterling
to Metromedia and its affiliates were refinanced, repaid or converted into
equity of MMG.
Certain of the amounts owed by Orion ($20.4 million), MITI ($34.1 million) and
Sterling ($524,000) to Metromedia were financed by Metromedia through borrowings
under a $55.0 million credit agreement between the Company and Metromedia (the
"Actava-Metromedia Credit Agreement"). Orion, MITI and Sterling repaid such
amounts to Metromedia, and Metromedia repaid the Company the amounts owed by
Metromedia to the Company under the Actava-Metromedia Credit Agreement. In
addition, certain amounts owed by Orion to Metromedia were repaid on November 1,
1995.
3. ENTERTAINMENT GROUP ACQUISITIONS
On July 2, 1996, the Entertainment Group consummated the acquisition (the
"Goldwyn Merger") of the Samuel Goldwyn Company ("Goldwyn") by merging the
Company's newly formed subsidiary, SGC Merger Corp., into Goldwyn. Upon
consummation of the Goldwyn Merger, Goldwyn was renamed Goldwyn Entertainment
Company. Holders of common stock received .3335 shares of the Company's common
stock (the "Common Stock") for each share of Goldwyn Common Stock in accordance
with a formula set forth in the Agreement and Plan of Merger relating to the
Goldwyn Merger (the "Goldwyn Merger Agreement"). Pursuant to the Goldwyn Merger,
the Company issued 3,130,277 shares of common stock.
F-17
<PAGE>
METROMEDIA INTERNATIONAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
3. ENTERTAINMENT GROUP ACQUISITIONS (CONTINUED)
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 (the
"MPCA Merger", together with the Goldwyn Merger, the "July 2 Mergers") of Motion
Picture Corporation of America ("MPCA") by merging the Company's recently formed
subsidiary, MPCA Merger Corp., with MPCA. In connection with the MPCA Merger,
the Company (i) issued 1,585,592 shares of common stock to MPCA's sole
stockholders, and (ii) paid such stockholders approximately $1.2 million in
additional consideration, consisting of promissory notes. The purchase price,
including transaction costs, related to the acquisition of MPCA was
approximately $21.9 million.
The excess of the purchase price over the net fair value of liabilities assumed
in the July 2 Mergers amounted to $125.4 million.
Following the consummation of the July 2 Mergers, the Company contributed its
interests in Goldwyn and MPCA to Orion, with Goldwyn and MPCA becoming
wholly-owned subsidiaries of Orion. Orion, Goldwyn and MPCA are collectively
referred to as the Entertainment Group. The July 2 Mergers have been recorded in
accordance with the purchase method of accounting for business combinations. The
purchase price to acquire both Goldwyn and MPCA were allocated to the net assets
acquired according to management's estimate of their respective fair values and
the results of those purchased businesses have been included in the accompanying
consolidated condensed financial statements from July 2, 1996, the date of
acquisition.
The following unaudited pro forma information illustrates the effect of the July
2 Mergers on revenues, loss from continuing operations, net loss and net loss
per share for the years ended December 31, 1996 and 1995, and assumes that the
July 2 Mergers occurred at the beginning of each period, the November 1 Merger
occurred at the beginning of 1995, Snapper was included in consolidated results
of operations at the beginning of 1995 and does not account for refinancing of
certain indebtedness of Goldwyn and MPCA debt as discussed in note 9 (in
thousands, except per share amounts):
<TABLE>
<CAPTION>
1996 1995
(UNAUDITED) (UNAUDITED)
----------- -----------
<S> <C> <C>
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>
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
F-18
<PAGE>
METROMEDIA INTERNATIONAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
4. SNAPPER, INC. (CONTINUED)
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 excess of the carrying value over fair value of net assets is reflected in
the accompanying consolidated financial statements as goodwill and is being
amortized over 25 years.
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 (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>
F-19
<PAGE>
METROMEDIA INTERNATIONAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
5. RDM SPORTS GROUP, INC.
The Company has identified its investment in RDM Sports Group, Inc. ("RDM") as a
non-strategic asset and the Company's investment in RDM is included in the
balance sheet at December 31, 1996 and 1995 as an asset held for sale. As of
November 1, 1995, the Company's investment in RDM was adjusted to the
anticipated proceeds from its sale under the purchase method of accounting.
Management regularly monitors and evaluates the net realizable value of its
assets held for sale to determine whether their carrying values have been
impaired. During 1996, the Company reduced the carrying value of its investment
in RDM to $31.2 million. The Company's write-down of its investment in RDM of
$16.3 million is reflected as a discontinued operation in the 1996 consolidated
statement of operations. The Company intends to dispose of its RDM stock during
1997. The equity in earnings and losses of RDM have been excluded from the
Company's results of operations since the November 1 Merger.
As of December 31, 1996, the Company owned 39% of the issued and outstanding
shares of RDM Common Stock based on approximately 49,507,000 shares of RDM
Common Stock outstanding at November 8, 1996. Summarized financial information
for RDM is shown below (in thousands):
<TABLE>
<CAPTION>
AS OF, AND FOR
THE
NINE MONTHS AS OF, AND FOR
ENDED THE
SEPTEMBER 28, YEAR ENDED
1996 DECEMBER 31,
(UNAUDITED) 1995
---------------- ----------------
<S> <C> <C>
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 receivable
is stated net of an allowance for doubtful accounts of $11.6 million at both
December 31, 1996 and 1995.
The Entertainment Group has entered into contracts for licensing of theatrical
and television product to the pay cable, home video and free television markets,
for which the revenue and the related accounts receivable will be recorded in
future periods when the films are available for broadcast or exploitation. These
contracts, net of advance payments received and recorded in deferred revenues as
described below, aggregated approximately $175.0 million at December 31, 1996.
Included in this amount is $61.5 million of license fees for which the revenue
and the related accounts receivable will be recorded only when the Entertainment
Group produces or acquires new products.
F-20
<PAGE>
METROMEDIA INTERNATIONAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
6. FILM ACCOUNTS RECEIVABLE AND DEFERRED REVENUES (CONTINUED)
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.
8. INVESTMENTS IN AND ADVANCES TO JOINT VENTURES
The Communications Group has recorded its investments in Joint Ventures at cost,
net of its equity in earnings or losses. Advances to the Joint Ventures under
the line of credit agreements are reflected based on amounts recoverable under
the credit agreement, plus accrued interest.
Advances are made to Joint Ventures in the form of cash, for working capital
purposes and for payment of expenses or capital expenditures, or in the form of
equipment purchased on behalf of the Joint Ventures. Interest rates charged to
the Joint Ventures under the credit agreement range from prime rate to prime
rate plus 6%. The credit agreements generally provide for the payment of
principal and interest from 90% of the Joint Ventures' available cash flow, as
defined, prior to any substantial distributions of dividends to the Joint
Venture partners. The Communications Group has entered into credit agreements
with its Joint Ventures to provide up to $69.6 million in funding of which $18.9
million remains unfunded at December 31, 1996. Under its credit agreements the
Communications Group's funding commitments are contingent on its approval of the
Joint Ventures' business plans.
F-21
<PAGE>
METROMEDIA INTERNATIONAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
8. INVESTMENTS IN AND ADVANCES TO JOINT VENTURES (CONTINUED)
At December 31, 1996 and 1995 the Communications Group's investments in the
Joint Ventures, at cost, net of adjustments for its equity in earnings or
losses, were as follows (in thousands):
INVESTMENTS IN AND ADVANCES TO JOINT VENTURES
<TABLE>
<CAPTION>
YEAR
VENTURE DATE OPERATIONS
JOINT VENTURE (BY SERVICE TYPE) 1996 1995 OWNERSHIP % FORMED COMMENCED
- ----------------------------------------------- --------- --------- ----------------- ----------- ------------------
<S> <C> <C> <C> <C> <C>
WIRELESS CABLE TV
Kosmos TV, Moscow, Russia...................... $ 759 $ 4,317 50% 1991 1992
Baltcom TV, Riga, Latvia....................... 8,513 6,983 50% 1991 1992
Ayety TV, Tbilisi, Georgia..................... 4,691 3,630 49% 1991 1993
Kamalak, Tashkent, Uzbekistan(1)............... 6,031 3,731 50% 1992 1993
Sun TV, Kishinev, Moldova...................... 3,590 1,613 50% 1993 1994
Alma-TV, Almaty, Kazakhstan(1)................. 2,840 1,318 50% 1994 1995
--------- ---------
26,424 21,592
--------- ---------
PAGING
Baltcom Paging, Tallinn, Estonia............... 3,154 2,585 39% 1992 1993
Baltcom Plus, Riga, Latvia..................... 1,711 1,412 50% 1994 1995
Tbilisi Paging, Tbilisi, Georgia............... 829 619 45% 1993 1994
Raduga Paging, Nizhny Novgorod, Russia......... 450 364 45% 1993 1994
St. Petersburg Paging, St. Petersburg,
Russia....................................... 963 527 40% 1994 1995
--------- ---------
7,107 5,507
--------- ---------
RADIO BROADCASTING
SAC, Moscow, Russia............................ -- 1,174 51%(2) 1994 1994
Eldoradio, St. Petersburg, Russia.............. 435 561 50% 1993 1995
Radio Socci, Socci, Russia..................... 361 269 51% 1995 1995
--------- ---------
796 2,004
--------- ---------
TELEPHONY
Telecom Georgia, Tbilisi, Georgia.............. 2,704 2,078 30% 1994 1994
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
Baltcom GSM.................................... 7,874 -- 24% 1996 Pre-Operational
PRC Telephony ventures and equipment........... 9,712 2,378
Other.......................................... 3,191 2,457
--------- ---------
26,367 5,753
--------- ---------
Total.......................................... $ 65,447 $ 36,934
--------- ---------
--------- ---------
</TABLE>
- ------------------------
(1) Includes paging operations
(2) During 1996, the Communications Group purchased an additional 32% of
SAC/Radio 7, increasing the ownership percentage to 83% and acquiring
control of its business. Accordingly, this investment is now accounted for
on a consolidated basis.
F-22
<PAGE>
METROMEDIA INTERNATIONAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
8. INVESTMENTS IN AND ADVANCES TO JOINT VENTURES (CONTINUED)
The ability of the Communications Group and its Joint Ventures to establish
profitable operations is subject to, among other things, special political,
economic and social risks inherent in doing business in the republics of the
former Soviet Union, Eastern Europe and the PRC. These include matters arising
out of government policies, economic conditions, imposition of taxes or other
similar charges by governmental bodies, foreign exchange fluctuations and
controls, civil disturbances, deprivation or unenforceability of contractual
rights, and taking of property without fair compensation.
MITI has obtained political risk insurance policies from the Overseas Private
Investment Corporation ("OPIC") for two of its Joint Ventures. The policies
cover loss of investment and losses due to business interruption caused by
political violence or expropriation. Recently, the United States House of
Representatives extended the insuring authority of OPIC for one year. If such
authority is not further renewed, OPIC may be unable to write any new insurance
policies or underwrite new investments.
Summarized combined balance sheet financial information as of September 30, 1996
and 1995 and combined statement of operations financial information for the
years ended September 30, 1996 and 1995 and for the nine months ended September
30, 1994 of Joint Ventures accounted for under the equity method that have
commenced operations as of the dates indicated are as follows (in thousands):
COMBINED BALANCE SHEETS
<TABLE>
<CAPTION>
1996 1995
--------- ---------
<S> <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>
COMBINED STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
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>
F-23
<PAGE>
METROMEDIA INTERNATIONAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
8. INVESTMENTS IN AND ADVANCES TO JOINT VENTURES (CONTINUED)
Financial information for Joint Ventures which are not yet operational is not
included in the above summary. 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.
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-24
<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 with approximately 37,000
subscribers, for approximately $2.8 million.
On March 18, 1996 Metromedia Asia Limited ("MAC," n/k/a Metromedia Asia
Corporation), entered into a Joint Venture agreement with Golden Cellular
Communications, Ltd, ("GCC") a company located in the PRC. The purpose of the
Joint Venture is to provide wireless local loop telephony equipment, network
F-25
<PAGE>
METROMEDIA INTERNATIONAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
8. INVESTMENTS IN AND ADVANCES TO JOINT VENTURES (CONTINUED)
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-26
<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
---------- ----------
Entertainment Group
Notes payable to banks under Credit, Security and Guaranty Agreements..................... 247,500 123,700
Other guarantees and contracts payable, net of unamortized discounts of $2,699 and
$2,402.................................................................................. 16,138 9,939
---------- ----------
263,638 133,639
---------- ----------
Communications Group
Hungarian Foreign Trade Bank.............................................................. 246 588
---------- ----------
246 588
---------- ----------
Snapper
Snapper Revolver.......................................................................... 46,419 --
Industrial Development Bonds.............................................................. 1,050 --
---------- ----------
47,469 --
---------- ----------
Capital lease obligations, interest rates of 9% to 13%.................................... 6,185 --
---------- ----------
Less: current portion................................................................... 55,638 40,597
---------- ----------
Long-term debt, net of current portion.................................................. $ 403,421 $ 264,046
---------- ----------
---------- ----------
</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-27
<PAGE>
METROMEDIA INTERNATIONAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
9. LONG-TERM DEBT (CONTINUED)
MMG DEBT (EXCLUDING COMMUNICATIONS GROUP, ENTERTAINMENT GROUP AND SNAPPER)
In 1987 the Company issued $75.0 million of 6 1/2% Convertible Subordinated
Debentures due in 2002 in the Euro-dollar market. The Debentures are convertible
into common stock at a conversion price of $41 5/8 per share. At the Company's
option, the Debentures may be redeemed at 100% plus accrued interest until
maturity.
The 9 1/2% Subordinated Debentures are due in 1998. These debentures do not
require annual principal payments.
The 9 7/8% Senior Subordinated Debentures are redeemable at the option of the
Company, in whole or in part, at 100% of the principal amount plus accrued
interest. Mandatory sinking fund payments of $3.0 million (which the Company may
increase to $6.0 million annually) began in 1982 and are intended to retire, at
par plus accrued interest, 75% of the issue prior to maturity. The Senior
Subordinated Debetures were paid in March 1997.
At the option of the Company, the 10% Subordinated Debentures are redeemable, in
whole or in part, at the principal amount plus accrued interest. Mandatory
sinking fund payments of 10% of the outstanding principal amount commenced in
1989, however, the Company receives credit for debentures redeemed or otherwise
acquired in excess of sinking fund payments.
During 1996 the Company repaid its outstanding balance of $28.8 million under
its revolving Credit Facility.
The carrying value of the Company's long-term and subordinated debt, including
the current portion at December 31, 1996, approximates fair value. Estimated
fair value is based on a discounted cash flow analysis using current incremental
borrowing rates for similar types of agreements and quoted market prices for
issues which are traded.
ENTERTAINMENT GROUP CREDIT FACILITY
On July 2, 1996, the Entertainment Group entered into a credit agreement with
Chase Bank as agent for a syndicate of lenders, pursuant to which the lenders
provided to the Entertainment Group and its subsidiaries a $300 million credit
facility (the "Entertainment Group Credit Facility"). The $300 million facility
consists of a secured term loan of $200 million (the "Term Loan") and a
revolving credit facility of $100 million, including a $10 million letter of
credit subfacility, (the "Revolving Credit Facility"). Proceeds from the Term
Loan and $24.0 million of the Revolving Credit Facility were used to refinance
the existing indebtedness of Orion (the "Old Orion Credit Facility"), Goldwyn
and MPCA. In connection with the refinancing of the Old Orion Credit Facility,
the Entertainment Group expensed the deferred financing costs associated with
the Old Orion Credit Facility and recorded an extraordinary loss of
approximately $4.5 million.
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
F-28
<PAGE>
METROMEDIA INTERNATIONAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
9. LONG-TERM DEBT (CONTINUED)
September 30, 1996, with the remaining principal amount due at the final
maturity date. If the outstanding balance under the Term Loan exceeds the
borrowing base, the Company will be required to pay down such excess amount. The
Term Loan and the Revolving Credit Facility are secured by a first priority lien
on all of the stock of Orion and its subsidiaries and on substantially all of
the Entertainment Group's assets, including its accounts receivable and film and
television libraries. Amounts outstanding under the Revolving Credit Facility in
excess of the applicable borrowing base are also guaranteed jointly and
severally by Metromedia Company, and John W. Kluge, a general partner. To the
extent the borrowing base exceeds the amount outstanding under the Term Loan,
such excess will be used to support the Revolving Credit Facility so as to
reduce the exposure of the guarantors under such facility.
The Entertainment Group Credit Facility contains customary convenants including
limitations on the issuance of additional indebtedness and guarantees, on the
creation of new liens, development costs and budgets and other information
regarding motion picture production and made-for television movies, the
aggregate amount of unrecouped print and advertising costs the Entertainment
Group may incur, on the amount of the Entertainment Group's leases, capital and
overhead expenses (including specific limitations on the Entertainment Group's
theatrical exhibition subsidiary's capital expenditures), prohibitions of the
declaration of dividends or distributions by the Entertainment Group (except as
defined in the agreement), limitations on the merger or consolidation of the
Entertainment Group or the sale by the Entertainment Group of any substantial
portion of its assets or stock and restrictions on the Entertainment Group's
line of business, other than activities relating to the production, distribution
and exhibition of entertainment product. The Entertainment Group's Credit
Facility also contains financial covenants, including requiring maintenance by
the Entertainment Group of certain cash flow and operational ratios.
The Revolving Credit Facility contains certain events of default, including
nonpayment of principal or interest on the facility, the occurrence of a "change
of control" (as defined in the agreement) or an assertion by the guarantors of
such facility that the guarantee of such facility is unenforceable. The Term
Loan portion of the Entertainment Group's Credit Facility also contains a number
of customary events of default, including non-payment of principal and interest
and the occurrence of a "change of management" (as defined in the agreement),
violation of covenants, falsity of representations and warranties in any
material respect, certain cross-default and cross-acceleration provisions, and
bankruptcy or insolvency of Orion or its material subsidiaries.
At the November 1 Merger date (see note 2), proceeds from the Old Orion Credit
Facility as well as amounts advanced from MMG under a subordinated promissory
note, were used to repay and terminate all outstanding Plan debt obligations
($210.7 million) and to pay certain transaction costs. To record the repayment
and termination of the Plan debt, the Entertainment Group removed certain
unamortized discounts associated with such obligations from its accounts and
recognized an extraordinary loss of $32.4 million on the extinguishment of debt.
It is assumed that the carrying value of the Entertainment Group's bank debt
approximates its face value because it is a floating rate instrument.
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-29
<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) and 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 Company not owning at least 80% of
all the outstanding stock of Snapper, (ii) a change of ownership of the
F-30
<PAGE>
METROMEDIA INTERNATIONAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
9. LONG-TERM DEBT (CONTINUED)
Company that results in (a) Messrs. Kluge and Subotnick not having beneficial
ownership or common voting power of at least 15% of the common voting power of
the Company, (b) any person having more common voting power than Messrs. Kluge
and Subotnick, or (c) any person other than Messrs. Kluge and Subotnick for any
reason obtaining the right to appoint a majority of the board of directors of
the Company.
At December 31, 1996 Snapper was not in compliance with certain of these
covenants. The Company and AmSouth have amended the Snapper Credit Agreement to
provide for (i) an annual administrative fee to be paid on December 31, 1997,
(ii) an increase in Snapper's borrowing rates as of December 31, 1997 (from
prime rate to prime rate plus 1.50% and from LIBOR plus 2.50% to LIBOR plus
4.00%), and (iii) an increase in Snapper's commitment fee as of December 31,
1997 from .50% per annum to .75% per annum. As part of the amendment to the
Snapper Credit Agreement AmSouth waived: (i) the covenant defaults as of
December 31, 1996, (ii) the $250,000 semi-annual administrative fee requirement
which was set to commence on May 26, 1997 and (iii) the mandatory borrowing rate
and commitment fee increase that was to occur on May 26, 1997. Furthermore, the
amendment replaces certain existing financial covenants with covenants on
minimum quarterly cash flow and equity requirements, as defined. In addition,
the Company and AmSouth have agreed to the major terms and conditions of a $10.0
million credit facility. The closing of the credit facility shall remain subject
to the delivery of satisfactory loan documentation.
The $10.0 million working capital facility will: (i) have a PARI PASSU
collateral interest (including rights under the Make-Whole and Pledge Agreement)
with the Credit Facility, (ii) accrue interest on borrowings at AmSouth's prime
rate, floating (same borrowing rate as the Credit Facility), (iii) become due
and payable on October 1, 1997. As additional consideration for AmSouth making
this new facility available, Snapper shall provide AmSouth with either: (i) the
joint and several guarantees of Messrs. Kluge and Subotnick on the new facility
only, or (ii) a $10.0 million interest-bearing deposit made by MMG at AmSouth
(this deposit will not be specifically pledged to secure the Snapper facility or
to secure MMG's obligations thereunder, but AmSouth shall have the right of
offset against such deposit as granted by law and spelled out within the Credit
Agreement).
It is assumed that the carrying value of Snapper's bank debt approximates its
face value because it is a floating rate instrument.
In addition, Snapper has industrial development bonds with certain
municipalities. The industrial development bonds mature in 1999 and 2001, and
their interest rates range from 62% to 75% of the prime rate.
10. STOCKHOLDERS' EQUITY
PREFERRED STOCK
There are 70,000,000 shares of Preferred Stock authorized, none of which were
outstanding or designated as to a particular series at December 31, 1996.
COMMON STOCK
On July 2, 1996, the Company completed a public offering of 18.4 million shares
of common stock, generating net proceeds of approximately $190.6 million.
F-31
<PAGE>
METROMEDIA INTERNATIONAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
10. STOCKHOLDERS' EQUITY (CONTINUED)
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.
F-32
<PAGE>
METROMEDIA INTERNATIONAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
10. STOCKHOLDERS' EQUITY (CONTINUED)
The per share weighted-average fair value of stock options granted during 1996
was $7.36 on the date of grant using the Black Scholes option-pricing model with
the following weighted average assumptions: expected volatility of 49%, expected
dividend yield of zero percent, risk-free interest rate of 5.2% and an expected
life of 7 years.
The Company applies APB 25 in recording the value of stock options granted
pursuant to its plans. No compensation cost has been recognized for stock
options granted under the MMG Plan and compensation expense of $153,000 has been
recorded for stock options under the MITI stock option plan in the financial
statements. Had the Company determined compensation cost based on the fair value
at the grant date for its stock options under SFAS 123, the Company's net loss
would have increased to the pro forma amounts indicated below (in thousands,
except per share amount):
<TABLE>
<CAPTION>
1996
-----------
<S> <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 EXERCISE
OF SHARES 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.
F-33
<PAGE>
METROMEDIA INTERNATIONAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
10. STOCKHOLDERS' EQUITY (CONTINUED)
At December 31, 1996 and 1995, the number of stock options exercisable was
2,031,000 and 1,214,000, respectively, and the weighted-average exercise price
of these options was $7.92 and $3.97, respectively
During 1994, an officer of the Communications Group was granted an option, not
pursuant to any plan, to purchase 657,908 shares of common stock (the "MITI
Options") at a purchase price of $1.08 per share. The MITI Options expire on
September 30, 2004, or earlier if the officer's employment is terminated.
Included in the fiscal 1995 statement of operations is $3.6 million of
compensation expense in connection with these options.
Prior to the November 1 Merger, an officer of Actava was granted an option, not
pursuant to any plan, to purchase 300,000 shares of common stock (the "Actava
Options") at a purchase price of $6.375 per share. The Actava Options expire on
April 18, 2001.
As part of the MPCA Merger, the Company issued 256,504 shares of restricted
common stock to certain employees. The common stock vests on a pro-rata basis
over a three year period ending in July 1999. The total market value of the
shares at the time of issuance is treated as unearned compensation and is
charged to expense over the vesting period. Unearned compensation charged to
expense for the period ended December 31, 1996 was $529,000.
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.
F-34
<PAGE>
METROMEDIA INTERNATIONAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
11. INCOME TAXES (CONTINUED)
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.
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
F-35
<PAGE>
METROMEDIA INTERNATIONAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
11. INCOME TAXES (CONTINUED)
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 taxes. These
carryforwards and credits began to expire in 1996. The minimum tax credit may be
carried forward indefinitely to offset regular tax in certain circumstances.
The use by the Company of the pre-November 1, 1995 net operating loss
carryforwards reported by Orion, Actava, MITI and Sterling ("the Pre-November 1
Losses") (and the subsidiaries included in their respective affiliated groups of
corporations which filed consolidated Federal income tax returns with Orion,
Actava, MITI or Sterling as the parent corporations) are subject to certain
limitations as a result of the November 1 Merger, respectively.
Under Section 382 of the Internal Revenue Code, annual limitations generally
apply to the use of the Pre-November 1 Losses by the Company. The annual
limitations on the use of the Pre-November 1 Losses of Orion, Actava, MITI or
Sterling by the Company approximate $11.9 million, $18.3 million, $10.0 million,
$510,000 per year, respectively. To the extent Pre-November 1 Losses equal to
the annual limitation with respect to Orion, Actava, MITI or Sterling are not
used in any year, the unused amount is generally available to be carried forward
and used to increase the applicable limitation in the succeeding year.
The use of Pre-November 1 Losses of Orion, MITI and Sterling is also separately
limited by the income and gains recognized by the corporations that were members
of the Orion, MITI and Sterling affiliated groups, respectively. Under proposed
Treasury regulations, such Pre-November 1 Losses of any such former members of
any such group, are usable on an aggregate basis to the extent of the income and
gains of such former members of such group.
As a result of the November 1 Merger, the Company succeeded to approximately
$92.2 million of Pre-November 1 Losses of the Actava Group. SFAS 109 requires
assets acquired and liabilities assumed to be recorded at their "gross" fair
value. Differences between the assigned values and tax bases of assets acquired
and liabilities assumed in purchase business combinations are temporary
differences under the provisions of SFAS 109. However, since all of the Actava
intangibles have been eliminated, when the Pre-November 1 Losses are utilized
they will reduce income tax expense.
F-36
<PAGE>
METROMEDIA INTERNATIONAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
12. EMPLOYEE BENEFIT PLANS
Orion, MITI and Snapper have defined contribution plans which provide for
discretionary annual contributions covering substantially all of their
employees. Participating employees can defer receipt of up to 15% of their
compensation, subject to certain limitations. Orion matches 50% of amounts
contributed up to $1,000 per participant per plan year and may make
discretionary contributions on an annual basis. MITI has the discretion to match
amounts contributed by plan participants up to 3% of their compensation.
Snapper's employer match is determined each year, and was 50% of the first 6% of
compensation contributed by each participant for the period November 1, 1996 to
December 31, 1996. The contribution expense for calendar 1996, calendar 1995 and
fiscal 1995 was $375,000, $124,000 and $107,000, respectively.
In addition, Snapper has a profit sharing plan covering substantially all
non-bargaining unit employees. Contributions are made at the discretion of
management. No profit sharing amounts were approved by management in 1996.
Prior to the November 1 Merger, Actava had a noncontributory defined benefit
plan which was "qualified" under Federal tax law and covered substantially all
of Actava's employees. In addition, Actava had a "nonqualified" supplemental
retirement plan which provided for the payment of benefits to certain employees
in excess of those payable by the qualified plans. Following the November 1
Merger (see note 2), the Company froze the Actava noncontributory defined
benefit plan and the Actava nonqualified supplemental retirement plan effective
as of December 31, 1995. Employees no longer accumulate benefits under these
plans.
In connection with the November 1 Merger, the projected benefit obligation and
fair value of plan assets were remeasured considering the Company's freezing of
the plan. The excess of the projected benefit obligations over the fair value of
plan assets in the amount of $4.9 million was recorded in the allocation of
purchase price. The recognition of the net pension liability in the allocation
of the purchase price eliminated any previously existing unrecognized gain or
loss, prior service cost, and transition asset or obligation related to the
acquired enterprise's pension plan.
Snapper sponsors a defined benefit pension plan which covers substantially all
bargaining unit employees. Benefits are based upon the employee's years of
service multiplied by fixed dollar amounts. Snapper's funding policy is to
contribute annually such amounts as are necessary to provide assets sufficient
to meet the benefits to be paid to the plan's members and keep the plan
actuarially sound.
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, 1996 were $5.4 million
and $6.7 million, respectively. Accrued post-retirement benefit cost at December
31, 1996 was $3.1 million. Disclosures regarding the funded status of the plan
have not been included herein because they are not material to the Company's
consolidated financial statements at December 31, 1996.
F-37
<PAGE>
METROMEDIA INTERNATIONAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
13. BUSINESS SEGMENT DATA
The business activities of the Company constitute three business segments (see
note 1 Description of the Business) and are set forth in the following table (in
thousands):
BUSINESS SEGMENT DATA
<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 discontinued operations and eliminations...... 119,120 155,456 --
---------- ---------- ----------
---------- ---------- ----------
Consolidated--Continuing Operations:
Net revenues............................................................... 201,755 138,970 194,789
Direct operating costs..................................................... (243,045) (184,912) (229,432)
Depreciation and amortization.............................................. (13,232) (2,795) (1,916)
---------- ---------- ----------
Loss from operations....................................................... (54,522) (48,737) (36,559)
---------- ---------- ----------
---------- ---------- ----------
Equity in losses of Joint Ventures......................................... (11,079) (7,981) (2,257)
---------- ---------- ----------
---------- ---------- ----------
Assets at year end......................................................... 944,740 599,638 391,870
Capital expenditures....................................................... $ 8,729 $ 3,475 $ 4,808
---------- ---------- ----------
---------- ---------- ----------
</TABLE>
- ------------------------
(1) Represents operations from November 1, 1996 to December 31, 1996.
F-38
<PAGE>
METROMEDIA INTERNATIONAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
13. BUSINESS SEGMENT DATA (CONTINUED)
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
--------- --------- ---------
<S> <C> <C> <C>
Canada....................................................... $ 1,995 $ 4,150 $ 3,862
Europe....................................................... 32,699 32,126 36,532
Mexico and South America..................................... 3,151 2,454 4,586
Asia and Australia........................................... 8,669 8,841 13,820
--------- --------- ---------
$ 46,515 $ 47,571 $ 58,800
--------- --------- ---------
--------- --------- ---------
</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. Plant, property and
equipment included capital leases of $7.2 million and related accumulated
amortization of $1.4 million at December 31, 1996.
F-39
<PAGE>
METROMEDIA INTERNATIONAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
14. COMMITMENTS AND CONTINGENT LIABILITIES (CONTINUED)
Minimum rental commitments under noncancellable leases are set forth in the
following table (in thousands):
<TABLE>
<CAPTION>
YEAR CAPITAL LEASES OPERATING 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 post-employment
contracts with various officers. The Company's remaining aggregate commitment at
December 31, 1996 under such contracts is approximately $1.1 million.
The Company pays a management fee to Metromedia for certain general and
administrative services provided by Metromedia personnel. Such management fee
amounted to $1.5 million in calendar 1996 and $250,000 for the period November
1, 1995 to December 31, 1995. The management fee commitment for the year ended
December 31, 1997 is $3.3 million.
Snapper has entered into various long-term manufacturing and purchase agreements
with certain vendors for the purchase of manufactured products and raw
materials. As of December 31, 1996, noncancelable commitments under these
agreements amounted to approximately $25.0 million.
Snapper has an agreement with a financial institution which makes available
floor plan financing to distributors and dealers of Snapper products. This
agreement provides financing for dealer inventories and accelerates Snapper's
cash flow. Under the terms of the agreement, a default in payment by a dealer is
nonrecourse to both the distributor and to Snapper. However, the distributor is
obligated to repurchase any equipment recovered from the dealer and Snapper is
obligated to repurchase the recovered equipment if the distributor defaults. At
December 31, 1996, there was approximately $35.3 million outstanding under this
floor plan financing arrangement.
CONTINGENCIES
The licenses pursuant to which the Communications Group's businesses operate are
issued for limited periods. Certain of these licenses expire over the next
several years. Two of the licenses held by the Communications Group have
recently expired, although the Communications Group has been permitted to
continue operations while the reissuance is pending. The Communications Group
has applied for
F-40
<PAGE>
METROMEDIA INTERNATIONAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
14. COMMITMENTS AND CONTINGENT LIABILITIES (CONTINUED)
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 collateralize 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.
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
F-41
<PAGE>
METROMEDIA INTERNATIONAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
14. COMMITMENTS AND CONTINGENT LIABILITIES (CONTINUED)
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.
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
F-42
<PAGE>
METROMEDIA INTERNATIONAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
14. COMMITMENTS AND CONTINGENT LIABILITIES (CONTINUED)
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 Sports Group, Inc. DP previously used the Opelika
Property as a storage area for stockpiling cement, sand, and mill scale
materials needed for or resulting from the manufacture of exercise weights. In
June 1994, DP discontinued the manufacture of exercise weights and no longer
needed to use the Opelika Property as a storage area. In connection with the
sale to RDM, RDM and the Company agreed that the Company, through a wholly-owned
subsidiary, would acquire the Opelika Property, together with any related
permits, licenses, and other authorizations under federal, state and local laws
governing pollution or protection of the environment. In connection with the
closing of the sale, the Company and RDM entered into an Environmental Indemnity
Agreement (the "Indemnity Agreement") under which the Company agreed to
indemnify RDM for costs and liabilities resulting from the presence on or
migration of regulated materials from the Opelika Property. The Company's
obligations under the Indemnity Agreement with respect to the Opelika Property
are not limited. The Indemnity Agreement does not cover
F-43
<PAGE>
METROMEDIA INTERNATIONAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
14. COMMITMENTS AND CONTINGENT LIABILITIES (CONTINUED)
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>
<TABLE>
<CAPTION>
THIRD QUARTER OF FOURTH QUARTER OF
--------------------- -----------------------
<S> <C> <C> <C> <C>
1996(B) 1995 1996(E) 1995
---------- --------- --------- ------------
Revenues................................................ $ 44,379 $ 35,468 $ 88,580 $ 25,069
Operating loss.......................................... (12,573) (7,004) (21,671) (22,646)(f)
Interest expense, net................................... 6,862 7,574 7,002 6,493
Equity interest in losses of Joint Ventures............. (2,292) (1,568) (5,019) (4,192)
Loss before discontinued operations and extraordinary
item.................................................. (22,050) (16,146) (34,392) (33,798)
Loss on disposal of discontinued operations............. (16,305 (c) -- -- (293,570)(g)
Loss on early extinguishment of debt.................... (4,505 (d) -- -- (32,382)(h)
Net loss................................................ (42,860) (16,146) (34,392) (359,750)
Primary loss per common share:
Continuing operations................................. $ (0.34) $ (0.77) $ (0.52) $ (0.96)
Discontinued operations............................... $ (0.25) $ -- $ -- $ (8.30)
Extraordinary item.................................... $ (0.07) $ -- $ -- $ (0.92)
Net loss.............................................. $ (0.66) $ (0.77) $ (0.52) $ (10.18)
</TABLE>
- ------------------------
(a) Includes $5.4 million of writedowns to previously released film product.
(b) Reflect the acquisition of Goldwyn and MPCA as of July 2, 1996.
(c) Reflects the writedown of the Company's investment in RDM.
F-44
<PAGE>
METROMEDIA INTERNATIONAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
15. SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED) (CONTINUED)
(d) In connection with the refinancing of the Orion Credit Facility, the Company
expensed the deferred financing costs of $4.5 million.
(e) Reflects the consolidation of Snapper as of November 1, 1996.
(f) Includes writedowns to estimated realizable value of $3.0 million for
unreleased theatrical product and $4.8 million for writedowns of previously
released product.
(g) Represents the excess of the allocated purchase price attributed to Snapper
in the November 1 Merger, over the estimated cash flows from the operations
and the anticipated sale of Snapper.
(h) Orion removed certain unamortized discounts associated with such obligations
from the accounts and recognized an extraordinary loss on the extinguishment
of debt.
The quarterly financial information for calendar 1995 presented above differs
from amounts previously reported in Orion's quarterly financial statements due
to the restatement of historical financial statements to account for the common
control merger with MITI (see note 2). In addition, Orion's previously filed
fiscal 1996 quarters have been restated and presented on a calendar year basis
in calendar 1995.
F-45
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBITS INCORPORATED HEREIN BY REFERENCE
------------------------------------------------
DESIGNATION OF DOCUMENT WITH WHICH EXHIBIT
EXHIBIT IN THIS WAS PREVIOUSLY FILED WITH
FORM 10-K DESCRIPTION OF EXHIBITS COMMISSION
- --------------- ------------------------------------------------ ------------------------------------------------
<C> <S> <C>
2.2 Agreement and Plan of Reorganization dated as of Quarterly Report on Form 10-Q for the three
July 20, 1994 by and among, The Actava Group months ended June 30, 1994, Exhibit 99.1
Inc., Diversified Products Corporation, Hutch
Sports USA Inc., Nelson/Weather-Rite, Inc.,
Willow Hosiery Company, Inc. and Roadmaster
Industries, Inc.
2.3 Amended and Restated Agreement and Plan of Current Report on Form 8-K for event occurring
Merger dated as of September 27, 1995 by and on September 27, 1995, Exhibit 99(a)
among The Actava Group Inc., Orion Pictures
Corporation, MCEG Sterling Incorporated,
Metromedia International Telecommunications,
Inc., OPG Merger Corp. and MITI Merger Corp. and
exhibits thereto. The Registrant agrees to
furnish copies of the schedules supplementally
to the Commission on request.
2.5 Agreement and Plan of Merger dated as of January Current Report on Form 8-K dated January 31,
31, 1996 by and among Metromedia International 1996, Exhibit 99.1
Group, Inc., The Samuel Goldwyn Company and SGC
Merger Corp. and exhibits thereto. The
registrant agrees to furnish copies of the
schedules to the Commission upon request.
3.1 Restated Certificate of Incorporation of Registration Statement on Form S-3 (Registration
Metromedia International Group, Inc. No. 33-63853), Exhibit 3.1
3.2 Restated By-laws of Metromedia International Registration Statement on Form S-3 (Registration
Group, Inc. No. 33-6353), Exhibit 3.2
4.1 Indenture dated as of August 1, 1973, with Application of Form T-3 for Qualification of
respect to 9 1/2% Subordinated Debentures due Indenture under the Trust Indenture Act of 1939
August 1, 1998, between The Actava Group Inc. (File No. 22-7615), Exhibit 4.1
and Chemical Bank, as Trustee.
4.2 Agreement among The Actava Group, Inc., Chemical Registration Statement on Form S-14
Bank and Manufacturers Hanover Trust Company, (Registration No. 2-81094), Exhibit 4.2
dated as of September 26, 1980, with respect to
successor trusteeship of the 9 1/2% Subordinated
Debentures due August 1, 1998.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
EXHIBITS INCORPORATED HEREIN BY REFERENCE
------------------------------------------------
DESIGNATION OF DOCUMENT WITH WHICH EXHIBIT
EXHIBIT IN THIS WAS PREVIOUSLY FILED WITH
FORM 10-K DESCRIPTION OF EXHIBITS COMMISSION
- --------------- ------------------------------------------------ ------------------------------------------------
<C> <S> <C>
4.3 Instrument of registration, appointment and Annual Report on Form 10-K for the year ended
acceptance dated as of June 9, 1986 among The December 31, 1986, Exhibit 4.3
Actava Group Inc., Manufacturers Hanover Trust
Company and Irving Trust Company, with respect
to successor trusteeship of the 9 1/2%
Subordinated Debentures due August 1, 1998.
4.4 Indenture dated as of March 15, 1977, with Registration Statement on Form S-7 (Registration
respect to 97/8% Senior Subordinated Debentures No. 2-58317), Exhibit 4.4
due March 15, 1997, between The Actava Group
Inc. and The Chase Manhattan Bank, N.A., as
Trustee.
4.5 Agreement among The Actava Group Inc., The Chase Registration Statement on Form S-14
Manhattan Bank, N.A. and United States Trust (Registration No. 2-281094), Exhibit 4.5
Company of New York, dated as of June 14, 1982,
with respect to successor trusteeship of the
97/8% Senior Subordinated Debentures due March
15, 1997.
4.6 Indenture between National Industries, Inc. and Post-Effective Amendment No. 1 to Application on
First National City Bank, dated October 1, 1974, Form T-3 for Qualification of Indenture Under
with respect to the 10% Subordinated Debentures, The Trust Indenture Act of 1939 (File No.
due October 1, 1999. 22-8076), Exhibit 4.6
4.7 Agreement among National Industries, Inc., The Registration Statement on Form S-14
Actava Group Inc., Citibank, N.A., and Marine (Registration No. 2-81094), Exhibit 4.7
Midland Bank, dated as of December 20, 1977,
with respect to successor trusteeship of the 10%
Subordinated Debentures due October 1, 1999.
4.8 First Supplemental Indenture among The Actava Registration Statement on Form S-7 (Registration
Group Inc., National Industries, Inc. and Marine No. 2-60566), Exhibit 4.8
Midland Bank, dated January 3, 1978,
supplemental to the Indenture dated October 1,
1974 between National and First National City
Bank for the 10% Subordinated Debentures due
October 1, 1999.
4.9 Indenture dated as of August 1, 1987 with Annual Report on Form 10-K for the year ended
respect to 6 1/2% Convertible Subordinated December 31, 1987, Exhibit 4.9
Debentures due August 4, 2002, between The
Actava Group Inc. and Chemical Bank, as Trustee.
10.1 1982 Stock Option Plan of The Actava Group Inc. Proxy Statement dated March 31, 1982, Exhibit A
10.2 1989 Stock Option Plan of The Actava Group Inc. Proxy Statement dated March 31, 1989, Exhibit A
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
EXHIBITS INCORPORATED HEREIN BY REFERENCE
------------------------------------------------
DESIGNATION OF DOCUMENT WITH WHICH EXHIBIT
EXHIBIT IN THIS WAS PREVIOUSLY FILED WITH
FORM 10-K DESCRIPTION OF EXHIBITS COMMISSION
- --------------- ------------------------------------------------ ------------------------------------------------
<C> <S> <C>
10.3 1969 Restricted Stock Plan of The Actava Group Annual Report on Form 10-K for the year ended
Inc. December 31, 1990, Exhibit 10.3
10.4 1991 Non-Employee Director Stock Option Plan. Annual Report on Form 10-K for the year ended
December 31, 1991, Exhibit 10.4
10.5 Amendment to 1991 Non-Employee Director Stock Annual Report on Form 10-K for the year ended
Option Plan. December 31, 1992, Exhibit 10.5
10.6 Snapper Power Equipment Profit Sharing Plan. Annual Report on Form 10-K for the year ended
December 31, 1987, Exhibit 10.6
10.7 Retirement Plan executed November 1, 1990, as Annual Report on Form 10-K for the year ended
amended effective January 1, 1989. December 31, 1990, Exhibit 10.7
10.8 Supplemental Retirement Plan of The Actava Group Annual Report on Form 10-K for the year ended
Inc. December 31, 1983, Exhibit 10.8
10.9 Supplemental Executive Medical Reimbursement Annual Report on Form 10-K for the year ended
Plan. December 31, 1990, Exhibit 10.9
10.10 Amendment to Supplemental Retirement Plan of The Annual Report on Form 10-K for the year ended
Actava Group Inc., effective April 1, 1992. December 31, 1991, Exhibit 10.10
10.11 1992 Officer and Director Stock Purchase Plan. Annual Report on Form 10-K for the year ended
December 31, 1991, Exhibit 10.11
10.12 Form of Restricted Purchase Agreement between Annual Report on Form 10-K for the year ended
certain officers of The Actava Group Inc. and December 31, 1991, Exhibit 10.12
The Actava Group Inc.
10.14 Form of Indemnification Agreement between Actava Annual Report on Form 10-K for the year ended
and certain of its directors and executive December 31, 1993, Exhibit 10.14
officers.
10.15 Employment Agreement between The Actava Group Current Report on Form 8-K dated April 19, 1994,
Inc. and John D. Phillips dated April 19, 1994. Exhibit 10.15
10.16 First Amendment to Employment Agreement dated Annual Report on Form 10-K for the year ended
November 1, 1995 between Metromedia December 31, 1995, Exhibit 10.16
International Group and John D. Phillips.
10.17 Option Agreement between The Actava Group Inc. Current Report on Form 8-K dated April 19, 1994,
and John D. Phillips dated April 19, 1994. Exhibit 10.17
10.18 Registration Rights Agreement among The Actava Current Report on Form 8-K dated April 19, 1994,
Group Inc., Renaissance Partners and John D. Exhibit 10.18
Phillips dated April 19, 1994.
10.19 Shareholders Agreement dated as of December 6, Annual Report on Form 10-K for the year ended
1994 among The Actava Group Inc., Roadmaster, December 31, 1994, Exhibit 10.19
Henry Fong and Edward Shake.
10.20 Registration Rights Agreement dated as of Annual Report on Form 10-K for the year ended
December 6, 1994 between The Actava Group Inc. December 31, 1994, Exhibit 10.20
and Roadmaster.
10.21 Environmental Indemnity Agreement dated as of Annual Report on Form 10-K for the year ended
December 6, 1994 between The Actava Group Inc. December 31, 1994, Exhibit 10.21
and Roadmaster.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
EXHIBITS INCORPORATED HEREIN BY REFERENCE
------------------------------------------------
DESIGNATION OF DOCUMENT WITH WHICH EXHIBIT
EXHIBIT IN THIS WAS PREVIOUSLY FILED WITH
FORM 10-K DESCRIPTION OF EXHIBITS COMMISSION
- --------------- ------------------------------------------------ ------------------------------------------------
<C> <S> <C>
10.22 Lease Agreement dated October 21, 1994 between Annual Report on Form 10-K for the year ended
JDP Aircraft II, Inc. and The Actava Group Inc. December 31, 1994, Exhibit 10.22
10.23 Lease Agreement dated as of October 4, 1995 Quarterly Report on Form 10-Q for the quarter
between JDP Aircraft II, Inc. and The Actava ended September 30, 1995, Exhibit 10.23
Group Inc.
10.37 Management Agreement dated November 1, 1995 Annual Report on Form 10-K for the year ended
between Metromedia Company and Metromedia December 31, 1995, Exhibit 10.37
International Group, Inc.
10.38 The Metromedia International Group, Inc. 1996 Proxy Statement dated August 6, 1996, Exhibit B
Incentive Stock Plan.
10.39 License Agreement dated November 1, 1995 between Annual Report on Form 10-K for the year ended
Metromedia Company and Metromedia International December 31, 1995, Exhibit 10.39
Group, Inc.
10.40 MITI Bridge Loan Agreement dated February 29, Annual Report on Form 10-K for the year ended
1996, among Metromedia Company and MITI December 31, 1995, Exhibit 10.40
10.41 Metromedia International Telecommunications, Quarterly Report on Form 10-Q for the quarter
Inc. 1994 Stock Plan ended March 31, 1996, Exhibit 10.41
10.42 Amended and Restated Credit Security and Quarterly Report on Form 10-Q for the quarter
Guaranty Agreement dated as of November 1, 1995, ended June 30, 1996, Exhibit 10.42
by and among Orion Pictures Corporation, the
Corporate Guarantors' referred to herein, and
Chemical Bank, as Agent for the Lenders.
10.43 Metromedia International Group/Motion Picture Quarterly Report or Form 10-Q for the quarter
Corporation of America Restricted Stock Plan ended June 30, 1996, Exhibit 10.43
10.44 The Samuel Goldwyn Company Stock Awards Plan, as Registration Statement on Form S-8 (Registration
amended No. 333-6453), Exhibit 10.44
10.45 Credit Agreement, dated November 26, 1996 Annual Report on Form 10-K for the year ended
between Snapper, Inc. and AmSouth Bank of December 31, 1996, Exhibit 10.45
Alabama
10.46 Amendment No. 1 to License Agreement dated June Annual Report on Form 10-K for the year ended
13, 1996 between Metromedia Company and December 31, 1996, Exhibit 10.46
Metromedia International Group, Inc.
10.47 Amendment No. 1 to Management Agreement dated as Annual Report on Form 10-K for the year ended
of January 1, 1997 between Metromedia Company December 31, 1996, Exhibit 10.47
and Metromedia International Group, Inc.
10.48 Amended and Restated Agreement and Plan of Annual Report on Form 10-K for the year ended
Merger, dated as of May 17, 1996 between December 31, 1996, Exhibit 10.48
Metromedia International Group, Inc., MPCA
Merger Corp. and Bradley Krevoy and Steven
Stabler and Motion Picture Corporation of
America
11 Statement of computation of earnings per share. Annual Report on Form 10-K for the year ended
December 31, 1996, Exhibit 11
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
EXHIBITS INCORPORATED HEREIN BY REFERENCE
------------------------------------------------
DESIGNATION OF DOCUMENT WITH WHICH EXHIBIT
EXHIBIT IN THIS WAS PREVIOUSLY FILED WITH
FORM 10-K DESCRIPTION OF EXHIBITS COMMISSION
- --------------- ------------------------------------------------ ------------------------------------------------
<C> <S> <C>
16 Letter from Ernst & Young to the Securities and Current Report on Form 8-K dated November 1,
Exchange Commission. 1995
21 List of subsidiaries of Metromedia International Annual Report on Form 10-K for the year ended
Group, Inc. December 31, 1996, Exhibit 21
23.1 Consent of KPMG Peat Marwick LLP regarding Annual Report on Form 10-K for the year ended
Metromedia International Group, Inc. December 31, 1996, Exhibit 23.1
27 Financial Data Schedule Annual Report on Form 10-K for the year ended
December 31, 1996, Exhibit 27
</TABLE>
- ------------------------
* Filed herewith
<PAGE>
METROMEDIA INTERNATIONAL GROUP, INC.
SCHEDULE I--CONDENSED FINANCIAL INFORMATION OF REGISTRANT
STATEMENTS OF OPERATIONS
YEAR ENDED DECEMBER 31, 1996
AND THE PERIOD ENDED DECEMBER 31, 1995
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
1996 1995
----------- -----------
<S> <C> <C>
Revenues................................................................................ $ -- $ --
Cost and Expenses:
Selling, general and administrative................................................... 9,355 1,109
Depreciation and amortization......................................................... 18 --
----------- -----------
Operating loss.......................................................................... (9,373) (1,109)
Interest expense, net................................................................... 13,313 2,208
Equity in losses of subsidiaries........................................................ (71,747) (83,707)
----------- -----------
Loss from continuing operations before discontinued operations and extraordinary item... (94,433) (87,024)
Discontinued operations:
Loss on disposal of assets held for sale.............................................. (16,305) (293,570)
Extraordinary item:
Early extinguishment of debt.......................................................... (4,505) (32,382)
----------- -----------
Net loss................................................................................ $ (115,243) $ (412,976)
----------- -----------
----------- -----------
Primary loss per common share:
Continuing operations................................................................. $ (1.74) $ (3.54)
----------- -----------
----------- -----------
Discontinued operations............................................................... $ (0.30) $ (11.97)
----------- -----------
----------- -----------
Extraordinary item.................................................................... $ (0.08) $ (1.32)
----------- -----------
----------- -----------
Net loss.............................................................................. $ (2.12) $ (16.83)
----------- -----------
----------- -----------
</TABLE>
The accompanying notes are an integral part of the condensed financial
information.
See notes to Condensed Financial Information on page S-4.
S-1
<PAGE>
METROMEDIA INTERNATIONAL GROUP, INC.
SCHEDULE I--CONDENSED FINANCIAL INFORMATION OF REGISTRANT--CONTINUED
BALANCE SHEETS
DECEMBER 31, 1996 AND 1995
(IN THOUSANDS)
<TABLE>
<CAPTION>
1996 1995
---------- ----------
<S> <C> <C>
Current Assets:
Cash and cash equivalents............................................................... $ 82,663 $ 16,482
Short-term investments.................................................................. -- 5,366
Other assets............................................................................ 2,765 3,010
---------- ----------
Total current assets.................................................................... 85,428 24,858
Investment in RDM Sports Group, Inc....................................................... 31,150 47,455
Investment in Snapper, Inc................................................................ -- 79,200
Investment in subsidiaries................................................................ 114,442 80,189
Intercompany accounts..................................................................... 188,065 86,102
Other assets.............................................................................. 2,542 4,525
---------- ----------
Total assets............................................................................ $ 421,627 $ 322,329
---------- ----------
---------- ----------
Current Liabilities:
Accounts payable........................................................................ $ 2,453 $ 943
Accrued expenses........................................................................ 57,581 66,750
Current portion of long term debt....................................................... 17,103 32,682
---------- ----------
Total current liabilities............................................................... 77,137 100,375
Long term debt............................................................................ 124,418 137,734
Other long term liabilities............................................................... 390 382
---------- ----------
Total liabilities....................................................................... 201,945 238,491
---------- ----------
Stockholders' equity
Common stock............................................................................ 66,153 42,614
Paid-in surplus......................................................................... 959,558 728,747
Other................................................................................... (2,680) 583
Accumulated deficit..................................................................... (803,349) (688,106)
---------- ----------
Total stockholders' equity.............................................................. 219,682 83,838
---------- ----------
Total liabilities and stockholders' equity.............................................. $ 421,627 $ 322,329
---------- ----------
---------- ----------
</TABLE>
The accompanying notes are an integral part of the condensed financial
information.
See Notes to Condensed Financial Information on page S-4
S-2
<PAGE>
METROMEDIA INTERNATIONAL GROUP, INC.
SCHEDULE I--CONDENSED FINANCIAL INFORMATION OF REGISTRANT--CONTINUED
STATEMENTS OF CASH FLOWS
YEAR ENDED DECEMBER 31, 1996
AND THE PERIOD ENDED DECEMBER 31, 1995
(IN THOUSANDS)
<TABLE>
<CAPTION>
1996 1995
----------- -----------
<S> <C> <C>
Net loss................................................................................ $ (115,243) $ (412,976)
Adjustments to reconcile net loss to net cash used in operating activities:
Loss on discontinued operations....................................................... 16,305 293,570
Equity in losses of subsidiaries...................................................... 76,252 116,089
Amortization of debt discounts and costs.............................................. 2,607 434
Change in cumulative translation adjustment of subsidiaries........................... (618) 399
Change in assets and liabilities:
(Increase) decrease in other current assets........................................... 245 (5,567)
Decrease in other assets.............................................................. 1,983 5,035
Increase (decrease) in accounts payable, accrued expenses and other liabilities....... (7,651) 1,769
----------- -----------
Cash used in operating activities................................................... (26,120) (1,247)
----------- -----------
Investing activities:
Proceeds from notes receivable........................................................ -- 45,320
Proceeds from sale of short-term investments.......................................... 5,366 --
(Investment in) distribution from subsidiaries........................................ 5,400 (4,230)
Cash acquired, net in merger.......................................................... -- 66,702
Due from subsidiary................................................................... (73,659) (72,877)
----------- -----------
Cash provided by (used in) investing activities..................................... (62,893) 34,915
----------- -----------
Financing activities:
Proceeds from (payment of) revolving term loan........................................ (28,754) 28,754
Payments on notes and subordinated debt............................................... (7,628) (48,222)
Proceeds from issuance of stock....................................................... 191,576 2,282
----------- -----------
Cash provided by (used in) financing activities..................................... 155,194 (17,186)
----------- -----------
Net increase in cash and cash equivalents............................................... 66,181 16,482
Cash and cash equivalents at beginning of year.......................................... 16,482 --
----------- -----------
Cash and cash equivalents at end of year................................................ $ 82,663 $ 16,482
----------- -----------
----------- -----------
</TABLE>
The accompanying notes are an integral part of the condensed financial
information.
See Notes to Condensed Financial Information on page S-4
S-3
<PAGE>
METROMEDIA INTERNATIONAL GROUP, INC.
SCHEDULE I--CONDENSED FINANCIAL INFORMATION OF REGISTRANT
NOTES TO CONDENSED FINANCIAL INFORMATION
DECEMBER 31, 1996 AND 1995
(A) Prior to the November 1 Merger discussed in note 2 to the consolidated
financial statements, there was no parent company. The accompanying parent
company financial statements reflect only the operations of MMG for the year
ended December 31, 1996 and from November 1, 1995 to December 31, 1995 and
the equity in losses of subsidiaries for the years ended December 31, 1996
and 1995. The calendar 1995, prior to the November 1 Merger, and fiscal 1995
amounts shown in the historical consolidated financial statements represent
the combined financial statements of Orion and MITI prior to the November 1
Merger and formation of MMG.
(B) Principal repayments of the Registrant's borrowings under debt agreements
and other debt outstanding at December 31, 1996 are expected to be required
no earlier than as follows (in thousands):
<TABLE>
<S> <C>
1997........................................................ 17,065
1998........................................................ 60,336
1999........................................................ 4,429
2000........................................................ --
Thereafter.................................................. 75,000
</TABLE>
For additional information regarding the Registrant's borrowings under debt
agreements and other debt, see note 9 to the consolidated financial
statements.
S-4
<PAGE>
METROMEDIA INTERNATIONAL GROUP, INC.
SCHEDULE II--VALUATION AND QUALIFYING ACCOUNTS
ALLOWANCES FOR DOUBTFUL ACCOUNTS, ETC. (DEDUCTED FROM CURRENT RECEIVABLES)
(IN THOUSANDS)
<TABLE>
<CAPTION>
BALANCE AT CHARGED BALANCE AT
BEGINNING TO COSTS OTHER DEDUCTIONS/ END
OF PERIOD AND EXPENSES CHARGES WRITE-OFFS OF PERIOD
----------- ------------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Year ended December 31, 1996........................ $ 11,913 $ 1,378 $ -- $ -- $ 13,291
----------- ------ ----- ----------- -----------
----------- ------ ----- ----------- -----------
Year ended December 31, 1995........................ $ 14,223 $ 90 $ -- $ (2,400) $ 11,913
----------- ------ ----- ----------- -----------
----------- ------ ----- ----------- -----------
Year ended February 28, 1995........................ $ 14,800 $ 2,064 $ 159 $ (2,800) $ 14,223
----------- ------ ----- ----------- -----------
----------- ------ ----- ----------- -----------
</TABLE>
S-5
<PAGE>
EXHIBIT 2
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM 10-Q
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934 FOR THE PERIOD ENDED MARCH 31, 1997
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934 FOR THE TRANSITION PERIOD FROM TO
COMMISSION FILE NUMBER 1-5706
------------------------
METROMEDIA INTERNATIONAL
GROUP, INC.
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C>
DELAWARE 58-0971455
(State or other jurisdiction (I.R.S. Employer
of Identification
incorporation or organization) Number)
</TABLE>
ONE MEADOWLANDS PLAZA, EAST RUTHERFORD, NJ 07073-2137
(Address and zip code of principal executive offices)
(201) 531-8000
(Registrant's telephone number, including area code)
------------------------
INDICATE BY CHECK MARK WHETHER THE REGISTRANT (1) HAS FILED ALL REPORTS REQUIRED
TO BE FILED BY SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 DURING
THE PRECEDING 12 MONTHS (OR FOR SUCH SHORTER PERIOD THAT THE REGISTRANT WAS
REQUIRED TO FILE SUCH REPORTS), AND (2) HAS BEEN SUBJECT TO SUCH FILING
REQUIREMENTS FOR THE PAST 90 DAYS. YES /X/ NO / /
THE NUMBER OF SHARES OF COMMON STOCK OUTSTANDING AS OF MAY 7, 1997 WAS
66,158,525.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
PART I--FINANCIAL INFORMATION
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
Item 1. Financial Statements
Consolidated Condensed Statements of Operations.................................................... 2
Consolidated Condensed Balance Sheets.............................................................. 3
Consolidated Condensed Statements of Cash Flows.................................................... 4
Consolidated Condensed Statements of Stockholders' Equity.......................................... 5
Notes to Consolidated Condensed Financial Statements............................................... 6
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations.................................................................................... 19
PART II--OTHER INFORMATION
Item 1. Legal Proceedings.................................................................................. 34
Item 6. Exhibits and Reports on Form 8-K................................................................... 34
Signatures................................................................................................. 35
</TABLE>
1
<PAGE>
METROMEDIA INTERNATIONAL GROUP, INC.
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
----------------------
<S> <C> <C>
MARCH 31, MARCH 31,
1997 1996
---------- ----------
Revenues.................................................................................. $ 103,418 $ 30,805
Cost and expenses:
Cost of sales and rentals and operating expenses........................................ 75,284 25,102
Selling, general and administrative..................................................... 35,335 14,117
Depreciation and amortization........................................................... 6,411 1,723
---------- ----------
Operating loss.......................................................................... (13,612) (10,137)
Interest expense, including amortization of debt discount of $1,185 and $1,259 for the
three months ended March 31, 1997, and March 31, 1996,
respectively............................................................................ 10,736 8,279
Interest income........................................................................... 2,746 1,245
---------- ----------
Interest expense, net................................................................... 7,990 7,034
Loss before provision for income taxes, equity in losses of Joint Ventures and minority
interest.............................................................................. (21,602) (17,171)
Provision for income taxes................................................................ (298) (200)
Equity in losses of Joint Ventures........................................................ (1,598) (1,783)
Minority interest, including $890 of Metromedia Asia Corporation for the three months
ended March 31, 1997.................................................................... 1,240 13
---------- ----------
Net loss.................................................................................. $ (22,258) $ (19,141)
---------- ----------
---------- ----------
Net loss per common share................................................................. $ (0.34) $ (0.45)
---------- ----------
---------- ----------
</TABLE>
See accompanying notes to consolidated condensed financial statements
2
<PAGE>
METROMEDIA INTERNATIONAL GROUP, INC.
CONSOLIDATED CONDENSED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1997 1996
--------------- -------------
<S> <C> <C>
(UNAUDITED)
ASSETS:
Current assets:
Cash and cash equivalents........................................................ $ 35,142 $ 91,130
Accounts receivable:
Film, net...................................................................... 24,864 30,447
Snapper, net................................................................... 48,191 36,843
Other, net..................................................................... 7,621 3,444
Film inventories................................................................. 67,045 66,156
Inventories...................................................................... 59,457 54,404
Other assets..................................................................... 8,639 8,123
--------------- -------------
Total current assets......................................................... 250,959 290,547
Investments in and advances to Joint Ventures...................................... 96,294 65,447
Asset held for sale--RDM Sports Group, Inc. ....................................... 31,150 31,150
Property, plant and equipment, net of accumulated depreciation..................... 73,865 73,928
Film inventories................................................................... 194,029 186,143
Long-term film accounts receivable................................................. 15,752 20,214
Intangible assets, less accumulated amortization................................... 323,081 258,783
Other assets....................................................................... 13,648 18,528
--------------- -------------
Total assets................................................................. $ 998,778 $ 944,740
--------------- -------------
--------------- -------------
LIABILITIES AND STOCKHOLDERS' EQUITY:
Current liabilities:
Accounts payable................................................................. $ 31,297 $ 25,968
Accrued expenses................................................................. 109,874 108,082
Participations and residuals..................................................... 44,651 36,529
Current portion of long-term debt................................................ 41,327 55,638
Deferred revenues................................................................ 17,587 16,724
--------------- -------------
Total current liabilities.................................................... 244,736 242,941
Long-term debt..................................................................... 421,202 403,421
Participations and residuals....................................................... 11,394 26,387
Deferred revenues.................................................................. 48,008 48,188
Other long-term liabilities........................................................ 3,482 3,590
--------------- -------------
Total liabilities............................................................ 728,822 724,527
--------------- -------------
Minority interest.................................................................. 41,142 531
Commitments and contingencies
Stockholders' equity:
Preferred Stock, authorized 70,000,000 shares -- --
Common Stock, $1.00 par value, authorized 400,000,000 shares, issued and
outstanding 66,158,525 and 66,153,439 shares at March 31, 1997 and December 31,
1996, respectively............................................................. 66,159 66,153
Paid-in surplus.................................................................. 994,665 959,558
Other............................................................................ (6,403) (2,680)
Accumulated deficit.............................................................. (825,607) (803,349)
--------------- -------------
Total stockholders' equity....................................................... 228,814 219,682
--------------- -------------
Total liabilities and stockholders' equity................................... $ 998,778 $ 944,740
--------------- -------------
--------------- -------------
</TABLE>
3
<PAGE>
METROMEDIA INTERNATIONAL GROUP, INC.
CONSOLIDATED CONDENSED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
See accompanying notes to consolidated condensed financial statements.
4
<PAGE>
METROMEDIA INTERNATIONAL GROUP, INC.
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
------------------------
<S> <C> <C>
MARCH 31, MARCH 31,
1997 1996
----------- -----------
Operating activities:
Net loss.............................................................................. $ (22,258) $ (19,141)
Adjustments to reconcile net loss to net cash used in operating activities:
Equity in losses of Joint Ventures.................................................. 1,598 1,783
Amortization of film costs.......................................................... 14,400 14,953
Amortization of debt discounts and bank guarantee 1,185 1,259
Depreciation and amortization....................................................... 6,411 1,723
Minority interest................................................................... (1,083) --
Other............................................................................... 980 --
Changes in assets and liabilities, net of effect of acquisitions:
(Increase) decrease in accounts receivable.......................................... (5,480) 3,688
Increase in inventories............................................................. (5,053) --
Increase (decrease) in accounts payable and accrued expenses........................ 5,395 (889)
Accrual of participations and residuals............................................. 2,588 4,316
Payments of participations and residuals............................................ (9,459) (4,677)
Increase (decrease) in deferred revenues............................................ 683 (9,570)
Other operating activities, net..................................................... (1,073) 192
----------- -----------
Cash used in operations......................................................... (11,166) (6,363)
----------- -----------
Investing activities:
Investments in and advances to Joint Ventures....................................... (15,343) (2,542)
Distributions from Joint Ventures................................................... 1,848 --
Purchase of short-term investments.................................................. -- (500)
Proceeds from sale of short-term investments........................................ -- 1,342
Purchase of additional equity in subsidiaries....................................... (2,445) --
Purchase of AAT..................................................................... (4,750) --
Investment in film inventories...................................................... (23,175) (1,578)
Additions to property, plant and equipment.......................................... (3,147) (3,616)
Other investing activities, net..................................................... -- 2,332
----------- -----------
Cash used in investing activities............................................... (47,012) (4,562)
----------- -----------
Financing activities:
Proceeds from issuance of long-term debt............................................ 29,508 11,800
Proceeds from issuance of stock related to incentive plans.......................... 48 238
Payments on notes and subordinated debt............................................. (27,366) (12,288)
Payment of deferred financing costs................................................. -- (3,200)
Other financing activities, net..................................................... -- 142
----------- -----------
Cash provided by (used in) financing activities................................. 2,190 (3,308)
----------- -----------
Net decrease in cash and cash equivalents............................................... (55,988) (14,233)
Cash and cash equivalents at beginning of period........................................ 91,130 26,889
----------- -----------
Cash and cash equivalents at end of period.............................................. $ 35,142 $ 12,656
----------- -----------
----------- -----------
</TABLE>
See accompanying notes to consolidated condensed financial statements.
4
<PAGE>
METROMEDIA INTERNATIONAL GROUP, INC.
CONSOLIDATED CONDENSED STATEMENTS OF STOCKHOLDERS' EQUITY
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
COMMON STOCK
-----------------------
<S> <C> <C> <C> <C> <C> <C>
NUMBER OF PAID-IN ACCUMULATED
SHARES AMOUNT SURPLUS OTHER DEFICIT TOTAL
------------ --------- ---------- --------- ------------ ----------
Balances, December 31, 1996..................... 66,153,439 $ 66,153 $ 959,558 $ (2,680) $ (803,349) $ 219,682
Issuance of stock related to incentive
plans......................................... 5,086 6 42 -- -- 48
Foreign currency translation adjustment......... -- -- -- (3,987) -- (3,987)
Amortization of restricted stock................ -- -- -- 264 -- 264
Increase in equity resulting from issuance of
stock by subsidiary........................... -- -- 35,065 -- -- 35,065
Net loss........................................ -- -- -- -- (22,258) (22,258)
------------ --------- ---------- --------- ------------ ----------
Balances, March 31, 1997........................ 66,158,525 $ 66,159 $ 994,665 $ (6,403) $ (825,607) $ 228,814
------------ --------- ---------- --------- ------------ ----------
------------ --------- ---------- --------- ------------ ----------
</TABLE>
See accompanying notes to consolidated condensed financial statements.
5
<PAGE>
METROMEDIA INTERNATIONAL GROUP, INC.
NOTES TO CONSOLIDATED CONDENSED
FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
The accompanying interim consolidated condensed 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"), and as of November 1, 1996, Snapper,
Inc. ("Snapper"). All significant intercompany transactions and accounts have
been eliminated.
Investments in other companies, including the Communications Group's Joint
Ventures ("Joint Ventures") which are not majority owned, or in which the
Company does not have control but 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." The
Company accounts for its equity in earnings (losses) of the Joint Ventures on a
three month lag.
Certain reclassifications have been made to the prior year financial statements
to conform to the March 31, 1997 presentation. The total allowance for doubtful
accounts at March 31, 1997 and December 31, 1996 was $14.6 million and $13.3
million, respectively.
The accompanying interim consolidated condensed financial statements have been
prepared without audit pursuant to the rules and regulations of the Securities
and Exchange Commission. Certain information and footnote disclosures normally
included in financial statements prepared in accordance with generally accepted
accounting principles have been condensed or omitted pursuant to such rules and
regulations, although the Company believes that the disclosures made are
adequate to make the information presented not misleading. These financial
statements should be read in conjunction with the consolidated financial
statements and related footnotes included in the Company's latest Annual Report
on Form 10-K (the "1996 Form 10-K"). In the opinion of management, all
adjustments, consisting only of normal recurring adjustments, necessary to
present fairly the financial position of the Company as of March 31, 1997, the
results of its operations and its cash flows for the three-month periods ended
March 31, 1997 and 1996, have been included. The results of operations for the
interim period are not necessarily indicative of the results which may be
realized for the full year.
2. SALE OF ENTERTAINMENT COMPANIES
On May 2, 1997, MMG, Orion and P&F Acquisition Corp., a Delaware Corporation
("P&F"), executed a Stock Purchase Agreement (the "Stock Purchase Agreement")
for the sale (the "Proposed Transaction") of certain of MMG's entertainment
assets (including Orion and its direct and indirect subsidiaries), other than
Landmark Theatre Corporation and its subsidiaries ("Landmark") to P&F (Orion,
together with such subsidiaries, excluding Landmark, are collectively referred
to herein as the "Entertainment Companies").
Pursuant to the terms of the Stock Purchase Agreement, MMG agreed to sell the
Entertainment Companies to P&F for an aggregate purchase price of $573.0
million, less the sum of (i) the greater of (A) all amounts outstanding under an
existing credit facility between Orion and Chase Manhattan Bank (the "Orion
Credit Facility"), net of cash on hand of the Entertainment Companies on
December 31, 1996 or (B) all amounts outstanding under the Orion Credit
Facility, net of cash on hand of the Entertainment Companies on the Closing
Date; and (ii) unpaid interest under the Orion Credit Facility accrued to, but
not including, the Closing Date; and (iii) the greater of (A) $13.0 million or
(B) all other debt of the Entertainment Companies (other than the Orion Credit
Facility) outstanding on the Closing Date; and (iv) unpaid interest on such
other debt (other than the Orion Credit Facility) accrued to, but not including,
6
<PAGE>
METROMEDIA INTERNATIONAL GROUP, INC.
NOTES TO CONSOLIDATED CONDENSED
FINANCIAL STATEMENTS (CONTINUED)
2. SALE OF ENTERTAINMENT COMPANIES (CONTINUED)
the Closing Date ( the "Purchase Price"). The assets to be sold to P&F include
MMG's film and television library, consisting of approximately 2,200 titles, the
production and distribution activities of the Entertainment Companies, which
include the operations of Orion, Goldwyn Entertainment Company and Motion
Picture Corporation of America, 12 substantially complete films and 5
direct-to-video features, and substantially all of the liabilities of these
entities. MMG will retain Landmark, which, as of December 31, 1996, has a total
of 138 screens at 50 locations throughout the United States.
Consummation of the Proposed Transaction is not subject to any financing
condition. However, because the Proposed Transaction may require stockholder
approval, the Company has decided to submit to the stockholders the Proposed
Transaction and Stock Purchase Agreement for approval. Pursuant to the terms of
a Stockholders Agreement, dated as of April 27, 1997, among John W. Kluge,
Stuart Subotnick, Met Telcell, Inc., a Delaware corporation, Metromedia Company,
a Delaware general partnership (collectively the "Metromedia Holders"), and P&F,
the Metromedia Holders have agreed (i) to vote their shares of common stock of
MMG (the "Common Stock"), in favor of the Proposed Transaction and approve the
Stock Purchase Agreement and (ii) not to transfer their shares of Common Stock
until the later of September 30, 1997 or 90 days after the date of the
stockholders meeting held to approve and adopt the Stock Purchase Agreement (as
long as such meeting is held by September 30, 1997). As of May 2, 1997, the
Metromedia Holders owned approximately 25% of the outstanding Common Stock.
Consummation of the Proposed Transaction is subject to various other conditions,
including, but not limited to (i) the release of MMG and its affiliates
(including certain of the Metromedia Holders) of all obligations under the Orion
Credit Facility; (ii) stockholder approval of the Stock Purchase Agreement;
(iii) the release of MMG of all obligations as guarantor under Orion's existing
lease; and (iv) the expiration or early termination of the waiting periods
prescribed under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as
amended.
At a meeting of the Board of Directors of MMG held on May 2, 1997, the Board of
Directors unanimously approved the terms of the Proposed Transaction as being in
the best interests of MMG and its stockholders, and unanimously recommended that
the stockholders of MMG vote to approve the Proposed Transaction.
Simultaneously with the closing of the Proposed Transaction, MMG may use a
portion of the net Purchase Price to repay MMG's outstanding subordinated
debentures.
As a result of the sale of the Entertainment Companies, MMG intends to
significantly alter its strategic focus. MMG will continue to operate its
remaining businesses.
The following unaudited pro forma information illustrates the effect of the sale
of the Entertainment Companies and the repayment of MMG's outstanding
subordinated debentures on revenues, loss from continuing operations (which does
not include the Entertainment Companies) and loss from continuing operations per
share for the three months ended March 31, 1997 and 1996, and assumes that the
sale of the Entertainment Companies, the repayment of MMG's outstanding
subordinated debentures and the acquisition of Asian American Telecommunications
Corporation occurred at the beginning of each period and that Snapper and
Landmark were included in the consolidated results of operations at the
beginning of 1996 (in thousands, except per share amounts).
7
<PAGE>
METROMEDIA INTERNATIONAL GROUP, INC.
NOTES TO CONSOLIDATED CONDENSED
FINANCIAL STATEMENTS (CONTINUED)
2. SALE OF ENTERTAINMENT COMPANIES (CONTINUED)
<TABLE>
<CAPTION>
1997 1996
----------- -----------
<S> <C> <C>
(UNAUDITED) (UNAUDITED)
Revenues........................................................... $ 75,998 $ 86,234
----------- -----------
----------- -----------
Loss from continuing operations.................................... (9,786) (9,683)
----------- -----------
----------- -----------
Loss from continuing operations per share.......................... $ (0.15) $ (0.20)
----------- -----------
----------- -----------
</TABLE>
3. FUTURE FINANCING NEEDS
MMG is a holding company, and accordingly, does not generate cash flows. The
Entertainment Group and Snapper are restricted under covenants contained in
their respective credit agreements from making dividend payments or advances to
MMG. The Communications Group is dependent on MMG for significant capital
infusions to fund its operations, its commitments to make capital contributions
and loans to its Joint Ventures and any acquisitions. Such funding requirements
are based on the anticipated funding needs of its Joint Ventures and certain
acquisitions committed to by the Company. Future capital requirements of the
Communications Group, including future acquisitions, will depend on available
funding from the Company and on the ability of the Communications Group's Joint
Ventures to generate positive cash flows.
In the short term, MMG intends to satisfy its current obligations and
commitments with available cash on hand of $27.5 million and the proceeds from
the sale of RDM Sports Group, Inc. (see note 5). Assuming that the Proposed
Transaction is consummated, the Company's remaining strategic business will be
the business conducted by the Communications Group. The Communications Group is
engaged in businesses that require the investment of significant amounts of
capital in order to construct and develop operational systems and market
services. In connection with the consummation of the Proposed Transaction, the
Company anticipates that it will receive approximately $296.0 million of net
cash proceeds (assuming the Entertainment Companies had $277.0 million of
outstanding debt as was outstanding at March 31, 1997). However, MMG may use
approximately $140.0 million of such net proceeds to repay some or all of its
outstanding subordinated debentures. As a result, although MMG will have no
significant long-term debt, MMG may require additional financing in order to
satisfy the Communications Group's on-going capital requirements and to achieve
the Communications Group's long-term business strategies. Such additional
capital may be provided through the public or private sale of debt or equity
securities. On April 4, 1997, MMG filed a Registration Statement with the SEC to
register $125.0 million of its convertible preferred stock. No determination has
been made by MMG as to whether it will proceed with this financing. If MMG
elects to proceed, no assurance can be given that the Company will be able to
consummate this financing or that any additional financing will be available to
MMG on acceptable terms, if at all. If adequate additional funds are not
available, 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.
8
<PAGE>
METROMEDIA INTERNATIONAL GROUP, INC.
NOTES TO CONSOLIDATED CONDENSED
FINANCIAL STATEMENTS (CONTINUED)
4. 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 period. 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. 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 that is lower than
primary earnings per share.
5. ASSETS HELD FOR SALE
RDM SPORTS GROUP, INC.
As of March 31, 1997, the Company owned approximately 39% of the issued and
outstanding shares of Common Stock of RDM Sports Group, Inc. (the "RDM Common
Stock") based on approximately 49,507,000 shares of RDM Common Stock outstanding
at November 8, 1996.
The Company has deemed its investment in RDM to be a non-strategic asset and it
intends to dispose of its investment in RDM during 1997. Since the Company's
investment in RDM is classified as a discontinued operation, the Company
excludes its equity in earnings and losses of RDM from its results of
operations. The carrying value of the Company's investment in RDM at March 31,
1997 and December 31, 1996, was approximately $31.2 million based on the
anticipated proceeds from its sale. However, no assurances can ge given that the
Company will be able to dispose of RDM in a timely fashion and/or on favorable
terms.
Summarized unaudited condensed statements of operations information for the year
ended December 31, 1996 and balance sheet information as of September 30, 1996
for RDM is shown below (in thousands):
<TABLE>
<S> <C>
Net sales......................................................... $ 366,683
Gross profit...................................................... 1,282
Interest expense.................................................. 22,652
Gain on sale of subsidiaries...................................... 116,324
Net income........................................................ 775
Current assets.................................................... $ 209,272
Non-current assets................................................ 82,657
Current liabilities............................................... 126,144
Non-current liabilities........................................... 110,730
Total shareholders' equity........................................ 55,055
</TABLE>
9
<PAGE>
METROMEDIA INTERNATIONAL GROUP, INC.
NOTES TO CONSOLIDATED CONDENSED
FINANCIAL STATEMENTS (CONTINUED)
5. ASSETS HELD FOR SALE (CONTINUED)
SNAPPER, INC.
In connection with the November 1 Merger, Snapper was classified 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. As of November 1, 1996, the Company has consolidated Snapper
into its results of operations.
The results of Snapper for the period January 1, 1996 through March 31, 1996,
which were excluded from the accompanying consolidated statement of operations,
are as follows (in thousands):
<TABLE>
<S> <C>
Net sales.......................................................... $ 62,724
Operating expenses................................................. 60,100
---------
Operating profit................................................... 2,624
Interest expense................................................... (2,152)
Other income....................................................... 9
---------
Income before taxes................................................ $ 481
---------
---------
</TABLE>
6. 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 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, and significantly
restricts the amount of dividends that may be paid to the Joint Venture
partners. The Communications Group has entered into credit agreements with its
Joint Ventures to provide up to $75.6 million in funding, of which $15.4 million
remains available at March 31, 1997. Under its credit agreements the
Communications Group's funding commitments are contingent on its approval of the
Joint Ventures' business plans.
10
<PAGE>
METROMEDIA INTERNATIONAL GROUP, INC.
NOTES TO CONSOLIDATED CONDENSED
FINANCIAL STATEMENTS (CONTINUED)
6. INVESTMENTS IN AND ADVANCES TO JOINT VENTURES (CONTINUED)
At March 31, 1997 and December 31, 1996, the Communications Group's cumulative
investments in the Joint Ventures, at cost, net of adjustments for its equity in
earnings or losses since inception, were as follows (in thousands):
INVESTMENTS IN AND ADVANCES TO JOINT VENTURES
<TABLE>
<CAPTION>
YEAR DATE
MARCH 31, DECEMBER 31, OWNERSHIP VENTURE OPERATIONS
1997 1996 % FORMED COMMENCED
----------- ------------- --------------- ----------- ----------------
<S> <C> <C> <C> <C> <C>
NAME
- -----------------------------------------------
WIRELESS CABLE TV
Kosmos TV, Moscow, Russia...................... $ 685 $ 759 50% 1991 1992
Baltcom TV, Riga Latvia........................ 8,878 8,513 50% 1991 1992
Ayety TV, Tbilisi, Georgia..................... 4,910 4,691 49% 1991 1993
Kamalak, Tashkent,.............................
Uzbekistan(1)................................ 5,686 6,031 50% 1992 1993
Sun TV, Kishinev, Moldova...................... 4,232 3,590 50% 1993 1994
Minsk Cable, Minsk, Belarus.................... 1,281 1,980 50% 1993 1996
Alma TV, Almaty, Kazakhstan(1)................. 4,134 2,840 50% 1994 1995
----------- -------------
29,806 28,404
----------- -------------
PAGING
Baltcom Paging, Tallinn, Estonia............... 3,419 3,154 39% 1992 1993
Baltcom Plus, Riga, Latvia..................... 1,668 1,711 50% 1994 1995
Tbilisi Paging, Tbilisi, Georgia............... 909 829 45% 1993 1994
Raduga Paging, Nizhny..........................
Novgorod, Russia............................. 404 450 45% 1993 1994
St. Petersburg Paging, St. Petersburg,
Russia....................................... 976 963 40% 1994 1995
----------- -------------
7,376 7,107
----------- -------------
RADIO BROADCASTING
Eldoradio (formerly Radio Katusha), St.
Petersburg, Russia........................... 580 435 50% 1993 1995
Radio Socci, Socci, Russia..................... 248 361 51% 1995 1995
----------- -------------
828 796
----------- -------------
TELEPHONY
Telecom Georgia, Tbilisi, Georgia.............. 4,020 2,704 30% 1994 1994
Baltcom GSM.................................... 10,979 7,874 24% 1996 1997
Trunked mobile radio ventures.................. 2,399 2,049
----------- -------------
17,398 12,627
----------- -------------
PRE-OPERATIONAL
St. Petersburg Cable, St. Petersburg, Russia... 787 554 45% 1996 Pre-operational
Kazpage, Kazakhstan............................ 350 350 51% 1996 Pre-operational
Magticom, Tbilisi, Georgia..................... 2,450 2,450 34% 1996 Pre-operational
Batumi Paging, Batumi, Georgia................. 263 256 35% 1996 Pre-operational
PRC telephony related ventures and equipment... 8,719 9,712 Pre-operational
Tai Li-Feng Telecom. Co., Ltd., PRC............ 11,040 -- 52% Pre-operational
Ningbo Ya Mei Communications, PRC.............. 9,508 -- 39% Pre-operational
Other.......................................... 7,769 3,191
----------- -------------
40,886 16,513
----------- -------------
Total $ 96,294 $ 65,447
----------- -------------
----------- -------------
</TABLE>
- ------------------------
(1) includes Paging Operations
11
<PAGE>
METROMEDIA INTERNATIONAL GROUP, INC.
NOTES TO CONSOLIDATED CONDENSED
FINANCIAL STATEMENTS (CONTINUED)
6. INVESTMENTS IN AND ADVANCES TO JOINT VENTURES (CONTINUED)
The ability of the Communications Group and its Joint Ventures to establish
profitable operations is subject to among other things, significant political,
economic and social risks inherent in doing business in Eastern Europe, the
republics of the former Soviet Union, and the People's Republic of China
("PRC"). These include potential risks 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.
Summarized combined financial information of Joint Ventures accounted for on a
three-month lag under the equity method that have commenced operations are as
follows (in thousands):
COMBINED BALANCE SHEETS
<TABLE>
<CAPTION>
MARCH 31, 1997 DECEMBER 31, 1996
-------------- -----------------
<S> <C> <C>
ASSETS
Current assets................................................................ $ 21,130 $ 16,073
Investments in wireless systems and equipment................................. 43,337 38,447
Other assets.................................................................. 11,568 3,100
------- -------
Total Assets.................................................................. $ 76,035 $ 57,620
------- -------
------- -------
LIABILITIES AND JOINT VENTURES' EQUITY (DEFICIT)
Current liabilities........................................................... $ 16,762 $ 18,544
Amount payable under MITI credit facility..................................... 46,454 41,055
Other long-term liabilities................................................... 6,505 6,043
------- -------
69,721 65,642
Joint Ventures' Equity (Deficit).............................................. 6,314 (8,022)
------- -------
Total Liabilities and Joint Ventures' Capital................................. $ 76,035 $ 57,620
------- -------
------- -------
</TABLE>
12
<PAGE>
METROMEDIA INTERNATIONAL GROUP, INC.
NOTES TO CONSOLIDATED CONDENSED
FINANCIAL STATEMENTS (CONTINUED)
6. INVESTMENTS IN AND ADVANCES TO JOINT VENTURES (CONTINUED)
COMBINED STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
THREE MONTHS ENDED
------------------------
<S> <C> <C>
MARCH 31, MARCH 31,
1997 1996
----------- -----------
Revenue............................................................................... $ 14,310 $ 8,995
Expenses:
Cost of service..................................................................... 1,317 4,161
Selling, general and administrative................................................. 6,953 4,409
Depreciation and amortization....................................................... 2,653 1,322
----------- -----------
Total expenses........................................................................ 10,923 9,892
----------- -----------
Operating income (loss)............................................................... 3,387 (897)
Interest expense...................................................................... (1,135) (732)
Other expense......................................................................... (979) (10)
Foreign currency translation.......................................................... 346 846
----------- -----------
Net income (loss)..................................................................... $ 1,619 $ (793)
----------- -----------
----------- -----------
</TABLE>
Financial information for Joint Ventures which are not yet operational is not
included in the above summary. MITI's investment in and advances to those Joint
Ventures and for those entities whose venture agreements are not yet finalized
amounted to approximately $40.9 million and $6.3 million at March 31, 1997 and
1996, respectively.
13
<PAGE>
METROMEDIA INTERNATIONAL GROUP, INC.
NOTES TO CONSOLIDATED CONDENSED
FINANCIAL STATEMENTS (CONTINUED)
6. INVESTMENTS IN AND ADVANCES TO JOINT VENTURES (CONTINUED)
The following tables represent summary financial information for all operating
entities being grouped as indicated as of and for the three months ended March
31, 1997 and 1996 (in thousands, except subscribers):
<TABLE>
<CAPTION>
MARCH 31,
---------------------
<S> <C> <C> <C> <C> <C> <C>
WIRELESS RADIO 1997 1996
CABLE TV PAGING BROADCASTING TELEPHONY TOTAL TOTAL
---------- --------- ------------- ----------- ---------- ---------
CONSOLIDATED SUBSIDIARIES AND JOINT VENTURES
Revenues.................................... $ 493 $ 857 $ 3,274 -- $ 4,624(1) $ 2,954(1)
Depreciation and amortization............... 103 105 108 -- 316 160
Operating income (loss)..................... (271) (5) 1,152 -- 876(1) 512(1)
Assets...................................... 3,125 3,010 3,801 -- 9,936 5,586
Capital expenditures........................ 860 103 87 -- 1,050 420
UNCONSOLIDATED EQUITY JOINT VENTURES
Revenues.................................... $ 5,405 $ 1,560 $ 401 $ 6,944 $ 14,310 $ 8,995
Depreciation and amortization............... 2,122 134 16 381 2,653 1,322
Operating income (loss)..................... (1,090) (55) 66 4,466 3,387 (897)
Assets...................................... 33,315 6,046 757 35,917 76,035 47,356
Capital expenditures........................ 2,117 124 2 1,704 3,947 2,471
Net investment in Joint Ventures............ 29,806 7,376 828 17,398 55,408 30,802
Equity in income (losses) of unconsolidated
investees................................. (2,415) (294) 93 1,018 (1,598) (1,783)
COMBINED
Revenues.................................... $ 5,898 $ 2,417 $ 3,675 $ 6,944 $ 18,934(1) $ 11,949(1)
Depreciation and amortization............... 2,225 239 124 381 2,969 1,482
Operating income (loss)..................... (1,361) (60) 1,218 4,466 4,263(1) (385)(1)
Assets...................................... 36,440 9,056 4,558 35,917 85,971 52,942
Capital expenditures........................ 2,977 227 89 1,704 4,997 2,891
Subscribers................................. 101,016 51,942 n/a 8,711 161,669 65,315
</TABLE>
- ------------------------
(1) Does not reflect the Communications Group's headquarter's revenue and
selling, general and administrative expenses for the three months ended
March 31, 1997 and 1996, respectively.
The following table represents information about the Communications Group's
operations in different geographic locations:
<TABLE>
<CAPTION>
REPUBLICS OF
FORMER SOVIET
UNION AND
UNITED EASTERN OTHER
MARCH 31, 1997 STATES EUROPE PRC FOREIGN CONSOLIDATED
- ------------------------------------------------- ------------ ------------- --------- --------- ------------
<S> <C> <C> <C> <C> <C>
Revenues......................................... $ 405 $ 4,651 $ -- $ 119 $ 5,175
Assets........................................... 178,844 70,075 36,739 6,773 292,431
</TABLE>
14
<PAGE>
METROMEDIA INTERNATIONAL GROUP, INC.
NOTES TO CONSOLIDATED CONDENSED
FINANCIAL STATEMENTS (CONTINUED)
6. INVESTMENTS IN AND ADVANCES TO JOINT VENTURES (CONTINUED)
On March 18, 1996, Metromedia Asia Telephony Limited, ("MATL") a subsidiary of
the Communications Group's Metromedia Asia Limited (n/k/a Metromedia Asia
Corporation) ("MAC") entered into a Joint Venture agreement with Golden Cellular
Communications, Ltd., ("GCC") 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 has been contributed by MATL 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 for the joint venture to
obtain a business license. Although the capital verification process has not
been completed, MATL is continuing its efforts towards completion and 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
share of common stock 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 communication
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. The transaction
was accounted for as a purchase, with MAC as the acquiring entity.
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 Class A Common Stock, par value $.01 per share (the "MAC Class A Common
Stock") and warrants to purchase an additional 1,250,000 shares of MAC Class A
Common Stock, at an exercise price of $6.00 per share. Shares of MAC Class A
Common Stock are identical to shares of MAC Common Stock except that they are
entitled, when owned by the Communications Group, to three votes per share on
all matters voted upon by MAC's stockholders and to vote as a separate class to
elect six of the ten members to MAC's Board of Directors. The securities
received by the Communications Group are not registered under the Securities
Act, but have certain demand and piggyback registration rights as provided in
the stock purchase agreement. As a result of the transaction, the Communications
Group owns 56.52% of MAC's outstanding common stock with 79% voting rights.
The purchase price of the AAT transaction was determined to be $86.0 million.
The excess of the purchase price over the fair value of the net tangible assets
acquired was $69.0 million. This has been recorded as goodwill and is being
amortized on a straight-line basis over 25 years. The amortization of such
goodwill for the three months ended March 31, 1997 was approximately $300,000.
15
<PAGE>
METROMEDIA INTERNATIONAL GROUP, INC.
NOTES TO CONSOLIDATED CONDENSED
FINANCIAL STATEMENTS (CONTINUED)
6. INVESTMENTS IN AND ADVANCES TO JOINT VENTURES (CONTINUED)
The purchase price was allocated as follows (in thousands):
<TABLE>
<CAPTION>
<S> <C>
Current assets...................................................................... $ 46
Property, plant and equipment....................................................... 279
Investments in Joint Ventures....................................................... 18,950
Goodwill............................................................................ 68,999
Current liabilities................................................................. (2,226)
Other liabilities................................................................... (5)
-------------
Purchase price.................................................................. $ 86,043
-------------
-------------
</TABLE>
The difference between the Company's investment balance of $18.6 million in MAC
prior to the acquisition of AAT and 56.52% of the net equity of MAC subsequent
to the acquisition of AAT of $53.7 million was recorded as an increase to
paid-in surplus of $35.1 million in the consolidated condensed statement of
stockholders' equity.
In January 1997, the Communications Group's 99% owned Joint Venture, Romsat
Cable TV and Radio, S.A., acquired the cable television assets of Standard Ideal
Consulting, S.A., a wired cable television company with approximately 37,000
connected subscribers, for approximately $2.8 million.
7. 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 (in thousands):
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1997 1996
----------- ------------
<S> <C> <C>
Lawn and garden equipment:
Raw materials............................................................... $ 19,766 $ 18,733
Finished goods.............................................................. 39,733 34,822
----------- ------------
59,499 53,555
Less LIFO reserve........................................................... 654 --
----------- ------------
58,845 53,555
Telecommunications:
Pagers...................................................................... 612 849
----------- ------------
$ 59,457 $ 54,404
----------- ------------
----------- ------------
</TABLE>
16
<PAGE>
METROMEDIA INTERNATIONAL GROUP, INC.
NOTES TO CONSOLIDATED CONDENSED
FINANCIAL STATEMENTS (CONTINUED)
8. FILM INVENTORIES
The following is an analysis of film inventories (in thousands):
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1997 1996
---------- ------------
<S> <C> <C>
Current:
Theatrical and television product released, less amortization.......................... $ 60,137 $ 60,377
Completed, not released................................................................ 6,908 5,779
---------- ------------
67,045 66,156
---------- ------------
Non current:
Theatrical and television product released, less amortization.......................... 125,435 133,014
Completed, not released................................................................ 2,952 2,476
In process and other................................................................... 65,642 50,653
---------- ------------
194,029 186,143
---------- ------------
$ 261,074 $ 252,299
---------- ------------
---------- ------------
</TABLE>
The Entertainment Group has in prior years recorded substantial write-offs 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 March 31, 2000. As of March 31, 1997 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 three months ended March 31, 1997 interest costs of $775,000 were
capitalized to film inventories.
9. LONG-TERM DEBT
On April 30, 1997 Snapper closed a $10.0 million working capital facility with
AmSouth Bank of Alabama ("AmSouth") which amended Snapper's existing $55.0
million facility. The $10.0 million working capital facility (i) gives AmSouth a
PARI PASSU collateral interest in all of Snapper's assets (including rights
under the Make-Whole and Pledge Agreement made by Metromedia Company in favor of
AmSouth in connection with the Snapper Revolver), (ii) accrues interest on
borrowings at AmSouth's floating prime rate (same borrowing rate as the Snapper
Revolver), and (iii) becomes due and payable on October 1, 1997. As additional
consideration for AmSouth making this new facility available, Snapper provided
to AmSouth the joint and several guarantees of Messrs. Kluge and Subotnick,
Chairman of the Board of MMG and Vice Chairman, President and Chief Executive
Officer of MMG, respectively, on the $10.0 million working capital facility.
10. STOCK OPTION PLANS
On March 26, 1997 the Board of Directors approved the cancellation and
reissuance of all stock options previously granted pursuant to the 1996
Metromedia International Group, Inc. Incentive Stock Plan (the "MMG Plan") at an
exercise price of $9.3129, the fair market value of MMG common stock at such
date.
17
<PAGE>
METROMEDIA INTERNATIONAL GROUP, INC.
NOTES TO CONSOLIDATED CONDENSED
FINANCIAL STATEMENTS (CONTINUED)
10. STOCK OPTION PLANS (CONTINUED)
In addition, on March 26, 1997 the Board of Directors authorized the grant of
approximately 1,700,000 stock options at an exercise price of $9.3129 under the
MMG Plan.
On April 18, 1997, two officers of the Company were granted stock options, not
pursuant to any plan, to purchase 1,000,000 shares each of MMG common stock at a
purchase price of $7.4375 per share, the fair market value of MMG stock at such
date. The stock options vest and become fully exercisable after four years from
the date of grant.
11. ACCOUNTING PRONOUNCEMENTS
In February 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 128, "Earnings per Share" ("SFAS 128") which
supersedes APB Opinion 15, "Earnings per Share". SFAS 128 specifies the
computation, presentation and disclosure requirements for earnings per share
("EPS") for entities with publicly held common stock. SFAS 128 replaces primary
EPS and fully diluted EPS with basic EPS and diluted EPS, respectively. SFAS
128, effective December 31, 1997, is not expected to have a material impact on
the Company's reporting of earnings per share. Earlier adoption of SFAS 128 is
not permitted. After the effective date, the Company's prior-period EPS data
will be restated to conform with the provisions of SFAS 128.
12. CONTINGENT LIABILITIES
Updated information on litigation and environmental matters subsequent to
December 31, 1996 is as follows:
MICHAEL SHORES V. SAMUEL GOLDWYN COMPANY
On May 20, 1996 a purported class action lawsuit against Goldwyn and its
directors was filed in the Superior Court of the State of California for the
County of Los Angeles in MICHAEL SHORES V. SAMUEL GOLDWYN COMPANY. ET AL., case
no. BC 150360. In the complaint, plaintiff alleged that Goldwyn's Board of
Directors breached its fiduciary duties to the stockholders of Goldwyn by
agreeing to sell Goldwyn to the Company at a premium, yet providing Mr. Samuel
Goldwyn, Jr., the Samuel Goldwyn Family Trust and Mr. Meyer Gottlieb with
additional consideration and other benefits not received by the other Goldwyn
shareholders, and sought to enjoin consummation of the Goldwyn Merger. On May 8,
1997, the plaintiff filed a motion for leave to file an amended complaint adding
the Company as a defendant and alleging that Goldwyn's Board of Directors
breached their fiduciary duties further by failing to negotiate certain
provisions concerning price and disseminating to stockholders misleading
information. In addition, the plaintiff alleges that the Company aided and
abetted the other defendents in their breaches of fiduciary duties. The Company
believes that the suit is without merit and intends to vigorously defend such
action.
18
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion should be read in conjunction with the Company's
consolidated condensed financial statements and related notes thereto.
GENERAL
MMG is a global communications, entertainment and media company currently
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
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 films
and television titles through its Entertainment Group (the "Entertainment
Group"). On May 2, 1997 the Company entered into a Stock Purchase Agreement with
P&F for the sale of certain of MMG's entertainment assets, other than Landmark,
which operates 50 theaters with 138 screens and is the largest exhibitor of
specialized motion pictures and art films in the United States (the "Proposed
Transaction"). The Company also owns two non-strategic assets: Snapper, Inc.,
("Snapper") a premium lawn and garden equipment manufacturer and supplier and
approximately 39% of RDM Sports Group Inc. ("RDM"), a leading sporting goods
manufacturer.
During 1995, the Company had 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, the
Company's investment in RDM is included in the accompanying consolidated
financial statements as an asset held for sale. The Company intends to dispose
of its RDM stock during 1997.
Assuming the Proposed Transaction is consummated, MMG intends to significantly
alter its strategic focus. MMG will continue to operate its remaining
businesses. Since the Proposed Transaction was announced subsequent to March 31,
1997, "Management's Discussion and Analysis of Financial Condition and Results
of Operations" includes information on the Company's Entertainment Group.
COMMUNICATIONS GROUP
The Company, through the Communications Group, is the owner of various interests
in Joint Ventures that are currently in operation or planning to commence
operations in certain republics of the former Soviet Union and in Eastern
European and other emerging markets.
The Joint Ventures currently offer wireless cable television, radio paging
systems, radio broadcasting, and various types of telephony services including
trunked mobile radio, international toll calling and wireless telephony
services. Joint ventures are often entered into with governmental agencies or
ministries under the existing laws of the respective countries.
19
<PAGE>
The consolidated financial statements include the accounts and results of
operations of the Communications Group, its majority owned and controlled Joint
Ventures as follows:
<TABLE>
<CAPTION>
POPULATION/HH
COVERED (MM)
JOINT VENTURE BUSINESS MARKET 1996(1)
- ------------------------------- ------------------------------- -------------------------------- -----------------
<S> <C> <C> <C>
CNM Paging..................... Paging Bucharest, Romania 23.0
Radio Juventus................. Radio Budapest, Hungary 3.5
Radio Skonto................... Radio Riga, Latvia 0.9
SAC/Radio 7.................... Radio Moscow, Russia 12.0
Romsat......................... Cable TV Bucharest, Romania 0.9
Vilnius Cable.................. Cable TV Vilnius, Lithuania 2.0
Protocall Ventures............. Trunked Mobile Radio Belgium, Portugal, Romania,
Spain 33.7
</TABLE>
- ------------------------
(1) Information for Romsat and Vilnius Cable are households covered. All other
information is for population covered.
Investments in other companies and joint ventures which are not majority owned,
or in which the Communications Group does not control, but exercises significant
influence, have been accounted for using the equity method. Investments of the
Communications Group or its consolidated subsidiaries over which significant
influence is not exercised are carried under the cost method. See note 6 to the
consolidated condensed financial statements, "Investments in and Advances to
Joint Ventures", for these Joint Ventures and their summary financial
information.
The following table summarizes the Communications Group's Joint Ventures at
March 31, 1997, as well as the amounts contributed, amounts loaned and total
amounts invested in such Joint Ventures at March 31, 1997 (in thousands):
<TABLE>
<CAPTION>
OWNERSHIP AMOUNT AMOUNT TOTAL
VENTURE(1) PERCENTAGE CONTRIBUTED LOANED INVESTMENTS(11)
- -------------------------------------------------------------- ------------- ----------- --------- ---------------
<S> <C> <C> <C> <C>
CABLE
Kosmos TV (Moscow, Russia).................................... 50% 1,093 9,407 10,500
Baltcom TV (Riga, Latvia)..................................... 50% 819 11,852 12,671
Ayety TV (Tbilisi, Georgia)................................... 49% 779 6,619 7,398
Romsat Cable TV (Bucharest, Romania).......................... 99% 682 5,080 5,762
Sun TV (Chisinau, Moldova).................................... 50% 400 4,393 4,793
Alma TV (Almaty, Kazakhstan).................................. 50% 222 4,633 4,855
Cosmos TV (Minsk, Belarus).................................... 50% 400 1,768 2,168
Viginta (Vilnius, Lithuania).................................. 55% 434 1,328 1,762
Kamalak TV (Tashkent, Uzbekistan)............................. 50% 755 5,216 5,971
PAGING
Baltcom Estonia (Estonia)..................................... 39% 396 4,151 4,547
CNM (Romania)................................................. 54% 490 3,724 4,214
Kamalak Paging (Tashkent, Samarkand, Bukhara and Andijan,
Uzbekistan)(2).............................................. 50%
Paging One (Tbilisi, Georgia)................................. 45% 250 911 1,161
Paging Ajara (Ajara, Georgia)................................. 35% 43 220 263
Raduga Poisk (Nizhny Novgorod, Russia)........................ 45% 330 71 401
Alma Page (Almaty and Ust-Kamenogorsk, Kazakhstan (3)......... 50%
Baltcom Plus (Latvia)......................................... 50% 250 2,764 3,014
PT-Page (St. Petersburg, Russia).............................. 40% 1,072 -- 1,072
</TABLE>
20
<PAGE>
<TABLE>
<CAPTION>
OWNERSHIP AMOUNT AMOUNT TOTAL
VENTURE(1) PERCENTAGE CONTRIBUTED LOANED INVESTMENTS(11)
- -------------------------------------------------------------- ------------- ----------- --------- ---------------
<S> <C> <C> <C> <C>
RADIO
Radio Juventus (Budapest, Siofok and Khebegy, Hungary)........ 100% 8,107 274 8,381
SAC (Moscow, Russia).......................................... 83% 631 3,128 3,759
Radio Katusha (St. Petersburg, Russia)........................ 50% 133 800 933
Radio Nika (Socci, Russia).................................... 51% 244 7 251
Radio Skonto (Riga, Latvia)................................... 55% 302 276 578
Radio One (Prague, Czech Republic)............................ 80% 265 62 327
TELEPHONY
Telecom Georgia (Georgia)..................................... 30% 2,554 -- 2,554
Baltcom GSM (Latvia).......................................... 34% 11,094 -- 11,094
TRUNKED MOBILE RADIO (4)
Belgium Trunking (Brussels and Flanders, Belgium)............. 24%
Radiomovel Telecommunicacoes (Portugal)....................... 14%
Teletrunk Spain (Madrid, Valencia, Aragon and Catalonia,
Spain) (5).................................................. 6-16%
National Business Communications (Bucharest, Cluj, Brasov,
Constanta and Timisoira, Romania) (6)....................... 58% 30 215 245
PRE-OPERATIONAL
Teleplus (St. Peterburg, Russia)(Cable)(7).................... 45% 787 -- 787
Paging One Services (Austria) (Paging)(8)..................... 100% 1,007 2,193 3,200
Spectrum (Kazakhstan)(Trunked Mobile Radio)(9)................ 31% 36 -- 36
Magticom (Georgia)(Cellular)(10).............................. 34% 2,450 -- 2,450
Metromedia-Jinfeng (Wireless Local Loop)(12).................. 60% 3,019 -- 3,019
Ningbo Ya Mei Communications (PRC) (Cellular)(12)............. 39% 9,508 -- 9,508
Tai Li-Feng Telecom (PRC)(Local Loop)(12)..................... 52% 11,040 -- 11,040
</TABLE>
- ------------------------
(1) The parenthetical notes the area of operations for the operational Joint
Ventures and the area for which the Joint Venture is licensed for the
pre-operational joint ventures.
(2) The Communications Group's cable and paging services in Uzbekistan are
provided by the same company, Kamalak TV. All amounts contributed and loaned
to Kamalak TV are listed under that Joint Venture's entry for cable.
(3) The Company's cable and paging services in Kazakhstan are provided by or
through the same company, Alma TV. All amounts contributed and loaned to
Alma TV are listed under that Joint Venture's entry for cable.
(4) Most of the Company's ownership of the trunked mobile radio ventures is
through Protocall Ventures, Ltd., a United Kingdom company in which the
Communications Group has 56% ownership. The Communications Group's interest
in Protocall Ventures, Ltd. was purchased for $2.5 million. As of March 31,
1997, the Communications Group had provided Protocall Ventures Ltd. $3.9
million in credit to fund its operations. This chart does not separately
list amounts contributed or loaned to the trunked mobile radio Joint
Ventures by Protocall Ventures, Ltd.
(5) The Communications Group's trunked mobile radio operations in Spain are
provided through four Joint Ventures of Protocall Ventures, Ltd. The
Company's ownership of these Joint Ventures ranges from 6% to 16%.
(6) Amounts contributed and loaned are amounts contributed and loaned to
National Business Communications directly by the Communications Group.
21
<PAGE>
(7) Teleplus was created in November 1996.
(8) Paging One Services launched commercial paging service in Vienna, Austria in
February 1997.
(9) Spectrum launched commercial trunked mobile radio service in Almaty and
Aryrau, Kazakhstan in March 1997.
(10) The Communications Group's interest in Magticom was registered in October
1996.
(11) The total investment does not include any incurred losses.
(12) These are pre-operational Joint Ventures that plan to provide
telecommunications equipment, financing, network planning, installation and
maintenance services to telecommunications operations in the PRC.
ENTERTAINMENT GROUP
The Entertainment Group consists of Orion and, as of July 2, 1996, Goldwyn and
MPCA and their respective subsidiaries. Until November 1, 1995, Orion operated
under certain agreements entered into in connection with the terms of its
Modified Third Amended Joint Consolidated Plan of Reorganization (the "Plan"),
which severely limited the Entertainment Group's ability to finance and produce
additional feature films. Therefore, the Entertainment Group's primary activity
prior to the November 1 Merger was the ongoing distribution of its library of
theatrical motion pictures and television programming. The Entertainment Group
believes the lack of a continuing flow of newly-produced theatrical product
while operating under the Plan adversely affected its results of operations. As
a result of the removal of the restrictions on the Entertainment Group to
finance, produce, and acquire entertainment products in connection with the
November 1 Merger, the Entertainment Group has begun to produce, acquire, and
release new theatrical product. In addition, the Entertainment Group operates a
movie theater circuit.
Theatrical motion pictures are produced initially for exhibition in theaters in
the United States and Canada. Foreign theatrical exhibition generally begins
within the first year after initial release. Home video distribution in all
territories usually begins six to twelve months after theatrical release in that
territory, with pay television exploitation beginning generally six months after
initial home video release. Exhibition of the Company's product on network and
on other free television outlets begins generally three to five years from the
initial theatrical release date in each territory.
SNAPPER
Snapper 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. 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.
22
<PAGE>
The following table sets forth the operating results of the Company's
entertainment, communications and lawn and garden products segments (in
thousands).
METROMEDIA INTERNATIONAL GROUP, INC.
SEGMENT INFORMATION
MANAGEMENT'S DISCUSSION & ANALYSIS TABLE
<TABLE>
<CAPTION>
THREE MONTHS ENDED THREE MONTHS ENDED
MARCH 31, 1997 MARCH 31, 1996
------------------- -------------------
<S> <C> <C>
Communications Group:
Revenues.............................................................. $ 5,175 $ 3,164
Cost of sales and rentals and operating expenses...................... (549) --
Selling, general and administrative................................... (11,109) (7,525)
Depreciation and amortization......................................... (1,949) (1,449)
-------- --------
Operating loss...................................................... (8,432) (5,810)
Equity in losses of Joint Ventures.................................... (1,598) (1,783)
Minority interest..................................................... 1,240 13
-------- --------
(8,790) (7,580)
Entertainment Group:
Revenues.............................................................. 44,443 27,641
Cost of sales and rentals and operating expenses...................... (37,289) (25,102)
Selling, general and administrative................................... (8,050) (4,966)
Depreciation and amortization......................................... (2,552) (267)
-------- --------
Operating loss...................................................... (3,448) (2,694)
Snapper:
Revenues.............................................................. 53,800 --
Cost of sales and rentals and operating expenses...................... (37,446) --
Selling, general and administrative................................... (14,955) --
Depreciation and amortization......................................... (1,907) --
-------- --------
Operating loss...................................................... (508) --
Corporate Headquarters and Eliminations:
Revenues.............................................................. -- --
Cost of sales and rentals and operating expenses...................... -- --
Selling, general and administrative................................... (1,221) (1,626)
Depreciation and amortization......................................... (3) (7)
-------- --------
Operating loss...................................................... (1,224) (1,633)
Consolidated:
Revenues.............................................................. 103,418 30,805
Cost of sales and rentals and operating expenses...................... (75,284) (25,102)
Selling, general and administrative................................... (35,335) (14,117)
Depreciation and amortization......................................... (6,411) (1,723)
-------- --------
Operating loss...................................................... (13,612) (10,137)
Interest expense........................................................ (10,736) (8,279)
Interest income......................................................... 2,746 1,245
Equity in losses in Joint Ventures...................................... (1,598) (1,783)
Minority interest....................................................... 1,240 13
Provision for income taxes.............................................. (298) (200)
-------- --------
Net loss............................................................ $ (22,258) $ (19,141)
-------- --------
-------- --------
</TABLE>
23
<PAGE>
MMG CONSOLIDATED--RESULTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 1997 COMPARED TO THREE MONTHS ENDED MARCH 31, 1996
Net loss increased to $22.3 million for the three months ended March 31, 1997
from $19.1 million for the three months ended March 31, 1996.
Loss from operations increased to $13.6 million in the three months ended March
31, 1997 from $10.1 million for the three months ended March 31, 1996. The
increase in the loss from operations reflects the inclusion of Snapper's
operating loss in 1997, the increase in operating loss of the Entertainment
Group due to increased amortization of goodwill in connection with the
acquisitions of Goldwyn and MPCA and increases in selling, general and
administrative costs experienced by the Communications Group as it continues its
expansion efforts.
Interest expense increased $2.5 million to $10.7 million for the three month
period ended March 31, 1997. The increase in interest expense was due primarily
to the inclusion of interest associated with the Snapper credit facility in
1997, an increase in the average debt outstanding at the Entertainment Group
associated with the acquisition of Goldwyn and MPCA and the increased
investments in films and related releasing costs partially offset by a reduction
in the outstanding debt balance at corporate headquarters.
Interest income increased $1.5 million to $2.7 million in 1997 principally from
funds invested at corporate headquarters.
COMMUNICATIONS GROUP--RESULTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 1997 COMPARED TO THREE MONTHS ENDED MARCH 31, 1996.
REVENUES
Revenues increased to $5.2 million for the three months ended March 31, 1997
from $3.2 million for the three months ended March 31, 1996. Revenues of
unconsolidated Joint Ventures for the three months ended March 31, 1997 and 1996
appear in note 6 to the consolidated condensed financial statements. The growth
in revenue of the consolidated Joint Ventures has resulted primarily from an
increase in radio operations in Hungary, paging service operations in Romania
and an increase in management and licensing fees. Revenue from radio operations
increased to $3.3 million for the three months ended March 31, 1997 from $2.4
million for the three months ended March 31, 1996. Radio paging services
generated revenues of $857,000 for the three months ended March 31, 1997 as
compared to $576,000 for the three months ended March 31, 1996. Management fees
and licensing fees increased to $341,000 for the three months ended March 31,
1997 from $45,000 for the three months ended March 31, 1996.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses increased by $3.6 million or 48%
for the three months ended March 31, 1997 as compared to the three months ended
March 31, 1996. Approximately fifty percent of the increase relates to the
expansion of operations in the PRC as a result of the acquisition of AAT. The
remaining increase relates to additional expenses associated with the increase
in the number of Joint Ventures, principally the addition of Protocall Ventures,
Ltd. 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 $1.9 million for the three
months ended March 31, 1997 from $1.4 million for the three months ended March
31, 1996. The increase is a result of the amortization of goodwill in connection
with the acquisition of AAT.
24
<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 reports the operations of its
unconsolidated Joint Ventures on a three month lag.
The Communications Group recognized equity in losses of its Joint Ventures of
approximately $1.6 million for the three months ended March 31, 1997 as compared
to $1.8 million for the three months ended March 31, 1996.
The losses recorded for the three months ended March 31, 1997 and the three
months ended March 31, 1996 represent the Communications Group's equity in the
losses of the Joint Ventures for the quarters ended December 31, 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 decrease in losses of the Joint Ventures of $200,000 from the three months
ended March 31, 1996 to the three months ended March 31, 1997 is attributable to
increased cable and telephony revenues, which were partially offset by the
acquisition in May 1996 of Protocall Ventures, Ltd., which includes five new
trunked mobile radio ventures and increased the loss by $400,000.
Revenues generated by unconsolidated Joint Ventures were $14.3 million for the
three months ended March 31, 1997 as compared to $9.0 million for the three
months ended March 31, 1996.
MINORITY INTEREST
The increase in losses allocable to minority interests of $1.2 million for the
three months ended March 31, 1997 principally represents the losses allocable to
the minority shareholders of MAC.
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
Communications Group believes that subscriber growth is an appropriate indicator
to evaluate the progress of the subscriber based businesses. The following table
presents the aggregate cable TV, paging and telephony Joint Ventures subscriber
growth:
<TABLE>
<CAPTION>
WIRELESS
CABLE TV PAGING TELEPHONY TOTAL
--------- --------- ----------- ---------
<S> <C> <C> <C> <C>
December 31, 1995...................................................... 37,900 14,460 -- 52,360
March 31, 1996......................................................... 44,632 20,683 -- 65,315
June 30, 1996.......................................................... 53,706 29,107 -- 82,813
September 30, 1996..................................................... 62,568 37,636 6,104 106,308
December 31, 1996...................................................... 69,118 44,836 6,642 120,596
March 31, 1997......................................................... 101,016 51,942 8,711 161,669
</TABLE>
25
<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 United
States ("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
Communications Group.
ENTERTAINMENT GROUP--RESULTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 1997 COMPARED TO THREE MONTHS ENDED MARCH 31, 1996
REVENUES
Total revenues for the three months ended March 31, 1997 were $44.4 million, an
increase of $16.8 million or 61% from the three months ended March 31, 1996.
Revenues increased for the three months ended March 31, 1997, reflecting the
additional revenues associated with the acquisitions of Goldwyn and MPCA
("Acquired Businesses"), comprised principally from revenues of the theatrical
exhibition business. Although the Entertainment Group released three pictures
theatrically during the current quarter, 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 the current quarter were $1.0 million, an increase of
approximately $800,000 or 350% from the previous year's first quarter. The
increase was due to the release of three pictures during the current quarter
compared to no theatrical releases in the previous year's first quarter.
Domestic home video revenues for the current quarter were $6.8 million, an
increase of $1.2 million or 21% from the previous year's first quarter. The
increase was primarily due to revenues generated from a three-series
direct-to-video release.
Home video subdistribution revenues for the current quarter were $1.3 million, a
decrease of $1.0 million from the previous year's first quarter. These revenues
are primarily generated in the foreign market place through a subdistribution
agreement with Sony Pictures Entertainment, Inc. The decrease was primarily due
to the release of the last titles under this agreement in some major territories
during the previous year's first quarter. All 23 pictures covered by this
agreement have been released theatrically.
Pay television revenues were $3.7 million in the current quarter, a decrease of
$3.5 million or 48% from the previous year's first quarter. The decrease in pay
television revenues was primarily due to the first quarter 1996 availability of
several titles under the British Sky Broadcasting, LTD pay cable agreement in
the U.K. The Entertainment Group's reduced theatrical release schedule during
the last few years will continue to have an adverse effect on future pay
television revenues.
Free television revenues for the current quarter were $14.6 million, an increase
of $2.3 million or 19% from the previous year's first quarter. In both the
domestic and international market places, the Entertainment Group derives
significant revenue from the licensing of free television rights. The
Entertainment
26
<PAGE>
Group's reduced theatrical release schedule during the last few years will
continue to have an adverse effect on free television revenues.
Film exhibition revenues for the current quarter were $17.0 million. As the
acquisition of this business occurred on July 2, 1996, there were no film
exhibition revenues generated in the previous year's first quarter.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses increased $3.1 million to $8.1
million during the first quarter of 1997 from $5.0 million during the first
quarter of 1996. The increase is attributed to the inclusion of the Acquired
Businesses' selling, general and administrative expenses for the first quarter
of 1997.
DEPRECIATION AND AMORTIZATION EXPENSE
Depreciation and amortization charges were $2.6 million for the current quarter,
an increase of $2.3 million from the previous year's first quarter. The increase
is attributed to the inclusion of the depreciation of the theater group property
and equipment as well as the amortization of the goodwill associated with the
Acquired Businesses.
SNAPPER--RESULTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 1997
REVENUES
Snapper's sales for the first quarter of 1997 were $53.8 million. Sales of lawn
and garden equipment contributed the majority of the revenues during the period.
First quarter sales for Snapper products reflect shipments to dealers and
distributors prior to the selling season for lawn and garden equipment.
Therefore, revenues are lower than what will be expected for the second quarter
of the year which is the primary selling season for lawn and garden products.
Gross profit during the period was $14.8 million. Higher sales margins were
obtained during the period due to the continuing implementation of the program
to restructure the distribution network. This program will be fully implemented
prior to the next model year production beginning in September 1997.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses were $15.0 million for the period.
In addition to normal expenses, these expenses reflect increased costs
associated with national advertising and expenditures relating to the
restructuring of the distribution network.
OPERATING LOSS
Snapper experienced an operating loss of $500,000 during the period. This loss
was due to the lower levels of shipments prior to the selling season and
advertising costs incurred during the three months ended March 31, 1997.
Management anticipates that Snapper will not be profitable for the full year of
1997 as it continues to change from a distributor network to a dealer direct
network, and as a result, repurchases certain finished goods from distributors
for resale to dealers in subsequent periods. The majority of these repurchases
will occur in the second and third quarters and are expected to have an
approximately $7.0 million negative impact on Snapper's profitability.
Management believes that the change in the distribution network will benefit
Snapper's operating and financial performance in the future.
27
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
MMG CONSOLIDATED
THREE MONTHS ENDED MARCH 31, 1997 COMPARED TO THREE MONTHS ENDED MARCH 31, 1996
CASH FLOWS FROM OPERATING ACTIVITIES
Cash used in operations for the three months ended March 31, 1997 was $11.2
million, an increase in cash used in operations of $4.8 million from the same
period in the prior year.
Losses from operations include significant non-cash items of depreciation,
amortization, equity in losses of Joint Ventures and losses allocable to
minority interests. Non-cash items increased $3.8 million from $19.7 million to
$23.5 million for the three months ended March 31, 1996 and 1997, respectively.
The increase relates principally to the increase in depreciation and
amortization associated with the acquisitions of Goldwyn and MPCA. Changes in
assets and liabilities, net of the effect of acquisitions, decreased cash flows
for the three months ended March 31, 1997 and 1996 by $12.4 million and $6.9
million, respectively.
The decrease in cash flows for the three months ended March 31, 1997 resulted
from the increased losses in the Communications Group's operations due to the
start-up nature of these operations and increases in selling, general and
administrative expenses to support the increase in the number of Joint Ventures.
The increase in operating assets prinicpally reflects increases in inventory and
accounts receivable for sales of Snapper products to dealers and distributors
prior to selling season.
CASH FLOWS FROM INVESTING ACTIVITIES
Cash used in investing activities increased $42.5 million to $47.0 million for
the three months ended March 31, 1997. The principal reasons for the increase
are increases in investments in and advances to Joint Ventures of $15.3 million
in 1997 as compared to $2.5 million in 1996 and increases in investments in film
inventories to $23.2 million in 1997 from $1.6 million in 1996. In addition,
MITI utilized $7.2 million of funds in acquisitions in the three months ended
March 31, 1997.
CASH FLOWS FROM FINANCING ACTIVITIES
Cash provided by financing activities was $2.2 million for the three months
ended March 31,1997 as compared to cash used in financing activities of $3.3
million for the three months ended March 31, 1996. Of the $27.4 million of debt
payments, $7.5 million were payments of the Entertainment Group Term Loan, $15.0
million was the repayment of the 9 7/8% Senior Debentures and $1.2 million was
the MPCA acquisition notes. Of the $29.5 million of additions to long-term debt,
$23.5 million was borrowed under the Entertainment Group's Revolving Credit
Facility and $6.0 million was borrowed under the Snapper Revolver. For the three
months ended March 31, 1996, the $11.8 million of borrowing and $12.3 million of
payments principally reflect activity under the old Orion credit facility. In
addition, the Entertainment Group made payments on deferred financing costs in
connection with the November 1 Merger of $3.2 million.
THE COMPANY
MMG is a holding company and, accordingly, does not generate cash flows. The
Entertainment Group and Snapper are restricted under covenants contained in
their respective credit agreements from making dividend payments or advances to
MMG. The Communications Group is dependent on MMG for significant capital
infusions to fund its operations and make acquisitions, as well as fulfill its
commitments to make capital contributions and loans to its Joint Ventures. Such
funding requirements are based on the 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
28
<PAGE>
from the Company and on the ability of the Communications Group's Joint Ventures
to generate positive cash flows.
In the short term, MMG intends to satisfy its current obligations and
commitments with available cash on hand of $27.5 million and the proceeds from
the sale of RDM. Assuming the Proposed Transaction is consummated, the Company's
remaining strategic business will be the business conducted by the
Communications Group. The Communications Group is engaged in businesses that
require the investment of significant amounts of capital in order to construct
and develop operational systems and market its services. In connection with the
consummation of the Proposed Transaction the Company anticipates that it will
receive approximately $296.0 million of net cash (assuming the Entertainment
Companies had $277.0 million of outstanding debt as was outstanding at March 31,
1997), and MMG may use approximately $140.0 million of such net proceeds to
repay all of its outstanding subordinated debentures. As a result, although MMG
will generate net cash proceeds from the sale of the entertainment assets and
will have no significant long-term debt, MMG may require additional financing in
order to satisfy the Communications Group's on-going capital requirements and to
achieve the Communications Group's long-term business strategies. Such
additional capital may be provided through the public or private sale of debt or
equity securities. On April 4, 1997, MMG filed a Registration Statement with the
SEC to register $125.0 million of its convertible preferred stock. No
determination has been made by MMG as to whether it will proceed with this
financing. If MMG elects to proceed, no assurance can be given that the Company
will be able to consummate this financing or that any additional financing will
be available to MMG on acceptable terms, if at all. If adequate additional funds
are not available, 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.
As the 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, fixed wireless loop telephony, GSM and
international toll calling businesses are capital intensive. The Communications
Group generally provides the primary source of funding for its Joint Ventures
both for working capital and capital expenditures, with the exception of its GSM
Joint Ventures. The GSM ventures have been funded to date on a pro-rata basis by
western sponsors, and the Communications Group has funded its pro rata share of
the GSM Joint Venture obligations. The Communications Group has and continues to
have discussions with vendors, commercial lenders and international financial
institutions to provide funding for the GSM Joint Ventures. The Communications
Group's joint venture agreements generally provide for the initial contribution
of assets or cash by the Joint Venture partners, and for the provision of a line
of credit from the Communications Group to the Joint Venture. Under a typical
arrangement, the Communications Group's Joint Venture partner contributes the
necessary licenses or permits under which the Joint Venture will conduct its
business, studio or office space, transmitting tower rights and other equipment.
The Communications Group's contribution is
29
<PAGE>
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, and significantly restricts the payment 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 March 31, 1997, the Communications Group
was committed to provide funding under the various credit lines in an aggregate
amount of approximately $75.6 million, of which $15.4 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 that expenditures are
not in accordance with the approved business plan, the Communications Group may
withhold funding until such expenditures are in accordance with such plan.
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, their ability to control operating
expenses and the sale of commercial advertising time in non-subscriber
businesses. 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 or that the
Joint Ventures will be able to generate positive operating results.
Additionally, if the Joint Ventures do become profitable and generate sufficient
cash flows in the future, there can be no assurance that the Joint Ventures will
pay dividends or return capital at any time.
The ability of the Communications Group and its consolidated and unconsolidated
Joint Ventures to establish profitable operations is also subject to significant
political, economic and social risks inherent in doing business in emerging
markets such as Eastern Europe, the republics of the former Soviet Union and the
PRC. These include matters arising out of government policies, economic
conditions, imposition of or changes to taxes or other similar charges by
governmental bodies, foreign exchange rate fluctuations and controls, civil
disturbances, deprivation or unenforceablility of contractual rights, and taking
of property without fair compensation.
For the quarter ended March 31, 1997, the Communications Group's primary source
of funds was from the Company in the form of non-interest bearing intercompany
loans.
Until the Communications Group's consolidated and unconsolidated operations
generate positive cash flow, the Communications Group will require significant
capital to fund its operations, and to make capital contributions and loans to
its Joint Ventures. The Communications Group relies on the Company to provide
the financing for these activities. The Company believes that as more of the
Communications
30
<PAGE>
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 Entertainment Group's Revolving Credit
Facility. In addition, the Company is exploring various off balance sheet
financing arrangements to augment its resources.
The cost of producing theatrical films varies depending on the type of film
produced, casting of stars or established actors, and many other factors. The
industry-wide trend over recent years has been an increase in the average cost
of producing and releasing films. The revenues derived from the production and
distribution of a motion picture depend primarily upon its acceptance by the
public, which cannot be predicted and does not necessarily correlate to the
production or distribution costs incurred. The Company will attempt to reduce
the risks inherent in its motion picture production activities by closely
monitoring the production and distribution costs of individual films and
limiting the Entertainment Group's investment in any single film.
The Entertainment Group Credit Facility consists of a $200 million Term Loan
which requires quarterly repayments of $7.5 million commencing September 1996
and a final payment of $50 million on maturity (June 30, 2001), and a $100
million Revolving Credit Facility, which has a final maturity of June 30, 2001.
For the remainder of 1997 and the year ended December 31, 1998, the
Entertainment Group will be required to make principal payments of approximately
$28.3 million, and $32.6 million, respectively, to meet the scheduled maturities
of its outstanding long-term debt.
The Entertainment Group Credit Facility contains customary covenants, including
limitations on the incurrence of additional indebtedness and guarantees, the
creation of new liens, restrictions on the development costs and budgets for new
films, limitations on the aggregate amount of unrecouped print and advertising
costs the Entertainment Group may incur, limitations on the amount of the
Entertainment Group's leases, capital and overhead expenses, (including specific
limitations on the capital expenditures of the Entertainment Group's theatre
group subsidiary) prohibitions on the declaration of dividends or distributions
by the Entertainment Group to MMG (other than $15 million of subordinated loans
which may be repaid to MMG), limitations on the merger or consolidation of the
Entertainment Group or the sale by the Entertainment Group of any substantial
portion of its assets or stock and restrictions on the Entertainment Group's
line of business, other than activities relating to the production and
distribution of entertainment product and other covenants and provisions
described above. The Entertainment Group Credit Facility is secured by a
security interest in all of the Entertainment Group's assets and the Revolving
Credit Facility is guaranteed by the Company's largest shareholder, Metromedia
Company, and its Chairman, John W. Kluge.
At March 31, 1997, the Entertainment Group had $14.0 million available under its
Revolving Credit Facility which management intends to utilize, together with
cash generated form operations, to finance its
31
<PAGE>
operations in 1997. In addition to the Entertainment Group Credit Facility and
cash generated from operations, management intends to explore such alternatives
as increasing its revolving line of credit, obtaining off-balance sheet
financing, or obtaining short term funding from MMG in order to augment its
resources to finance anticipated levels of production and distribution
activities and to meet debt obligations as they become due during 1997 and 1998.
SNAPPER
Cash flows used in operations totaled $5.4 million for the first quarter ended
March 31, 1997. This shortfall in cash was related to the seasonality of sales
and the related cash collections.
Snapper's liquidity is generated from operations and borrowings. On November 26,
1996, Snapper entered into a credit agreement (the "Snapper Credit Agreement")
with AmSouth Bank of Alabama ("AmSouth") pursuant to which AmSouth has agreed to
make available to Snapper a revolving line of credit up to $55.0 million, under
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 is guaranteed by the Company. The Snapper Revolver contains covenants
regarding minimum quarterly cash flow and equity requirements. Snapper was in
compliance with these covenants as of March 31, 1997.
On April 30, 1997 Snapper closed a $10.0 million working capital facility with
AmSouth which amended Snapper's existing $55.0 million facility. The $10.0
million working capital facility will (i) have a PARI PASSU collateral interest
in all of Snapper's assets (including rights under the Make-Whole and Pledge
Agreement made by Metromedia Company in favor of AmSouth in connection with the
Snapper Revolver) with the Snapper Revolver, (ii) accrue interest on borrowings
at AmSouth's floating prime rate (same borrowing rate as the Snapper Revolver),
and (iii) become due and payable on October 1, 1997. As additional consideration
for AmSouth making this new facility available, Snapper provided to AmSouth the
joint and several guarantees of Messrs. Kluge and Subotnick, Chairman of the
Board of MMG and Vice Chairman, President and Chief Executive Officer of MMG,
respectively, on the $10.0 million working capital facility or a 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 as stated
within the Snapper Credit Agreement).
Management believes that available cash on hand, borrowings from the Snapper
Revolver and Working Capital Facility, and the cash flow generated by operating
activities will provide sufficient funds for Snapper to meet its obligations.
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS.
Certain statements under the captions "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and "Business" and elsewhere in
this Form 10-Q constitute "forward-looking statements" within the meaning of the
Private Securities Litigation Reform Act of 1995 (the "Reform Act"). Such
forward-looking statements involve known and unknown risks, uncertainties and
other factors which may cause the actual results, performance or achievements of
the Company, or industry results, to be materially different from any future
results, performance or achievements expressed or implied by such
forward-looking statements. Such factors include among others, general economic
and business conditions, which will, among other things, impact demand for the
Company's products and services; industry capacity, which tends to increase
during strong years of the business cycle; changes in public taste, industry
trends and demographic changes, which may influence the exhibition of films in
certain areas; competition from other entertainment and communications
companies, which may affect the Company's ability to generate revenues;
political, social and economic conditions and laws, rules and regulations,
particularly in Eastern Europe, the former Soviet Republics, the PRC and other
emerging markets, which may affect the Company's results of operations; timely
completion of construction projects for new systems for the Joint Ventures in
which the Company has invested; developing legal structures in Eastern Europe,
the former
32
<PAGE>
Soviet Republics, the PRC and other emerging markets, which may affect the
Company's results of operations; cooperation of local partners for the Company's
communications investments in Eastern Europe, the former Soviet Republics and
the PRC; exchange rate fluctuations; license renewals for the Company's
communications investments in Eastern Europe, the former Soviet Republics and
the PRC; the loss of any significant customers (especially clients of the
Communications Group); changes in business strategy or development plans; the
significant indebtedness of the Company; quality of management; availability of
qualified personnel; changes in or the failure to comply with, government
regulations; and other factors referenced in the Form 10-Q.
33
<PAGE>
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Updated information on litigation and environmental matters subsequent to
December 31, 1996 is as follows:
MICHAEL SHORES V. SAMUEL GOLDWYN COMPANY
On May 20, 1996 a purported class action lawsuit against Goldwyn and its
directors was filed in the Superior Court of the State of California for the
County of Los Angeles in MICHAEL SHORES V. SAMUEL GOLDWYN COMPANY, ET AL., case
no. BC 150360. In the complaint, plaintiff alleged that Goldwyn's Board of
Directors breached its fiduciary duties to the stockholders of Goldwyn by
agreeing to sell Goldwyn to the Company at a premium, yet providing Mr. Samuel
Goldwyn, Jr., the Samuel Goldwyn Family Trust and Mr. Meyer Gottlieb with
additional consideration and other benefits not received by the other Goldwyn
shareholders, and sought to enjoin consummation of the Goldwyn Merger. On May 8,
1997, the plaintiff filed a motion for leave to file an amended complaint adding
the Company as a defendant and alleging that Goldwyn's Board of Directors
breached their fiduciary duties further by failing to negotiate certain
provisions concerning price and disseminating to stockholders misleading
information. In addition, the plaintiff alleges that the Company aided and
abetted the other defendants in their breaches of fiduciary duties. The Company
believes that the suit is without merit and intends to vigorously defend such
action.
INDEMNIFICATION AGREEMENTS
In accordance with Section 145 of the General Corporation Law of the State of
Delaware, pursuant to the Company's Restated Certificate of Incorporation, the
Company has agreed to indemnify its officers and directors against, among other
things, any and all judgments, fines, penalties, amounts paid in settlements and
expenses paid or incurred by virtue of the fact that such officer or director
was acting in such capacity to the extent not prohibited by law.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
EXHIBIT
NUMBER
11* Computation of Earnings Per Share
27* Financial Data Schedule
(b) Reports on Form 8-K
(i) On February 11, 1997, a Form 8-K was filed to report the Company's
intention to actively manage the operations of its wholly-owned
subsidiary, Snapper, Inc.
(ii) On May 6, 1997, a Form 8-K was filed to report the execution of a Stock
Purchase Agreement with P&F Acquisition Corp. concerning the sale of
certain of the Company's entertainment assets.
- ------------------------
*Filed herewith
34
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities and
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
METROMEDIA INTERNATIONAL GROUP, INC.
By: /s/ SILVIA KESSEL
------------------------------------------
Silvia Kessel
EXECUTIVE VICE PRESIDENT,
CHIEF FINANCIAL OFFICER
AND TREASURER
Dated: May 15, 1997
35
<PAGE>
EXHIBIT 3
<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 8-K
CURRENT REPORT
Filed Pursuant to Section 13 OR 15(d) of
THE SECURITIES EXCHANGE ACT OF 1934
Date of Report (Date of earliest event reported): February 11, 1997
METROMEDIA INTERNATIONAL GROUP, INC.
------------------------------------
(Exact name of registrant as specified in its charter)
DELAWARE 1-5706 58-0971455
-------- ------ ----------
(State or other jurisdiction (Commission (IRS Employer
of incorporation) File Number) Identification Number)
One Meadowlands Plaza
EAST RUTHERFORD, NEW JERSEY 07073
---------------------------------
(Address of principal executive offices)
Registrant's telephone number, including area code: (201) 531-8000
<PAGE>
Item 5. Other Events
On February 11, 1997, Snapper, Inc., a wholly owned subsidiary of the
Company, issued a press release, a copy of which is attached as Exhibit 99.1, in
which it announced that Jerry J. Schweiner resigned as President and Chief
Executive Officer of Snapper. Robin Chamberlain was appointed President and
Chief Executive Officer or Snapper. In addition, the Company announced that it
reversed its previously announced intention to dispose of Snapper.
<PAGE>
Item 7. Financial Statements, Pro Forma
FINANCIAL INFORMATION AND EXHIBITS
(c) The following is an exhibit to this Report and is filed herewith:
Exhibit 99.1 Press Release dated February 11, 1997 of
Snapper, Inc.
<PAGE>
SIGNATURES
----------
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
METROMEDIA INTERNATIONAL GROUP, INC.
(Registrant)
By: /s/ ARNOLD L. WADLER
------------------------
Executive Vice President
Dated: February 12, 1997
<PAGE>
Exhibit 4
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 8-K
CURRENT REPORT
Filed Pursuant to Section 13 OR 15(d) of
THE SECURITIES EXCHANGE ACT OF 1934
Date of Report (Date of earliest event reported): May 2, 1997
-------------------------------
METROMEDIA INTERNATIONAL GROUP, INC.
-----------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 1-5706 58-0971455
---------------------------- --------------- ---------------------
(State or other jurisdiction (Commission File (IRS Employer
of incorporation) Number) Identification Number)
One Meadowlands Plaza
East Rutherford, New Jersey 07073-2137
----------------------------------------
(Address of principal executive offices)
Registrant's telephone number, including area code: (201) 531-8000
------------------------
<PAGE>
Item 2. ACQUISITION OR DISPOSITION OF ASSETS.
On April 27, 1997, Metromedia International Group, Inc., a Delaware
corporation ("MIG"), Orion Pictures Corporation, a Delaware corporation
("ORION") and P&F Acquisition Corp., a Delaware corporation ("P&F"), entered
into a Letter of Intent (the "LETTER OF INTENT"), and on May 2, 1997, MIG, Orion
and P&F executed a definitive Stock Purchase Agreement (the "STOCK PURCHASE
AGREEMENT") for the sale (the "PROPOSED TRANSACTION") of certain of MIG's
entertainment assets (including Orion and its direct and indirect subsidiaries,
other than Landmark Theater Group and its subsidiaries ("LANDMARK")) to
Metro-Goldwyn-Mayer Inc., a Delaware corporation, through its parent company,
P&F (Orion, together with such subsidiaries, excluding Landmark, are
collectively referred to herein as the "ENTERTAINMENT COMPANIES").
Pursuant to the terms of the Stock Purchase Agreement, MIG proposes to
sell the Entertainment Companies to P&F for an aggregate purchase price of
$573,000,000, LESS the sum of (i) the greater of (A) all amounts outstanding
under an existing credit facility between Orion and Chase Manhattan Bank (the
"ORION CREDIT FACILITY"), net of cash on hand of the Entertainment Companies on
December 31, 1996 and (B) all amounts outstanding under the Orion Credit
Facility, net of cash on hand of the Entertainment Companies on the Closing
Date; AND (ii) unpaid interest under the Orion Credit Facility accrued to, but
not including, the Closing Date; AND (iii) the greater of (A) $13 million or
(B) all other debt of the Entertainment Companies (other than the Orion Credit
Facility) outstanding on the Closing Date; AND (iv) unpaid interest on such
other debt (other than the Orion Credit Facility) accrued to, but not including,
the Closing Date (the "PURCHASE PRICE"). The assets to be sold to P&F include
MIG's film and television library, consisting of approximately 2,200 titles, the
production and distribution activities of the Entertainment Companies, which
include the operations of Orion, Goldwyn Entertainment Company and Motion
Picture Corporation of America, as well as 12 substantially complete films and 5
direct-to-video features, and substantially all of the liabilities of these
entities. MIG will retain and actively manage Landmark, which, as of December
31, 1996, has a total of 138 screens at 50 locations throughout the United
States.
Consummation of the Proposed Transaction is not subject to receipt by
P&F of any financing. However, because the Proposed Transaction may constitute
a sale of "substantially all" of the assets of MIG for purposes of Delaware law,
the Company has decided to submit the Stock Purchase Agreement for stockholder
approval. Pursuant to the terms of a Stockholders Agreement, dated as of April
27, 1997, among John W. Kluge, Stuart Subotnick, Met Telcell, Inc., a Delaware
corporation, Metromedia Company, a Delaware limited partnership (collectively,
the "METROMEDIA HOLDERS"), and P&F, the Metromedia Holders have agreed (i) to
vote their shares of common stock of MIG, par value $1.00 per share (the "COMMON
STOCK"), in favor of the Stock Purchase Agreement and (ii) not to transfer their
shares of Common Stock until the later of September 30, 1997 or 90 days after
the date of the stockholders meeting held to approve and adopt the Stock
Purchase Agreement (as
<PAGE>
long as such meeting is held by September 30, 1997). As of May 2, 1997, the
Metromedia Holders own approximately 24.6% of the Common Stock.
Consummation of the Proposed Transaction is also subject to various
other conditions, including, but not limited to (i) the release of MIG and its
affiliates (including certain of the Metromedia Holders) of all obligations
under the Orion Credit Facility; (ii) stockholder approval of the Stock Purchase
Agreement; (iii) the release of MIG of all obligations as guarantor under
Orion's existing lease; and (iv) the expiration or early termination of the
waiting periods prescribed under the Hart-Scott-Rodino Antitrust Improvements
Act of 1976, as amended.
At a meeting of the Board of Directors of MIG held on May 2, 1997, the
Board of Directors unanimously approved the terms of the Proposed Transaction as
being in the best interests of MIG and its stockholders, and unanimously
recommended that the stockholders of MIG vote to approve the Proposed
Transaction.
Simultaneously with the closing of the Proposed Transaction, MIG
intends to use a portion of the net Purchase Price to repay MIG's outstanding
subordinated debentures.
As a result of the sale of the Entertainment Companies, MIG's
strategic focus will be significantly altered. MIG will continue to operate its
one strategic business through its Communications Group, and it will continue to
own and actively manage Landmark, Snapper, Inc., its premium lawn and garden
equipment manufacturer and supplier subsidiary and its approximately 39%
interest in RDM Sports Group, Inc., a NYSE-listed company.
Item 7. EXHIBITS. The following exhibits to this Report and are filed herewith:
Exhibit 99.1 Press release, dated April 28, 1997
Exhibit 99.2 Letter of Intent, dated as of April 27, 1997, among
MIG, Orion and P&F
Exhibit 99.3 Stockholders Agreement, dated as of April 27, 1997,
among MIG, P&F and the Metromedia Holders
Exhibit 99.4 Stock Purchase Agreement, dated as of May 2, 1997,
among MIG, Orion and P&F
2
<PAGE>
SIGNATURES
----------
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
METROMEDIA INTERNATIONAL GROUP, INC.
(Registrant)
By:/s/ Arnold L. Wadler
---------------------------------
Arnold L. Wadler
Senior Vice President, General
Counsel and Secretary
Dated: May 6, 1997
3
<PAGE>
EXHIBIT 5
<PAGE>
REPORT OF INDEPENDENT AUDITORS
To The Stockholders
The Actava Group Inc.
We have audited the accompanying consolidated balance sheets of The
Actava Group Inc. and subsidiaries as of December 31, 1994 and 1993, and the
related consolidated statements of operations, stockholders' equity, and cash
flows for each of the three years in the period ended December 31, 1994. Our
audits also included the financial statement schedule listed in the Index at
Item 14(a). These financial statements and schedule are the responsibility of
the Company's management. Our responsibility is to express an opinion on
these financial statements and schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
The Actava Group Inc. and subsidiaries at December 31, 1994 and 1993, and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended December 31, 1994, in conformity with generally
accepted accounting principles. Also, in our opinion, the related financial
statement schedule, when considered in relation to the basic financial
statements taken as a whole, presents fairly in all material respects the
information set forth therein.
As discussed in the notes to consolidated financial statements, in 1993
Actava changed in its method of accounting for postretirement benefits, and in
1992 Actava changed its method of accounting for the cost of its proof
advertising program.
ERNST & YOUNG LLP
Atlanta, Georgia
March 10, 1995
<PAGE>
THE ACTAVA GROUP INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
December 31,
----------------------------
1994 1993
-------- --------
(In thousands)
ASSETS
<S> <C> <C>
Current Assets
Cash and cash equivalents .............................................. $ 47,916 $ 18,770
Short-term investments ................................................. 14,321 29,635
Receivables (less allowance for doubtful accounts of $6,851 in 1994 and
$10,227 in 1993) ..................................................... 132,948 276,018
Note receivable from Eastman Kodak Co. (less allowance for unearned
discount of $3,635 in 1994) .......................................... 96,365 --
Note receivable from Metromedia Company ................................ 32,395 --
Current portion of note receivable from Triton Group Ltd. .............. 6,250 3,750
Inventories ............................................................ 13,403 108,439
Prepaid expenses and other assets ...................................... 7,384 43,809
Income tax benefits .................................................... 6,911 28,894
--------- -----------
Total current assets ............................................... 357,893 509,315
Investment in Roadmaster Industries, Inc. ................................ 68,617 --
Property, plant and equipment
Land ................................................................... 1,471 8,303
Buildings and improvements ............................................. 11,802 72,289
Machinery and equipment ................................................ 61,629 393,643
--------- -----------
74,902 474,235
Less allowances for depreciation ....................................... (40,005) (198,881)
--------- -----------
Total property, plant and equipment ................................ 34,897 275,354
Note receivable from Triton Group Ltd., less current portion ............. 16,726 22,976
Other assets (less allowances for doubtful notes and accounts of $3,988 in
1993) .................................................................. 15,013 50,702
Long-term investments .................................................... -- 26,611
Intangibles (less accumulated amortization of $88,281 in 1993) ........... 633 386,626
--------- -----------
Total assets ....................................................... $ 493,779 $ 1,271,584
========= ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Accounts payable ....................................................... $ 8,397 $ 86,163
Accrued expenses and other current liabilities ......................... 83,256 186,515
Notes payable .......................................................... 64,573 135,114
Current portion of long-term debt ...................................... 417 2,915
Current portion of subordinated debt ................................... 33,827 3,750
Redeemable common stock ................................................ 12,000 --
--------- -----------
Total current liabilities .......................................... 202,470 414,457
Deferred income taxes .................................................... 6,911 44,380
Long-term debt ........................................................... 2,547 220,887
Subordinated debt ........................................................ 157,193 190,551
Minority interest in photofinishing subsidiary ........................... -- 205,395
Redeemable common stock .................................................. -- 12,000
Stockholders' equity
Common stock (22,767,485 shares in 1994 and 22,767,744 in 1993) ........ 22,768 22,768
Additional capital ..................................................... 35,482 46,362
Retained earnings ...................................................... 173,639 236,333
Less treasury stock -- at cost (5,490,327 shares in 1994 and
6,223,467 shares in 1993) ............................................ (107,231) (121,549)
--------- -----------
Total stockholders' equity ......................................... 124,658 183,914
--------- -----------
Total liabilities and stockholders' equity ......................... $ 493,779 $ 1,271,584
========= ===========
</TABLE>
See Notes to Consolidated Financial Statements.
<PAGE>
THE ACTAVA GROUP INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Years Ended December 31,
---------------------------------------
1993 1992
1994 (Restated) (Restated)
-------- ---------- ----------
(In thousands except per share
amounts)
<S> <C> <C> <C>
Net sales ................................................................ $ 551,828 $ 465,812 $ 377,890
Costs, expenses and other costs of products sold ......................... 461,175 401,471 283,635
Selling, general and administrative ...................................... 86,470 85,179 74,946
Interest expense ......................................................... 28,434 26,811 20,811
Provision for doubtful accounts .......................................... 3,204 4,661 2,941
Income from equity investment in Roadmaster Industries, Inc. ............. (365) -- --
Other (income) expenses - net ............................................ (4,934) 1,706 (4,651)
Provision for plant closure costs ........................................ -- (865) (1,132)
Provision for employee agreements and related costs ...................... 1,300 -- --
--------- --------- ---------
Total costs, expenses and other ...................................... 575,284 518,963 376,550
Income (loss) before income taxes, discontinued operations,
extraordinary loss and cumulative effect of changes in accounting
principles ............................................................. (23,456) (53,151) 1,340
Income tax expense (benefit) ............................................. -- (1,435) 1,662
--------- --------- ---------
Loss from continuing operations .......................................... (23,456) (51,716) (322)
Income (loss) from discontinued operations ............................... (40,693) (8,526) 10,887
--------- --------- ---------
Income (loss) before extraordinary loss and cumulative effect of changes
in accounting principles ............................................... (64,149) (43,190) 10,565
Extraordinary loss related to Swiss Franc Bonds .......................... (1,601) -- --
--------- --------- ---------
Income (loss) before cumulative effect of changes in accounting
principles ............................................................. (65,750) (43,190) 10,565
Cumulative effect of changes in accounting principles .................... -- (4,404) 1,034
--------- --------- ---------
Net income (loss) ........................................................ $ (65,750) $ (47,594) $ 11,599
========= ========= =========
Earnings (loss) per share of common stock
Primary
Continuing operations .................................................. $ (1.29) $ (3.01) $ (.02)
Discontinued operations ................................................ (2.24) .49 .66
Extraordinary loss ..................................................... (.09) -- --
Cumulative effect of changes in accounting principles .................. -- (.25) .06
--------- --------- ---------
Net income (loss) ........................................................ $ (3.62) $ (2.77) $ .70
========= ========= =========
Pro forma effect assuming the changes in accounting principles are applied
retroactively:
Net income (loss) ........................................................ $ (65,750) $ (43,190) $ 10,565
========= ========= =========
Net income (loss) per share .............................................. $ (3.62) $ (2.52) $ .64
========= ========= =========
</TABLE>
See Notes to Consolidated Financial Statements.
<PAGE>
THE ACTAVA GROUP INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Years Ended December 31,
---------------------------------------
1993 1992
1994 (Restated) (Restated)
-------- ------------ ------------
(In thousands)
<S> <C> <C> <C>
Cash Flows from Operating Activities:
Net loss from continuing operations ................................. $ (23,456) $ (56,120) $ (322)
Less: Cumulative effect of change in accounting principle ......... -- (4,404) --
--------- --------- ---------
Loss before cumulative effect of change in accounting principle and
extraordinary item .............................................. (23,456) (51,716) (322)
Less: Items providing (using) cash from continuing operating
activities ...................................................... 24,215 (16,082) (44,181)
--------- --------- ---------
Net cash provided by (used in) continuing operations .............. 759 (67,798) (44,503)
--------- --------- ---------
Income (loss) from discontinued operations .......................... (40,693) 8,526 11,921
Less: Cumulative effect of change in accounting principle ......... -- -- 1,034
--------- --------- ---------
Income before cumulative effect of change in accounting principle . (40,693) 8,526 10,887
Less: Items providing cash from discontinued operations ........... 37,862 46,325 57,895
--------- --------- ---------
Net cash provided by (used in) discontinued operations ............ (2,831) 54,851 68,782
--------- --------- ---------
Net cash provided by (used in) all operations ..................... (2,072) (12,947) 24,279
Cash Flows from Investing Activities:
Repayment of advance to businesses sold ........................... 10,502 -- --
Purchases of investments (maturities over 90 days) ................ (52,584) (99,510) (99,198)
Sales of investments (maturities over 90 days) .................... 63,036 111,851 107,932
Net sales of other investments .................................... 4,862 21,866 6,143
Purchase of long-term investments ................................. -- -- (24,719)
Payments for property, plant and equipment ........................ (25,022) (55,554) (81,800)
Proceeds from disposals of property, plant and equipment .......... 4,551 16,024 10,230
Proceeds from the sale of businesses .............................. 50,000 -- --
Payments for purchases of businesses net of cash required ......... -- (9,415) (30,560)
Loans to Triton Group Ltd. ........................................ 3,750 5,000 (1,426)
Loans to Metromedia Company ....................................... (32,395) -- --
Other investing activities -- net ................................. (6,515) (15,221) (3,604)
--------- --------- ---------
Net cash provided by (used in) investing activities ............... 20,185 (24,959) (117,002)
--------- --------- ---------
Cash Flows from Financing Activities:
Net borrowings (payments) under short-term bank agreements ........ (13,076) 52,284 51,107
Borrowings under long-term debt agreements ........................ 228,579 21,503 817,000
Payments on long-term debt agreements ............................. (195,046) (21,192) (771,136)
Payments of subordinated debt ..................................... (3,750) (1,847) (200)
Proceeds from issuance of Actava common stock ..................... 4,776 -- --
Cash dividends paid by Qualex to minority interest ................ (10,450) (8,614) (3,886)
Cash dividends paid by Actava ..................................... -- (6,250) (5,956)
--------- --------- ---------
Net cash provided by financing activities ......................... 11,033 35,884 86,929
--------- --------- ---------
Increase (decrease) in cash and cash equivalents ................ 29,146 (2,022) (5,794)
Cash and cash equivalents at beginning of year ...................... 18,770 20,792 26,586
--------- --------- ---------
Cash and cash equivalents at end of year ........................ $ 47,916 $ 18,770 $ 20,792
========= ========= =========
</TABLE>
See Notes to Consolidated Financial Statements.
<PAGE>
THE ACTAVA GROUP INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
Common Stock Treasury Stock
------------ Additional Retained --------------
Shares Amount Capital Earnings Shares Amount Total
------ ------ ------- -------- ------ ------ -----
(In thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
Balance -- January 1, 1992 ................ 22,768 $ 22,768 $46,362 $287,854 6,224 $(121,553) $235,431
Net income for the year ................. 11,599 11,599
Cash dividends on Common Stock, $.36
per share ............................. (5,956) (5,956)
Common Stock issued under employee
stock options ......................... (1) 4 4
Other, principally foreign currency
translation adjustment ................ (1,231) (1,231)
------ -------- ------- -------- ----- --------- --------
Balance -- December 31, 1992 .............. 22,768 22,768 46,362 292,266 6,223 (121,549) 239,847
Net loss for the year ................... (47,594) (47,594)
Cash dividends on Common Stock, $.36
per share ............................. (6,250) (6,250)
Other, principally foreign currency
translation adjustment ................ (2,089) (2,089)
------ -------- ------- -------- ----- --------- --------
Balance -- December 31, 1993 .............. 22,768 22,768 46,362 236,333 6,223 (121,549) 183,914
Net loss for the year ................... (65,750) (65,750)
Common Stock issued ..................... (9,542) (733) 14,318 4,776
Net unrealized loss on available-for-sale
securities ............................ (609) (609)
Other, principally foreign currency
translation adjustment ................ (1,338) 3,665 2,327
------ -------- ------- -------- ----- --------- --------
Balance -- December 31, 1994 .............. 22,768 $ 22,768 $35,482 $173,639 5,490 $(107,231) $124,658
====== ======== ======= ======== ===== ========= ========
</TABLE>
See Notes to Consolidated Financial Statements.
<PAGE>
THE ACTAVA GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Summary of Significant Accounting Policies
Principles of Consolidation
The consolidated financial statements include the accounts of Actava and
its majority-owned subsidiaries. The equity method of accounting is used when
the Company has a 20% to 50% interest in other companies. Under the equity
method, original investments are recorded at cost and adjusted by the Company's
share of undistributed earnings or losses of these companies. All significant
intercompany transactions and accounts have been eliminated in consolidation.
Investments
The Company and its subsidiaries invest in various debt and equity
securities. In May, 1993, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 115, "Accounting for Certain
Investments in Debt and Equity Securities," which requires certain debt
securities to be reported at amortized cost, certain debt and equity securities
to be reported at market with current recognition of unrealized gains and
losses, and certain debt and equity securities to be reported at market with
unrealized gains and losses as a separate component of stockholders' equity. The
Company adopted the provisions of the new standard for investments held as of or
acquired after January 1, 1994. In accordance with the Statement, prior period
financial statements have not been restated to reflect the change in accounting
principle. The cumulative effect of adopting Statement 115 as of January 1, 1994
was not material.
Management determines the appropriate classification of investments as
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.
Inventories
Inventories of finished goods, work in process and raw materials are
stated at the lower of cost or market. The Last-In, First-Out (LIFO) method of
determining cost is used for a substantial portion of these inventories.
Advertising Costs
Effective January 1, 1992, Qualex changed its method of accounting for
the cost of its proof advertising program to recognize these costs at the time
the advertising was placed by the customer. Under the proof advertising program,
Qualex reimbursed certain advertising costs incurred by its customers up to a
percentage of sales to that customer. Qualex previously accrued such costs at
the time of the initial sale. Qualex believed that this new method was
preferable because it recognized advertising expense as it was incurred rather
than at the time of the initial sale to the customer. The 1992 adjustment of
$1,034,000 was included in the cumulative effect of change in accounting
principle for 1992 to apply retroactively the new method. The pro forma amounts
presented in the consolidated statements of operations for 1992 and 1991 reflect
the effect of the retroactive application of applying the new method.
Production advertising costs are expensed in the period incurred. The
costs of communicating advertising are expensed at the time of communication.
Amounts paid in advance for communicating advertising are reported as prepaid
expenses. Total advertising expense was $15,178,000, $12,624,000 and $16,120,000
for
<PAGE>
THE ACTAVA GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
1994, 1993 and 1992, respectively. Total prepaid advertising was $4,751,000 at
December 31, 1994. There were no prepaid advertising costs at December 31, 1993.
Property, Plant and Equipment
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 and on accelerated methods
for tax purposes. Amortization associated with capitalized leases is included in
depreciation expense.
Intangibles
Intangibles consist of the excess of the purchase price over the net
assets of businesses acquired and also included customer lists and covenants not
to compete in prior years. Amounts relating to the excess of the purchase price
over the net assets of businesses acquired are amortized over a 40-year period
using the straight-line method, unless acquired prior to November 1, 1970.
Amounts relating to customer lists and covenants not to compete were amortized
over two to five years or the life of the agreement, respectively. Management
continuously evaluates intangible assets to determine that no diminishment in
value has occurred. Management evaluates intangible assets on the basis of the
operations of the particular entity to which the intangible relates to determine
whether any changes in the nature and expected benefits to be derived from the
intangible have occurred which would require an adjustment to its recorded
value. In the event management believes that the recorded value of the
intangible is greater than its actual value, the Company will write-down the
value of the intangible. In conjunction with the evaluation of any possible
impairment of its intangibles, the Company also similarly assesses whether a
change in the life of the intangible is required for amortization purposes.
Intangible assets are summarized as follows (in thousands):
<TABLE>
<CAPTION>
December 31,
---------------------------------
1994 1993
------- ---------
<S> <C> <C>
Excess of purchase price over net assets of businesses acquired ........ $633 $349,546
Customer lists ......................................................... -- 29,847
Covenants not to compete ............................................... -- 7,233
---- --------
$633 $386,626
==== ========
</TABLE>
Income Taxes
Income taxes are provided for all taxable items in the statements of
operations regardless of when these items are reported for Federal income tax
purposes. Actava elects to utilize certain provisions of the Federal income tax
laws to reduce current taxes payable. Deferred income taxes are provided for
temporary differences in recognition of income and expenses for tax and
financial reporting purposes.
Effective January 1, 1993, the Company adopted FASB Statement No. 109,
"Accounting for Income Taxes." Under Statement 109, the liability method is used
in accounting for income taxes: deferred tax assets and liabilities are
determined based on differences between financial reporting and tax bases of
assets and liabilities and are measured using the enacted tax rates and laws
that will be in effect when the differences are expected to reverse. Prior to
the adoption of Statement 109, income tax expense was determined using the
deferred method: deferred tax expense was based on items of income and expense
that were reported in different years in the financial statements and tax
returns and were measured at the tax rate in effect in the year the difference
originated.
<PAGE>
THE ACTAVA GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
As permitted by Statement 109, the Company elected not to restate the
financial statements of any prior years. The cumulative effect of the change in
accounting principle on pre-tax income from continuing operations, net income
and financial position was not material.
Earnings Per Share of Common Stock
Primary earnings per share are computed by dividing net income (loss) by
the 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. 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.
Revenue Recognition
Sales are recognized when the products are shipped to customers.
Index Protection Agreements
The Company used index protection agreements to hedge interest rate risk
associated with Qualex's borrowings and to hedge the risk of market price
fluctuations of commodities bought and sold in the normal course of business.
These contracts were accounted for as hedges and any gains or losses were
deferred and included in the basis of the underlying transactions. Cash flows
from the contracts were accounted for in the same categories as the cash flows
from the items being hedged. As of December 31, 1994, the Company did not have
any index protection agreements due to the sale of Qualex. See "Photofinishing
Transaction and Discontinued Operation."
During 1993, Qualex entered into a hedge agreement with a bank which was
to expire in 1996 related to Qualex's $200,000,000 of Senior Notes. The hedge
agreement included a Basic Transaction for a notional amount of $100,000,000
under which Qualex paid an interest rate based on the three-month London
Interbank Offered Rate (LIBOR) and received a fixed interest rate of 4.0587%
quarterly, and an Enhancement Transaction for a notional amount of $163,000,000
under which Qualex paid an interest rate based on the three-month LIBOR and
received a variable interest rate based on the prime rate less 2.49%. A net
settlement was calculated and paid on a quarterly basis. At December 31, 1993,
termination of this rate swap agreement would have required a cash payment by
Qualex of $1,158,000 based on market quotes.
Qualex had also entered into combined put/call agreements which provided
protection for silver recoveries from photofinishing processes. The outstanding
contracts at December 31, 1993 covered the sale of 2,900,000 troy ounces of
silver at index amounts of $3.85 to $4.67 per ounce in 1994 and 1,420,000 troy
ounces per year at index amounts of $4.23 to $5.10 per ounce from 1995 to 2005.
In 1997, Qualex had the sale of 4,300,000 troy ounces covered by such agreements
at an index amount of $5.15 per ounce. During 1993 and 1992, gain amortization
related to these contracts totaled $2,445,000 and $1,232,000, net of tax, and is
included in income from discontinued operations. At December 31, 1993 and 1992,
respectively, $7,442,000 and $11,476,000 of these gains were recorded as
deferred income. At December 31, 1993, termination of the combined put/call
agreements would have required cash payments by Qualex of $18,688,000 based on
market quotes.
<PAGE>
THE ACTAVA GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Hedging Instruments
At December 31, 1994, the Company had entered into several forward
exchange contracts in the aggregate notional amount of $8,000,000 to effectively
hedge amounts due from foreign subsidiaries. The contracts are accounted for as
hedges and any gains or losses are deferred and included in the basis of the
underlying transaction. The contracts matured or will mature in 1995.
Termination of these forward exchange contracts at December 31, 1994 would
require the Company to make cash payments of $39,000, based on quoted market
prices of comparable contracts or current settlement values. The table below
summarizes by currency the contractual amounts of the Company's forward exchange
contracts at December 31, 1994:
Forward
Exchange Unrealized
Contracts Gain/(Loss)
----------- --------
Belgian Franc ................................. $ 1,400,000 $ (9,000)
French Franc .................................. 2,600,000 (9,000)
Deutschemark .................................. 2,600,000 (17,000)
Pound Sterling ................................ 1,400,000 (4,000)
----------- --------
$ 8,000,000 $(39,000)
=========== ========
Research and Development Costs
Research and development expenditures are expensed when incurred. During
1994, 1993 and 1992 the Company expensed $5,972,000, $4,407,000 and $4,262,000,
respectively.
Self-Insurance
The Company is primarily self-insured for workers' compensation, health,
automobile, product and general liability costs. The self-insurance claim
liability is determined based on claims filed and an estimate of claims incurred
but not yet reported.
Accrued Warranty
The Company provides an accrual for estimated future warranty costs
related to various product coverage programs, based on the historical
relationship of actual costs as a percentage of sales. During 1993, Snapper
revised its estimate of accrued product warranty expense to reflect an increase
in the amount of future warranty expense to be incurred due to increased
warranty claims. This change in accounting estimate resulted in an additional
$4,000,000 charge to net income in 1993.
Environmental Costs
Environmental expenditures that relate to current operations are expensed
or capitalized as appropriate. Expenditures that relate to an existing condition
caused by past operations, and which do not contribute to current or future
revenue generation, are recorded as current expenses. Liabilities are recorded
when environmental assessments and/or remedial efforts are probable and when the
cost can be reasonably estimated.
Reclassifications
Certain reclassifications were made in prior years' financial statements
to conform to current presentations.
<PAGE>
THE ACTAVA GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Supplemental Cash Flow Information
The following tables provide additional information related to the
Consolidated Statements of Cash Flows (in thousands):
<TABLE>
<CAPTION>
Years Ended December 31,
-------------------------------
1993 1992
1994 (Restated) (Restated)
--------- -------- --------
<S> <C> <C> <C>
Items providing (not providing) cash from continuing operations:
Income from equity investment in Roadmaster Industries,
Inc. ................................................................ $ (365) $ -- $ --
Depreciation ........................................................... 12,832 11,472 8,638
Amortization ........................................................... 504 631 108
Provision for doubtful accounts ........................................ 3,204 4,661 2,941
Provision for plant closure costs ...................................... -- (865) (1,132)
Changes in operating assets and liabilities, net of effects from purchases
and dispositions:
Accounts receivable .................................................... (8,607) (34,319) (45,283)
Inventories ............................................................ 13,908 (17,529) (7,259)
Prepaid expenses and other assets ...................................... (2,742) 1,591 (1,616)
Accounts payable, accrued expenses and other current
liabilities ........................................................... 3,230 17,814 (14,350)
Current and deferred taxes ............................................. 574 88 14,790
Other operating activities - net ....................................... 1,677 374 (1,018)
--------- -------- --------
Net items providing (using) cash from continuing operations .............. $ 24,215 $(16,082) $(44,181)
========= ======== ========
Items providing (not providing) cash from discontinued operations:
Minority interest ...................................................... $ (2,835) $ 8,526 $ 11,922
Loss on disposal ....................................................... 37,858 -- --
Depreciation ........................................................... 16,780 33,193 26,392
Amortization ........................................................... 11,633 25,149 23,898
Provision for doubtful accounts ........................................ 1,263 2,601 478
Provision for plant closure costs ...................................... 930 4,096 --
Changes in operation of assets and liabilities, net of effects from
purchases and dispositions of discontinued operations:
Accounts receivable .................................................... (14,443) 3,654 19,819
Inventories ............................................................ 1,303 (13,906) 2,496
Prepaid expenses and other assets ...................................... 3,552 (15,503) (22,005)
Accounts payable, accrued expenses and other current
liabilities .......................................................... (7,723) (17,515) (6,647)
Current and deferred taxes ............................................. (10,456) 16,030 1,542
--------- -------- --------
Net items providing cash from discontinued operations .................... $ 37,862 $ 46,325 $ 57,895
========= ======== ========
Net assets of business sold:
Total assets ........................................................... $ 770,901 $ -- $ --
Total liabilities ...................................................... 398,973 -- --
--------- -------- --------
Net assets ............................................................. $ 371,928 $ -- $ --
========= ======== ========
</TABLE>
<PAGE>
THE ACTAVA GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Years Ended December 31,
-------------------------------------
1993 1992
1994 (Restated) (Restated)
----------- ----------- -----------
Net assets of businesses purchased:
Total assets ................... $ -- $ 71,693 $ 58,040
Total liabilities .............. -- 48,063 27,448
----------- ----------- -----------
Net assets ..................... $ -- $ 23,630 $ 30,592
=========== =========== ===========
Interest paid .................. $ 34,729 $ 44,570 $ 27,279
Income taxes paid .............. $ 393 $ 11,406 $ 3,334
Photofinishing Transaction and Discontinued Operation
Qualex, Inc. is a photofinishing business formed in March 1988 by the
combination of Actava's photofinishing operations with the domestic
photofinishing operations of Eastman Kodak Company. Prior to June 30, 1994,
Actava owned 51% of the voting stock of Qualex, was entitled to and elected a
majority of the members of the Board of Directors of Qualex, and had the ability
through its control of the Board of Directors to declare dividends, remove the
executive officers of Qualex and otherwise direct the management and policies of
Qualex, except for policies relating to certain designated actions requiring the
consent of at least one member of the Board of Directors of Qualex designated by
Kodak. Because of these rights, the Company believes that it had effective
unilateral control of Qualex which was not temporary during the period from 1988
until the second quarter of 1994. As a result, the Company consolidated the
results of operations of Qualex with the results of operations of the Company
for periods ending prior to June 30, 1994 and presented Kodak's portion of
ownership and equity in the income of Qualex as a minority interest.
In June 1994, the Company decided to sell its interest in Qualex and
engaged in negotiations with Kodak regarding the sale of such interest.
Accordingly, the results of Qualex for all years presented are reported in the
accompanying reclassified statements of operations under discontinued
operations. In the second quarter of 1994, the Company provided for an
anticipated loss of $37,858,000 on the sale of its interest in Qualex and the
related covenant not to compete and release. No income tax expenses or benefits
were recognized due to the Company's net operating loss carryforwards and
recognition of tax benefits in prior periods.
On August 12,1994, Kodak purchased all of the Company's interest in Qualex
and obtained a covenant not to compete and related releases from the Company in
exchange for $50,000,000 in cash and a promissory note in the principal amount
of $100,000,000. The promissory note is payable in installments of $50,000,000
each, without interest, on February 13, 1995 and August 11, 1995. Because the
principal amount due under the note does not bear interest, the Company
discounted the value of the note to $92,832,000 and will record imputed interest
income of $7,168,000 over the term of the note. Approximately $3,500,000 of
imputed interest income was recorded during 1994. All amounts received in
exchange for the covenant not to compete and release were included in the
computation of the anticipated loss on the sale of Qualex. The Company received
$50,000,000 under the promissory note on February 13, 1995.
<PAGE>
THE ACTAVA GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
The following assets and liabilities of Qualex were included in the
Company's balance sheet at December 31, 1993; however, no assets and liabilities
are included in the Company's balance sheet at December 31, 1994 due to the sale
of the Company's interest in Qualex on August 12, 1994 (in thousands).
FINANCIAL POSITION OF QUALEX
December 31,
1993
--------
Cash and short-term investments ................................. $ 4,060
Net accounts receivable ......................................... 69,015
Inventories ..................................................... 29,381
Other assets .................................................... 38,153
--------
Total current assets ..................................... 140,609
Net property, plant and equipment ............................... 202,150
Other assets .................................................... 30,413
Long-term investments ........................................... 26,611
Intangibles ..................................................... 371,106
--------
Total assets ............................................. $770,889
========
Current liabilities ............................................. $130,845
Deferred income taxes ........................................... 22,446
Long-term debt .................................................. 217,987
Stockholders' equity ............................................ 399,611
--------
Total liabilities and stockholders' equity ............... $770,889
========
The Company's statements of operations for the three years in the period
ended December 31, 1994, have been restated to reflect Qualex as a discontinued
operation. The results of Qualex for these periods through August 12, 1994, the
date of sale of Qualex, are as follows (in thousands):
<TABLE>
<CAPTION>
1994 1993 1992
--------- --------- ---------
<S> <C> <C> <C>
Net sales ........................................... $ 333,970 $ 775,299 $ 770,853
Operating expenses .................................. 342,134 723,952 716,217
--------- --------- ---------
Operating profit (loss) ............................. (8,164) 51,347 54,636
--------- --------- ---------
Interest expense .................................... (8,582) (16,488) (12,643)
Other income (expense) .............................. (439) (1,209) 1,448
--------- --------- ---------
Income (loss) before taxes .......................... (17,185) 33,650 43,441
Income taxes (benefit) .............................. (11,514) 16,598 21,666
--------- --------- ---------
Net income (loss) from discontinued
operations before minority interest ............... (5,671) 17,052 21,775
Minority interest ................................... 2,836 (8,526) (10,888)
--------- --------- ---------
Net income (loss) from discontinued operations ...... $ (2,835) $ 8,526 $ 10,887
========= ========= =========
</TABLE>
Acquisitions
On June 8, 1993, the Company acquired substantially all the assets of
Diversified Products Corporation (DP) for a net purchase price consisting of
$11,629,500, the issuance of 1,090,909 shares of the Company's Common Stock
valued at $12,000,000, and the assumption or payment of certain liabilities
including trade payables and a revolving credit facility. The Company also
entered into an agreement which
<PAGE>
THE ACTAVA GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
could provide the seller the right to additional payments depending upon the
value of the issued shares over a period of not longer than one year from the
purchase date. The issuance of additional payments of cash or additional shares
would not increase the cost of DP; any subsequent issuance would only affect the
manner in which the total purchase price was recorded for Actava. This
transaction was accounted for using the purchase method of accounting;
accordingly, the purchased assets and liabilities were recorded at their
estimated fair value at the date of the acquisition. The purchase price resulted
in an excess of costs over net assets acquired of approximately $11,417,000. The
results of operations of the acquired business were included in the
consolidated financial statements from the date of acquisition to the date the
Company transferred ownership of DP to Roadmaster Industries, Inc. See
"Investment in Roadmaster Industries, Inc."
The following data represents the combined unaudited operating results of
Actava on a pro forma basis as if the above transaction had taken place at the
beginning of 1992. The pro forma information does not necessarily reflect the
results of operations as they would have been had the transaction actually taken
place at that time. Adjustments include amounts of depreciation to reflect the
fair value and economic lives of property, plant and equipment and amortization
of intangible assets. (in thousands, except per share amounts):
Pro Forma Year Ended
December 31,
--------------------
1993 1992
---- ----
(Unaudited)
Sales .......................................... $ 519,477 $534,140
Net income (loss) .............................. (56,988) 1,352
Income (loss) per share -- primary ............. (3.23) .08
During 1992, Qualex acquired Samiljan Foto, L.P. and certain other
photofinishing operations for $21,228,000 and $22,997,000 respectively,
including expenses. For one of the businesses in which Qualex purchased a
majority interest in 1992, the sellers had the right to require Qualex to
purchase the remaining interest, beginning in 1997, at an amount not to exceed
$18,000,000.
These transactions were accounted for using the purchase method of
accounting, accordingly; the assets and liabilities of the purchased businesses
were recorded at their estimated fair value at the dates of acquisition. The
purchase price resulted in an excess of costs over net assets acquired of
approximately $23,321,000 for 1992, in addition to $19,215,000 attributed to
customer lists. The results of operations of the businesses acquired were
included in the consolidated financial statements since the dates of
acquisition.
Accounts and Notes Receivable
Receivables from sales of Actava's lawn and garden products amounted to
$137,815,000 and $146,994,000 at December 31, 1994 and 1993, respectively. The
receivables are primarily due from independent distributors located throughout
the United States. Amounts due from distributors are supported by a security
interest in the inventory or accounts receivable of the distributors. The
receivables generally have extended due dates which correspond to the seasonal
nature of the products' retail selling season. Concentrations of credit risk due
to the common business of the customers are limited due to the number of
customers comprising the customer base and their geographic location. Ongoing
credit evaluations of customers financial condition are performed and reserves
for potential credit losses are maintained. Such losses, in the aggregate, have
not exceeded management's expectations.
During 1994, Actava sold its interest in its photofinishing business and
has reclassified the results of its operations as a discontinued operation.
Photofinishing sales in prior years included sales to national, regional and
local retailers located throughout the United States, including mass merchants,
grocery store chains and
<PAGE>
THE ACTAVA GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
drug store chains. Photofinishing receivables were $70,744,000 at December 31,
1993 and were generally unsecured and due within 20 days following the end of
each month. Accounts receivable from photofinishing sales at December 31, 1993
included $54,711,000 due from national retail chains. At December 31, 1993,
$9,812,000 was receivable from one such customer on net sales of $84,297,000.
The Company provided an allowance for doubtful accounts equal to the estimated
losses expected to be incurred in the collection of accounts receivable. Such
losses were consistently within management's expectations.
During 1994, Actava combined its sporting goods companies with Roadmaster
Industries, Inc. in exchange for common stock of Roadmaster which is accounted
for under the equity method. Receivables in prior years from the sale of
sporting goods were primarily from mass merchants and sporting goods retailers
located throughout the United States. The receivables, which were unsecured,
were $71,836,000 at December 31, 1993, and were generally due within 30 to 60
days. At December 31, 1993, approximately $23,362,000 was due from four
customers. The sporting goods companies maintained allowances for potential
credit losses and such losses, in the aggregate, had not exceeded management's
expectations.
Triton Group Ltd. Loan
At December 31,1994, the Company had a $22,976,000 note receivable from
Triton Group Ltd. secured by 3,690,998 shares of Actava Common Stock. At
December 31, 1993, $26,726,000 was outstanding under the loan and was secured
by 4,413,598 shares of Actava Common Stock.
Effective June 25, 1993, the Company and Triton modified the terms of the
loan as part of a plan of reorganization filed by Triton under Chapter 11 of the
U.S. Bankruptcy Code. The modifications, which became effective June 25, 1993,
included: extending the due date of the loan to April 1, 1997; reducing the
interest rate to prime plus 1 1/2% for the first six months following June 25,
1993, to prime plus 2% for the next six months, and to prime plus 2 1/4% for the
remainder of the term of the note: revising collateral maintenance (margin call)
requirements; and providing for release of collateral under certain
circumstances. Under the modified agreements, Actava's right of first refusal
with respect to any sale by Triton of its Actava Common Stock will continue in
effect until the loan is paid in full. The Stockholder Agreement was amended to
permit Triton to designate two directors (who are not officers or employees of
Triton) on an expanded nine-member Board of Directors so long as Triton
continues to own 20% or more of Actava's outstanding Common Stock.
Triton filed a motion on July 30, 1993, with the United States Bankruptcy
Court for the Southern District of California seeking to modify Triton's
recently approved Plan of Reorganization. The modifications sought by Triton
would have amended or eliminated the collateral maintenance (margin call)
provisions that are an integral part of the Amended and Restated Loan Agreement.
On August 2, 1993, the Bankruptcy Court entered a temporary restraining order
suspending the effectiveness of the margin call provisions until the Court had
an opportunity to hear Triton's motion seeking preliminary injunction. The
motion seeking a preliminary injunction was heard on August 10, 1993, and was
denied. Triton then withdrew its motion to modify its Plan of Reorganization.
Therefore, the provisions of the Amended and Restated Loan Agreement continue to
remain in effect. On August 19, 1993, the Amended and Restated Loan agreement
was amended to allow Triton to satisfy certain margin call requirements by
making deposits to a Collateral Deposit Account in lieu of delivering
certificates of deposit. The margin call provisions for principal repayments and
transfers of shares of Company Common Stock were not amended. On December 7,
1993, the Amended and Restated Loan Agreement was amended, in connection with a
$5,000,000 prepayment of principal received on December 7, 1993, to provide for
quarterly principal payment installments of $1,250,000 due on the last day of
each quarter of each year beginning March 31, 1994, with any unpaid principal
and accrued interest due on April 1, 1997. The Agreement was also amended to
require 75,000 additional shares of Actava Common Stock to be pledged as
collateral and to modify the margin call provisions of the Agreement to provide
a $7.50 minimum per share value of Actava Common Stock for purposes of
determining the amount of any margin call mandatory payments. These
modifications limit the circumstances under which Triton must pledge additional
collateral
<PAGE>
THE ACTAVA GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
for the loan: however, 3,690,998 shares of Actava Common Stock owned by Triton
will continue to be pledged to secure the loan until the loan is paid in full.
At March 10, 1995, the pledged shares had a market value of $36,449,000 as
compared to the loan balance of $22,976,000. In the opinion of management, the
shares held as collateral are, and will continue to be, sufficient to provide
for realization of the loan.
Metromedia Company Loan
On August 31, 1994, the Company entered into letters of intent providing
for a proposed combination of the Company with Orion Pictures Corporation
("Orion"), MCEG Sterling Incorporated ("Sterling") and Metromedia International
Telecommunications Inc. ("MITI") (the "Proposed Metromedia Transaction").
Metromedia Company ("Metromedia") and its affiliates control in excess of 50% of
the voting power of both Orion and MITI. Pursuant to the letters of intent, the
Company and Metromedia entered into a Credit Agreement dated as of October 11,
1994 (the "Credit Agreement") under which the Company will make loans to
Metromedia in an amount not to exceed an aggregate of S55,000,000. Under the
terms of the Credit Agreement, Metromedia will use the proceeds of the loans to
make advances to or to pay obligations on behalf of Orion, Sterling and MITI.
All loans made by the Company to Metromedia under the Credit Agreement are
secured by shares of stock of Orion and MITI owned by Metromedia and its
affiliates. In addition, a general partner of Metromedia has personally
guaranteed the loans. The Credit Agreement provides that interest will be due on
the principal amount of all loans at an annual rate equal to the prime rate
announced from time to time by Chemical Bank. Interest will be increased to
prime plus three percent per annum if a party other than the Company terminates
discussions relating to the Proposed Metromedia Transaction. All loans are due
and payable on April 12, 1995. The outstanding balance under the Credit
Agreement as of December 31, 1994 was $32,395,000.
Inventories
Inventory balances are summarized as follows (in thousands):
December 31,
-----------------------
1994 1993
--------- ---------
Finished goods and goods purchased for resale .. $ 12,618 $ 82,559
Raw materials and supplies ..................... 15,395 46,018
--------- ---------
28,013 128,577
Reserve for LIFO cost valuation ................ (14,610) (20,138)
--------- ---------
$ 13,403 $ 108,439
========= =========
Work in process is not considered significant.
During 1994, certain inventory quantities were reduced resulting in a
liquidation of LIFO inventory quantities which were carried at lower costs
prevailing in prior years as compared with the cost of current year purchases.
The utilization of this lower cost inventory decreased the net loss by
approximately $1,200,000 and decreased loss per share of common stock by $.07.
<PAGE>
THE ACTAVA GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Investments
All of the Company's investments are classified as available-for-sale and
are summarized as follows (in thousands):
<TABLE>
<CAPTION>
Available-for-Sale Securities
------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
December 31, 1994
U.S. securities .................... $ 13,261 $ -- $ 559 $ 12,702
Other debt securities .............. 1,669 -- 50 1,619
--------- --------- --------- ---------
Total debt securities ....... $ 14,930 $ -- $ 609 $ 14,321
========= ========= ========= =========
</TABLE>
<TABLE>
<CAPTION>
Available-for-Sale Securities
------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
December 31, 1993
Short-term:
U.S. securities ..................... $ 26,460 $ 147 $ -- $ 26,607
Other debt securities ............... 3,175 -- -- 3,175
--------- --------- --------- ---------
Total short-term debt securities $ 29,635 $ 147 $ -- $ 29,782
========= ========= ========= =========
Long-term:
Equity securities ................... $ 15,850 $ 275 $ 10 $ 16,115
U.S. securities ..................... 7,758 -- 39 7,719
Other debt securities ............... 3,003 11 17 2,997
--------- --------- --------- ---------
Total long-term debt securities $ 26,611 $ 286 $ 66 $ 26,831
========= ========= ========= =========
</TABLE>
The gross realized gains for 1994 on sales of available-for-sale
securities totaled approximately $205,000 and the gross realized losses totaled
approximately $240,000. The net adjustment to unrealized holding losses on
available-for-sale securities included as a separate component of shareholders'
equity totaled $609,000 in 1994.
The amortized cost and estimated fair value of debt and marketable equity
securities at December 31, 1994 by contractual maturity, are shown below (in
thousands). Expected maturities will differ from contractual maturities because
the issuers of the securities may have the right to prepay obligations without
prepayment penalties.
Estimated
Amortized Fair
Cost Value
--------- ---------
Available-for-Sale
Due after one year through three years ..... $ 8,174 $ 7,872
Due after three years ...................... 6,756 6,449
--------- ---------
Total ............................ $ 14,930 $ 14,321
========= =========
All available-for-sale securities are classified as current since they are
available for use in the Company's current operations.
<PAGE>
THE ACTAVA GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Investment in Roadmaster Industries, Inc.
On December 6, 1994, the Company transferred ownership of its four
sporting goods subsidiaries to Roadmaster Industries, Inc. in exchange for
19,169,000 shares of Roadmaster's Common Stock. As of December 31, 1994, the
Company owned 39% of the issued and outstanding shares of Roadmaster's Common
Stock based on approximately 48,600,000 shares of Roadmaster's Common Stock
outstanding. The four Actava subsidiaries transferred to Roadmaster were
Diversified Products Corporation, Hutch Sports USA Inc., Nelson/Weather-Rite,
Inc. and Willow Hosiery Company, Inc. No gain or loss was recognized for this
nonmonetary transaction. The Company's initial investment in Roadmaster was
recorded at approximately $68,300,000 and is accounted for by the equity method.
The excess of the Company's investment in Roadmaster over its share in the
related underlying equity in net assets is being amortized on a straight-line
basis over a period of 40 years. The remaining unamortized balance at December
31, 1994 was $28,855,000.
The quoted market value of the Company's investment in Roadmaster common
stock as of December 31, 1994, was $3.625 per share or a total value of
$69,488,000 and as of March 10, 1995, was $3.00 per share or a total value of
$57,507,000.
Summarized financial information for Roadmaster is shown below (in
thousands):
Roadmaster Industries, Inc.
Year Ended December 31,
------------------------------
1994 1993 1992
---- ---- ----
Net sales ........................ $455,661 $312,160 $226,201
Gross profit ..................... 66,790 48,129 35,250
Net income ....................... 5,000 7,633 3,697
December 31,
---------------------
1994 1993
---- ----
Current assets ......................... $358,169 $223,541
Non-current assets ..................... 158,478 58,234
Current liabilities .................... 181,778 100,723
Non-current liabilities ................ 231,772 162,054
Minority interest ...................... -- 622
Redeemable common stock ................ 2,000 2,000
Total stockholders' equity ............. 101,097 16,376
Accrued Expenses and Other Current Liabilities
Accrued expenses and other current liabilities, including $31,392,000 in
1993 due to Eastman Kodak Company, are summarized as follows (in thousands):
December 31,
----------------
1994 1993
---- ----
Accrued salaries and wages ......................... $ 1,370 $ 8,363
Accrued interest ................................... 8,176 14,471
Accrued advertising and promotion .................. 987 25,238
Deferred income .................................... -- 13,791
Self-insurance claims payable ...................... 30,442 35,070
Reserve for relocation and consolidation of
photofinishing operations ........................ -- 6,754
Other .............................................. 42,281 82,828
-------- --------
$ 83,256 $186,515
======== ========
<PAGE>
THE ACTAVA GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Postretirement Benefits
Effective January 1, 1993, the Company adopted FASB Statement No. 106,
"Accounting for Postretirement Benefits Other Than Pensions." The Company and
its subsidiaries provide group medical plans 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 the Company's expressed
intent to increase the retiree contribution rate annually for the expected
medical trend rate for that year. The Company funds the excess of the cost of
benefits under the plans over the participants' contributions as the costs are
incurred. The coordination of benefits with medicare uses a supplemental, or
exclusion of benefits, approach.
As permitted by Statement 106, the Company elected to immediately
recognize the effect in the statement of operations for the first quarter of
1993 as a $4,404,000 charge to net income as the cumulative effect of a change
in accounting principle. The annual net periodic postretirement benefit expense
for 1993 decreased by $38,000 as a result of adopting the new rules.
Postretirement benefit expense for 1992, recorded on a cash basis, was not
restated. The pro forma amounts presented in the consolidated statements of
operations reflect no effect of the retroactive application of applying the new
method as it is not material. The assumed health care cost trend rate used to
measure the expected cost of benefits covered by the plan for 1994 is 12%. This
trend rate is assumed to decrease in 1% decrements to 6% in 2001 and years
thereafter. An 8% discount rate per year, compounded annually, was assumed to
measure the accumulated postretirement benefit obligation as of December 31,
1994, as compared to 7% as of December 31, 1993. A 1% increase in the assumed
health care cost trend rate would increase the accumulated postretirement
benefit obligations as of December 31, 1994, by 10% and the net periodic
postretirement benefit cost by 26%.
The following table presents the plans' funded status reconciled with
amounts recognized in the Company's consolidated balance sheet (in thousands):
December 31,
--------------------
1994 1993
-------- --------
Accumulated postretirement benefit obligation:
Retirees ...................................... $ (913) $(1,094)
Fully eligible active plan participants ....... (360) (788)
Other active plan participants ................ (609) (1,149)
------- -------
(1,882) (3,031)
Plan assets ..................................... -- --
------- -------
Accumulated postretirement benefit obligation
in excess of plan assets ...................... (1,882) (3,031)
Unrecognized prior service cost ................. (1,687) (1,995)
Unrecognized net (gain) or loss ................. (181) 544
------- -------
Accrued postretirement benefit cost ............. $(3,750) $(4,482)
======= =======
Net periodic postretirement benefit cost (benefit) includes the following
components (in thousands):
1994 1993
---- ----
Service cost ............................................... $ 89 $ 96
Interest cost .............................................. 139 296
Amortization of unrecognized prior service cost ............ (308) (154)
Amortization of unrecognized gain .......................... (30) --
----- -----
$(110) $ 238
===== =====
<PAGE>
THE ACTAVA GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Notes Payable and Long-Term Debt
Qualex had three separate line of credit agreements for working capital
needs for which $3,200,000 was outstanding at December 31, 1993. These
agreements were $5,000,000 each, for a total of $15,000,000. The Company paid a
facility fee of 1/4% per annum on the committed line of credit agreements.
Included in Notes Payable at December 31, 1994 and 1993 is $63,302,000 and
$87,359,000, respectively, which was outstanding under a three year Finance and
Security Agreement which provides working capital to the Snapper division. The
Agreement, dated October 23, 1992, is for $75,000,000 (and may be increased
under certain circumstances up to $100,000,000 for a specified period of time).
Interest is payable at the prime rate plus 3/4% to 1 1/4%, depending upon the
prime rate in effect. The Agreement provides for the payment of an annual line
fee of $487,500 which is subject to increases in certain circumstances. The loan
is principally secured by Snapper assets and certain inventory of Snapper and
requires Actava to comply with various restrictive financial covenants. The
assets which serve as collateral are determined by reference to the outstanding
balance under the credit agreement and the qualification of the assets as
collateral as defined in the credit agreement; however, the assets potentially
available as collateral are, in the aggregate, $143,343,000. Also included in
notes payable at December 31, 1994 and 1993 is $1,271,000 and $3,890,000,
respectively, under a short-term credit facility with a bank for the Company's
foreign subsidiaries. See Commitments and Contingencies. The interest rate on
the note varied between 5.9% and 7.0% during 1994.
During 1992, in order to provide additional working capital and for
general corporate purposes, an Actava Sports subsidiary entered into a three
year Loan and Security Agreement with a financial institution to provide up to
$35,000,000 of working capital. The Agreement was transferred in the Roadmaster
business transaction. Interest was payable at the prime rate plus 1 1/4%. The
Agreement provided for a facility fee of $350,000. At December 31, 1994, no
amount is reflected in the balance sheet while $1,846,000 was outstanding at
December 31, 1993.
During 1992, in order to provide additional working capital and for
general corporate purposes, an Actava Sports subsidiary entered into a one-year
Revolving Loan Agreement with a financial institution to provide up to
$6,500,000 for working capital. The Agreement was transferred in the Roadmaster
business transaction. Interest was payable at the prime rate of the financial
institution. At December 31, 1994, no amount is reflected in the balance sheet
while $2,700,000 was outstanding at December 31, 1993.
In April 1993, a Revolving Loan and Security Agreement with respect to a
revolving credit facility of up to $10,000,000 was entered into by an Actava
Sports subsidiary. The Agreement was transferred in the Roadmaster business
transaction. Interest was payable at the prime rate plus 1%. The Agreement
provided for a facility fee of $25,000. At December 31, 1994 no amount is
reflected in the balance sheet and at December 31, 1993 no amount was
outstanding under the agreement.
In December 1993, an Actava Sports subsidiary, DP, entered into a Finance
and Security Agreement with two financial institutions in order to provide up to
$50,000,000 of working capital under a revolving credit facility. The agreement
was transferred in the Roadmaster business transaction. Interest was payable at
the prime rate plus 1 1/4%. The Agreement provided for an annual facility fee of
$375,000. At December 31, 1994, no amount is reflected in the balance sheet and
at December 31,1993, $36,178,000 was outstanding under the Agreement.
The weighted average interest rate on short-term borrowings was 8.24% and
7.82% for the years ended December 31, 1994 and 1993, respectively.
<PAGE>
THE ACTAVA GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Long-term debt is summarized as follows (in thousands):
December 31,
-------------------
1994 1993
-------- --------
Senior notes -- Qualex ................................... $ -- $200,000
Revolving credit agreement -- Qualex ..................... -- 10,000
Capitalized lease obligations ............................ 452 545
Other long-term debt:
Secured (4-9% notes due at various dates to 2002) ....... 1,095 1,900
Unsecured (4-8% notes due at various dates to 2001) .... 1,000 8,442
-------- --------
$ 2,547 $220,887
======== ========
Qualex issued through a private placement $200,000,000 of Senior Notes in
1992 with interest rates ranging from 7.99% to 8.84%.
During 1992, Qualex entered into an unsecured $115,000,000 Revolving
Credit Agreement with eight financial institutions with an expiration date in
May 1995. Interest was payable under three rate options which were determined by
reference to the prime rate, the London interbank offered rate plus 1/2% to
3/4%, and competitive bids. The Agreement provided for a participation fee of
1/8% and an annual facility fee of 1/4%. At December 31, 1994 no amount was
reflected in the balance sheet and at December 31, 1993, $10,000,000 was
outstanding under the agreement.
Collateral for certain of the long-term debt includes real property.
Assets pledged as collateral under the borrowings are not material. Maturities
of long-term and subordinated debt are $4,057,000 in 1996, $15,733,000 in 1997,
$59,472,000 in 1998, $4,478,000 in 1999 and $76,000,000 in 2000 and years
thereafter.
The fair value of Actava's long-term and subordinated debt, including the
current portion, at December 31, 1994 is estimated to be approximately
$163,000,000 and was estimated at $436,000,000 at December 31, 1993. These
estimates are based on a discounted cash flow analysis using Actava's current
incremental borrowing rates for similar types of agreements and on quoted market
prices for issues which are traded.
Subordinated Debt
Subordinated debt is summarized as follows (in thousands):
<TABLE>
<CAPTION>
December 31,
------------------
1994 1993
-------- --------
<S> <C> <C>
6% Senior Swiss Franc Bonds due 1996
[redeemed February 17, 1995] ........................................... $ 30,152 $ 30,152
6 1/2% Convertible Debentures due 2002 .................................. 75,000 75,000
9 1/2% Debentures due 1998, net of unamortized discount of $1,023 in 1994
and $1,308 in 1993 ..................................................... 58,461 58,176
9 7/8% Senior Debentures due 1997, net of unamortized discount of $296 in
1994 and $468 in 1993 .................................................. 20,704 23,532
10% Debentures due 1999 ................................................. 6,703 7,441
-------- --------
191,020 194,301
Less current portion .................................................... 33,827 3,750
-------- --------
$157,193 $190,551
======== ========
</TABLE>
<PAGE>
THE ACTAVA GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
In 1986 Actava issued 6% Senior Subordinated Swiss Franc Bonds due 1996
for 100,000,000 Swiss francs. Simultaneously, in order to eliminate exposure to
fluctuations in the currency exchange rate over the life of the bonds, Actava
entered into a currency swap agreement with a financial institution whereby
Actava received approximately $48,000,000 in exchange for the Swiss Franc Bond
proceeds. As a result of the swap agreement, Actava, in effect, made its
interest and principal bond repayments in U.S. dollars without regard to changes
in the currency exchange rate. A default by the counterparty to the swap
agreement would have exposed Actava to potential currency exchange risk on the
remaining bond interest and principal payments in that Actava would have been
required to purchase Swiss francs at current exchange rates rather than at the
swap agreement exchange rate. At December 31, 1994, the swap agreement had an
effective exchange rate over its remaining term of .5255 Swiss francs per U.S.
dollar while the U.S. dollar equivalent market exchange rate was .7644. After
considering the stated interest rate, the cost of the currency swap agreement,
taxes and underwriting commissions, the effective cost of the bonds was
approximately 11.3%. The fair value of the currency swap as of December 31, 1994
and 1993, was $15,820,000 and $10,795,000, respectively; however, domestic
interest rates and foreign currency markets affect this value.
In December, 1994, Actava entered into an agreement to redeem the
outstanding Swiss Franc Bonds at par plus accrued interest and to terminate the
currency swap agreement on February 17, 1995. The Company recorded an
extraordinary loss of $1,601,000 in 1994 related to this early extinguishment of
debt.
In 1987 Actava issued $75,000,000 of 6 1/2% Convertible Subordinated
Debentures due in 2002 in the Euro-dollar market. The Debentures are convertible
into Actava's Common Stock at a conversion price of $4l 3/4 per share. At
Actava's option the Debentures may be redeemed at 100% plus accrued interest
until maturity.
The 9 7/8% Senior Subordinated Debentures are redeemable at the option of
Actava at 101.035% of the principal amount plus accrued interest if redeemed
prior to March 15, 1995, and at decreasing prices thereafter. Mandatory sinking
fund payments of $3,000,000 (which Actava may increase to $6,000,000 annually)
began in 1982 and are intended to retire, at par plus accrued interest, 75% of
the issue prior to maturity.
At the option of Actava, the 10% Subordinated Debentures are redeemable,
in whole or in part, at the principal amount plus accrued interest. Sinking fund
payments of 10% of the outstanding principal amount commenced in 1989; however,
Actava receives credit for Debentures redeemed or otherwise acquired in excess
of sinking fund payments.
Redeemable Common Stock
Redeemable Common Stock represents 1,090,909 shares of common stock which
were issued in the acquisition of substantially all the assets and liabilities
of Diversified Products Corporation. See "Acquisitions." These shares were
redeemed for $12,000,000 on February 17, 1995.
Capital Stock
Preferred and Preference Stock
There are 5,000,000 authorized shares of Preferred Stock and 1,000,000
authorized shares of Preference Stock none of which were outstanding or
designated as to a particular series at December 31, 1994.
Common Stock
There are 100,000,000 authorized shares of Common Stock, $1 par value. At
December 31, 1994, 1993 and 1992 there were 18,368,067, 17,635,186 and
16,544,277 shares issued and outstanding, respectively, after
<PAGE>
THE ACTAVA GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
deducting 5,490,327, 6,223,467 and 6,223,467 treasury shares, respectively, and
after the issuance of 1,090,909 shares of Redeemable Common Stock during the
year ended December 31, 1993.
Actava has reserved the shares of Common Stock listed below for possible
future issuance:
December 31,
-----------------------
1994 1993
--------- ---------
Stock options ...................................... 1,049,750 761,000
6 1/2% Convertible Subordinated Debentures ......... 1,801,802 1,801,802
Restricted stock plan .............................. 102,800 102,800
--------- ---------
2,954,352 2,665,602
========= =========
Stock Options
Actava's stock option plans provide for the issuance of qualified
incentive stock options and nonqualified stock options. Incentive stock options
may be issued at a per share price not less than the market value of Actava's
Common Stock at the date of grant. Nonqualified options may be issued generally
at prices and on terms determined by the stock option committee. The following
table reflects changes in the incentive stock options issued under these plans:
Approximate
Price Range
Shares Per Share
------- -----------
Options outstanding at January 1, 1992 ............ 55,250 $12 - 28
Exercised ....................................... (250) 12
Canceled ........................................ (17,125) 12 - 28
------- --------
Options outstanding at December 31, 1992 .......... 37,875 12 - 28
Granted ......................................... 20,000 9 - 12
Canceled ........................................ (1,125) 12 - 28
------- --------
Options outstanding at December 31, 1993 .......... 56,750 9 - 28
Granted .......................................... 228,223 8 - 9
Canceled ......................................... (13,750) 12 - 28
------- --------
Options outstanding at December 31, 1994 .......... 271,223 $ 8 - 28
======= ========
During 1994 nonqualified options for 486,777 shares at price ranges of
approximately $6.37 to $9.00 per share were granted.
At December 31, 1994, incentive stock options totaling 124,538 shares were
exercisable at prices ranging from $8.31 to $12.19 and nonqualified options
totaling 569,712 shares were exercisable at prices ranging from $6.37 to $14.50.
There were 209,050 and 591,550 shares under Actava's stock option plans at
December 31, 1994 and 1993, respectively, which were available for the granting
of additional stock options.
Provisions for Plant Closure Costs
In 1994 loss from discontinued operations includes a provision of
$311,600, ($930,000 before income taxes and minority interest for discontinued
operations) or $.02 per share for plant closure costs. The 1993 income from
discontinued operations includes $1,038,000, ($4,096,000 before income taxes and
minority interest for discontinued operations) or $.06 per share for the costs
of closing three of Qualex's photofinishing plants. The provision for plant
closure costs for Qualex included in income from discontinued operations
includes lease termination costs and fixed asset and facility closure costs
which may be incurred over several years based on the remaining terms of the
leases and employee severance and termination costs.
<PAGE>
THE ACTAVA GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
The reserve for closing certain lawn and garden facilities was established
in 1990 by a provision for plant closure of approximately $13,700,000. Lawn and
garden production at these facilities ceased in early 1991; however, inventory
previously produced at these sites continued to be distributed from these sites
until 1992. Costs associated with this warehouse and distribution function
included in costs of sales in 1992 were immaterial. Due to market conditions and
the size of these lawn and garden facilities, the Company estimated in 1990 that
it would require approximately three years to dispose of these facilities and in
1993 this was accomplished. No plant closure costs were provided for in 1994.
During 1993 and 1992, costs of approximately $3,400,000 and $2,100,000,
respectively, were incurred related to employee severance, plant maintenance,
interest on capitalized lease obligations and the loss on disposal of equipment
and buildings. In 1993, the provision for plant closure costs included
reductions of $849,000, before and after tax, of $.05 per share, to the reserve
for closing the lawn and garden facilities as this disposal was completed.
The 1991 provision for plant closure costs also included $500,000 before
tax ($315,000 net of tax or $.02 per share) for closing facilities at a sporting
goods subsidiary and $1,432,000 before tax ($945,000 net of tax or $.06 per
share) for reducing the Actava corporate office facilities. The costs related to
the planned reduction of corporate office facilities were estimated in 1991 when
management made the decision to move out of its corporate office. The Company
subleased a portion of its space in 1991 and utilized $300,000 of the original
reserve. However, in 1992, it became apparent that the remaining space could not
be subleased as anticipated in 1991 and the Company decided to reverse its
remaining reserve of approximately $1,100,000 through the provision for plant
closure costs and utilize its remaining space until the lease expires in 1995.
<PAGE>
THE ACTAVA GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Changes in the reserve for plant closure costs are as follows (in
thousands):
<TABLE>
<CAPTION>
Recorded
Charged Through
Charged to Income Purchase
to Provision (Loss) Accounting in
for Plant from the
Closure Discontinued Year of
Costs Operations Acquisition Total
------------ ------------ ------------- --------
<S> <C> <C> <C> <C>
Balance at January 1, 1992 ............. $ 7,946 $ 32,482 $ 15,418 $ 55,846
Additions for:
Fixed asset and facility closure costs -- -- 1,244 1,244
Reductions in reserves ............... (1,132) (374) -- (1,506)
------- -------- -------- --------
Total additions (reductions) .... (1,132) (374) (1,244) (262)
------- -------- -------- --------
Costs incurred(b) ...................... (2,360) (23,713) (11,755) (37,828)
------- -------- -------- --------
Balance at December 31, 1992 ........... 4,454 8,395 4,907 17,756
Additions for:
Lease termination costs(a) ........... -- 1,475 -- 1,475
Employee severance & termination of
benefits(a) ......................... -- 1,294 -- 1,294
Fixed asset and facility closure costs -- 1,327 906 2,233
Reduction in reserves ................ (865) -- -- (865)
------- -------- -------- --------
Total additions (reductions) net (865) 4,096 906 4,137
------- -------- -------- --------
Costs incurred(b) ...................... (3,589) (7,437) (4,432) (15,458)
------- -------- -------- --------
Balance at December 31, 1993 ........... -- 5,054 1,381 6,435
Additions for:
Employee severance & termination of
benefits(a) ........................ -- 430 -- 430
Fixed asset and facility closure costs -- 500 -- 500
------- -------- -------- --------
Total additions (reductions) net . -- 930 -- 930
------- -------- -------- --------
Costs incurred(b) ...................... -- (2,628) (670) (3,298)
Disposal of discontinued operations .... -- (3,356) (711) (4,067)
------- -------- -------- --------
Balance at December 31, 1994 ........... $ -- $ -- $ -- $ --
======= ======== ======== ========
</TABLE>
- ----------
(a) Substantially all amounts accrued require future cash expenditures.
(b) Costs were generally incurred in accordance with line item categories as
presented above.
Other Income - Net
Other income net of other (expenses) from continuing operations is
summarized as follows (in thousands):
Years Ended December 31,
---------------------------------
1994 1993 1992
------- ------- -------
Interest and investment income .......... $ 8,415 $ 6,167 $ 5,831
Miscellaneous income (expense) .......... (3,481) (7,873) (1,180)
------- ------- -------
$ 4,934 $(1,706) $ 4,651
======= ======= =======
Early payment interest credit expense which is the result of cash payments
received by Snapper from distributors prior to receivable due dates is included
in net miscellaneous income (expense). The early payment interest credit expense
was $4,729,000 for 1994, $4,322,000 for 1993 and $2,522,000 for 1992.
<PAGE>
THE ACTAVA GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Income Taxes
Income tax expense (benefit) is composed of the following (in thousands):
Years Ended December 31,
-------------------------------
Liability Deferred
Method Method
------------------- --------
1994 1993 1992
-------- -------- --------
Continuing operations:
Current Federal ............................ $ -- $ (1,674) $ (1,316)
Current state .............................. -- 239 156
Deferred federal and state ................. -- -- 2,822
-------- -------- --------
$ -- $ (1,435) $ 1,662
======== ======== ========
Discontinued operations ..................... $ -- $ 16,598 $ 21,666
======== ======== ========
Income tax expense (benefit) computed by applying Federal statutory rates
to income (loss) before income taxes is reconciled to the actual income tax
expense (benefit) as follows (in thousands):
<TABLE>
<CAPTION>
Years Ended December 31,
------------------------------
Liability Deferred
Method Method
------------------- --------
1994 1993 1992
-------- -------- --------
<S> <C> <C> <C>
Continuing operations:
Computed tax at statutory rates ...................... $ (8,210) $(18,603) $ 457
State tax, net of Federal benefit .................... -- 155 103
Effect of tax rate changes on realization of timing
differences ........................................ -- 414 153
Amortization of goodwill ............................. -- 52 51
Undistributed earnings of majority-owned subsidiary .. -- 603 812
Deferred tax valuation allowance ..................... 7,398 16,227 --
Other ................................................ 812 (283) 86
-------- -------- --------
$ -- $ (1,435) $ 1,662
======== ======== ========
Discontinued operations:
Computed tax at statutory rates ...................... $(14,243) $ 11,778 $ 14,769
State tax, net of Federal benefit .................... -- 2,088 3,000
Amortization of goodwill ............................. -- 3,071 3,184
Effect of non-tax basis adjustments in connection with
acquisitions ....................................... -- -- 914
Tax-exempt interest .................................. -- (26) (80)
Dividends received deduction ......................... -- (290) --
Deferred tax valuation allowance ..................... 4,124 -- --
Change due to Qualex sale ............................ 10,119 -- --
Other ................................................ -- (23) (121)
-------- -------- --------
$ -- $ 16,598 $ 21,666
======== ======== ========
</TABLE>
<PAGE>
THE ACTAVA GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Significant components of deferred tax assets and liabilities at December
31, 1994 and 1993, are as follows (in thousands):
<TABLE>
<CAPTION>
1994 1993
-------------------------- --------------------------
Deferred Tax Deferred Tax Deferred Tax Deferred Tax
Assets Liabilities Assets Liabilities
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Net operating loss carryforward ................ $10,873 $30,383
Reserves for losses and write-down of certain
assets ....................................... 11,306 14,885
Reserves for self-insurance .................... 10,059 11,781
Alternative minimum tax credit ................. 10,005 8,805
Provisions for loss on loans and receivables ... 2,280 3,509
Tax amortizable intangible ..................... -- 3,145
State tax accruals ............................. 551 2,676
Gain on hedge transaction ...................... -- 2,609
Obligation for postretirement benefits ......... 1,313 1,966
Reserves for plant relocations and
consolidations ................................ -- 1,541
Charitable contribution carryforward ........... -- 1,053
Imputed interest on interest-free note ......... 1,272
Investment in equity investee .................. 7,805
Other .......................................... 3,567 $ 1,553 9,726 $ 6,670
Investment in less than 80% owned
subsidiary ................................... -- -- -- 28,832
Basis differences in fixed assets .............. -- 5,438 -- 29,387
Purchase of safe harbor lease investment ....... -- 9,472 -- 9,783
Undistributed earnings of majority-owned
subsidiary ................................... -- -- -- 1,282
------- ------- ------- -------
Subtotal ....................................... 59,031 16,463 92,079 75,954
Valuation allowance ............................ 42,568 -- 31,611 --
------- ------- ------- -------
Total deferred taxes ........................... $16,463 $16,463 $60,468 $75,954
======= ======= ======= =======
Net deferred taxes ............................. $ -- $15,486
======= =======
</TABLE>
The components of deferred income tax expense (benefit) for the year ended
December 31, 1992 is as follows (in thousands):
Year Ended December 31,
1992
-----------------------
Accelerated depreciation ................................ $ 643
Provision for loss on loans and receivables ............. (281)
Reserves for losses and write-down of certain assets .... 1,030
Plant closure costs ..................................... 1,077
Undistributed earnings of majority-owned subsidiary ..... 547
Other ................................................... (194)
-------
$ 2,822
=======
Actava has a net operating loss carryforward for Federal income tax
purposes of approximately $31,000,000 at December 31, 1994, which will expire in
the year 2008. Actava has an alternative minimum tax
<PAGE>
THE ACTAVA GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
credit carryforward of approximately $10,000,000, which may be carried forward
indefinitely, available to offset regular tax in certain circumstances.
Pension Plans
Actava and its subsidiaries have several noncontributory defined benefit
and other pension plans which are "qualified" under Federal tax law and cover
substantially all employees. In addition, Actava has a "nonqualified"
supplemental retirement plan which provides for the payment of benefits to
certain employees in excess of those payable by the qualified plans. Benefits
under the qualified and nonqualified plans are based upon the employee's years
of service and level of compensation. Actava's funding policy for the qualified
plans is to contribute annually such amounts as are necessary to provide assets
sufficient to meet the benefits to be paid to the plans' members and to keep the
plans actuarially sound. Contributions are intended to provide not only for
benefits attributed to service to date but also for those expected to be earned
in the future.
The components of net periodic pension costs are as follows (in
thousands):
Years Ended December 31,
-------------------------
1994 1993 1992
------- ----- -------
Service cost -- benefits earned during the period .. $ 536 $ 374 $ 705
Interest cost on projected benefit obligation ...... 1,074 961 1,015
Actual return on plan assets ....................... (209) (996) (992)
Net amortization and deferral ...................... (753) 76 (31)
------- ----- -------
$ 648 $ 415 $ 697
======= ===== =======
Assumptions used in the accounting for the defined benefit plans are as
follows:
Years Ended
December 31,
------------------------
1994 1993 1992
---- ---- ----
Weighted-average discount rates .................. 7.1% 7.2% 8.4%
Rates of increase in compensation levels ......... 5.0% 4.7% 6.1%
Expected long-term rate of return on assets ...... 7.2% 7.6% 8.3%
The following tables set forth the funded status and amount recognized in
the Consolidated Balance Sheets for Actava's defined benefit pension plans (in
thousands):
<TABLE>
<CAPTION>
December 31,
-----------------
1994 1993
------- -------
Plans Whose Assets Exceed Accumulated Benefits
<S> <C> <C>
Actuarial present value of benefit obligations:
Vested benefit obligations ........................................... $(3,972) $(4,652)
======= =======
Accumulated benefit obligation ....................................... $(4,360) $(5,232)
======= =======
Projected benefit obligations ........................................ $(4,360) $(5,232)
Plan assets at fair value ............................................ 5,958 6,296
------- -------
Funded status -- plan assets in excess of projected benefit obligation $ 1,598 $ 1,064
======= =======
Comprised of:
Prepaid pension cost ................................................. $ 394 $ 415
Unrecognized net gain (loss) ......................................... 130 (523)
Unrecognized prior service cost ...................................... 172 187
Unrecognized net assets at January 1, 1987, net of amortization ...... 902 985
------- -------
$ 1,598 $ 1,064
======= =======
</TABLE>
<PAGE>
THE ACTAVA GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
<TABLE>
<CAPTION>
December 31,
-------------------
1994 1993
-------- --------
Plans Whose Accumulated Benefits Exceed Assets
<S> <C> <C>
Actuarial present value of benefit obligations:
Vested benefit obligation ............................................ $(10,602) $(21,174)
======== ========
Accumulated benefit obligation ....................................... $(10,711) $(22,224)
======== ========
Projected benefit obligation ......................................... $(11,421) $(25,320)
Plan assets at fair value ............................................ 6,287 18,615
-------- --------
Funded status -- projected benefit obligation in excess of plan assets $ (5,134) $ (6,705)
======== ========
Comprised of:
Accrued pension cost ................................................. $ (3,388) $ (4,637)
Unrecognized net (loss) .............................................. (1,824) (2,157)
Unrecognized prior service cost ...................................... (199) (215)
Unrecognized net obligation at January 1, 1987, net of amortization .. 277 304
-------- --------
$ (5,134) $ (6,705)
======== ========
</TABLE>
Substantially all of the plan assets at December 31, 1994 and 1993 are
invested in governmental bonds, mutual funds and temporary investments.
The 1993 amounts for plans whose accumulated benefits exceed assets
includes a Qualex retirement plan, which is not included in 1994 due to the sale
of Qualex.
Some of the Company's subsidiaries also have defined contribution plans
which provide for discretionary annual contributions covering substantially all
of their employees. Contributions from continuing operations of approximately
$186,000 in 1994, $400,000 in 1993 and $800,000 in 1992 were made to these
plans.
Leases
Actava and its subsidiaries are lessees of warehouses, manufacturing
facilities and other properties under numerous noncancelable leases.
Capitalized leased property, which is not significant, is included in
property, plant and equipment and other assets.
Future minimum payments for the capital leases and noncancelable operating
leases with initial or remaining terms of one year or more are summarized as
follows (in thousands):
Years Ending Operating Capital
December 31, Leases Leases
- ------------ --------- -------
1995 ................................................... $ 828 $ 151
1996 ................................................... 291 151
1997 ................................................... 243 151
1998 ................................................... 125 151
1999 ................................................... -- 100
Thereafter ............................................. -- --
------- -----
Total minimum lease payments ........................... $ 1,487 704
=======
Less amounts representing interest ..................... (157)
-----
Present value of net minimum lease payments ............ $ 547
=====
<PAGE>
THE ACTAVA GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Rental expense charged to continuing operations for all operating leases
was $5,849,000, $4,641,000 and $3,454,000 for the years ended December 31, 1994,
1993 and 1992, respectively.
Certain noncancelable leases have renewal options for up to 10 years, and
generally, related real estate taxes, insurance and maintenance expenses are
obligations of Actava. Certain leases have escalation clauses which provide for
increases in annual rentals in certain circumstances.
Fair Value of Financial Instruments
Statement of Financial Accounting Standards Number 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. Those techniques
are significantly affected by the assumptions used, including discount rate 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 instrument. Statement 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 of 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 balance sheet for cash and cash
equivalents, receivables, notes receivable and accounts payable approximate
fair values.
Short-term Investments
For short-term investments, fair values are based on quoted market prices.
If a quoted market price is not available, fair value is estimated using quoted
market prices for similar securities or dealer quotes. See "Investments" for
fair values on investment securities.
Long-term and Subordinated 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 "Notes Payable and
Long-term Debt" for fair values of long-term and subordinated debt.
Litigation
In 1991, three lawsuits were filed against Actava, certain of Actava's
current and former directors and Intermark, Inc., which owned approximately 26%
of Actava's Common Stock. One complaint alleged, among other things, a
long-standing pattern and practice by the defendants of misusing and abusing
their power as directors and insiders of Actava by manipulating the affairs of
Actava to the detriment of Actava's past and present stockholders. The complaint
sought monetary damages from the director defendants, injunctive relief against
Actava, Intermark and its current directors, and costs of suit and attorney's
fees. The other two complaints alleged, among other things that members of the
Actava Board of Directors contemplate either a sale, a merger, or other business
combination involving Intermark, Inc. and Actava or one or more of its
subsidiaries or affiliates. The complaints sought costs of suit and attorney's
fees and preliminary and permanent injunctive relief and other equitable
remedies, ordering the director defendants to carry out their fiduciary duties
and to take all appropriate steps to enhance Actava's value as a merger or
acquisition
<PAGE>
THE ACTAVA GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
candidate. These three suits were consolidated on May 1, 1991 into a lawsuit
captioned In re Fuqua Industries, Inc. Shareholders litigation, Civil Action No.
11974. While these actions are in their discovery stages, management currently
believes the actions will not materially affect the operations or financial
position of Actava.
On November 30, 1993, a lawsuit was filed by the Department of Justice
("DOJ") against American Seating Company ("American Seating"), a former
subsidiary of Actava, in the United States District Court for the Western
District of Michigan. The lawsuit is captioned United States v. American Seating
Co., Civil Action No. 1:93-CV-956. Pursuant to an asset purchase agreement
between Actava and Amseco Acquisition, Inc., dated July 15, 1987, Actava assumed
the obligation for certain liabilities incurred by American Seating arising out
of litigation or other disputes involving events occurring on or before June 22,
1987. The DOJ alleges among other things that American Seating failed to
disclose certain information relating to its price discount practices that it
contends was required in an offer submitted by American Seating to the General
Services Administration for possible contracts for sales of systems furniture
and related services. The complaint seeks recovery of unspecified single and
treble damages, penalties, costs and prejudgment and post-judgment interest. The
parties have engaged in settlement discussions but have not agreed on a
disposition of the case. A trial, if necessary, has been scheduled for June
1995. The DOJ has asserted damages of approximately $3.5 million. If such
damages were awarded and then trebled, the total damages, excluding penalties,
costs and interest, could exceed $10 million. In addition, penalties, if
assessed, could range from several thousand dollars to several million dollars.
As a result, the lawsuit could have a material effect on the results of
operations and financial condition of the Company. Management, however, believes
that American Seating has meritorious defenses to the allegations made by the
DOJ and does not expect the Company to incur any material liability as a result
of this suit.
On September 23, 1994, a stockholder of the Company filed a class action
lawsuit against the Company and each of its directors seeking to block the
Proposed Metromedia Transaction. The lawsuit was filed in the Chancery Court for
New Castle County, Delaware and is styled James F. Sweeney, Trustee of Frank
Sweeney Defined Benefit Pension Plan Trust v. John D. Phillips, et. al., Civil
Action No. 13765. The Company and its directors were served with this lawsuit on
September 28, 1994. The complaint alleges that the terms of the Proposed
Metromedia Transaction constitute an overpayment for the assets being acquired
and as a result would result in a waste of the Company's assets. The complaint
further alleges that the directors of the Company would be breaching their
fiduciary duties to the Company's stockholders by approving the Proposed
Metromedia Transaction and that the transaction would result in a change of
voting control without giving stockholders an opportunity to maximize their
investment and the current stockholders of the Company would suffer a dramatic
dilution of their voting rights. The Company and its directors have filed a
motion to dismiss this lawsuit. The stockholder who filed the lawsuit has not
responded to the motion to dismiss. Management believes that the allegations
contained in the complaint are without merit for a variety of reasons, including
the fact that the Company has not entered into a definitive agreement with
respect to the Proposed Metromedia Transaction and the Proposed Metromedia
Transaction has not been approved by the Board of Directors of the Company.
Actava is a defendant in various other legal proceedings. Except as noted
above, however, Actava is not aware of any action which, in the opinion of
management, would materially affect the financial position or results of
operations of Actava.
Contingent Liabilities and Commitments
Actava, on behalf of its Snapper division, has an agreement with a
financial institution which makes available to dealers floor plan financing for
Snapper products. This agreement provides financing for dealer inventories and
accelerates cash flow to Snapper's distributors and to Snapper. Under the terms
of the agreement, a default in payment by one of the dealers on the program is
non-recourse to both the distributor
<PAGE>
THE ACTAVA GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
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, 1994 and 1993,
there were approximately $29,449,000 and $23,000,000, respectively, outstanding
under these floor plan financing arrangements.
Actava is contingently liable under various guarantees of debt totaling
approximately $6,000,000. The debt is primarily Industrial Revenue Bonds which
were issued to finance the manufacturing facilities and equipment of
subsidiaries disposed of prior to 1994, and is secured by the facilities and
equipment. In addition, upon the sale of the subsidiaries, Actava received
lending institution guarantees or bank letters of credit to support Actava's
contingent obligations. There are no material defaults on the debt agreements.
Actava is contingently liable under various real estate leases of
subsidiaries sold prior to 1994. The total future payments under these leases,
including real estate taxes, is estimated to be approximately $3,400,000. The
leased properties generally have financially sound subleases.
In January 1992, Qualex entered into an agreement whereby it sold an
undivided interest in a designated pool of trade accounts receivable on an
ongoing basis. The maximum allowable amount of receivables to be sold, initially
set at $50,00,000, was increased to $75,000,000 in August 1992. As collections
reduced the pool of sold accounts receivable, Qualex sold participating
interests in new receivables to bring the amount sold up to the desired level.
At December 31, 1993, the uncollected balance of receivables sold amounted to
$60,000,000. The proceeds were reported as discontinued operations in the
statement of cash flows and a reduction of receivables in Qualex's balance
sheet. Total proceeds received by Qualex during the year were $519,000,000 for
1993. There has been no adjustment to the allowance for doubtful accounts
because Qualex retained substantially the same risk of credit loss as if the
receivables had not been sold. Qualex paid fees based on the purchaser's level
of investment and borrowing costs. During 1993 and 1992, Qualex recorded
$2,200,000 and $1,100,000, respectively, of these fees as other expenses in
discontinued operations.
Through the date of sale, Qualex had a supply contract with Kodak for the
purchase of sensitized photographic paper and purchased substantially all of the
chemicals used in photoprocessing from Kodak. Qualex also purchased various
other production materials and equipment from Kodak.
Former subsidiaries of the Company handled and stored various materials in
the normal course of business that have been classified as hazardous by various
Federal, state and local regulatory agencies and for which the Company may be
liable. As of December 31, 1994, the Company is continuing to participate in
testing or is conducting tests at the sites where these materials were stored
and will perform any necessary cleanup where and to the extent legally required.
At those sites where tests have been completed, cleanup costs have been
immaterial. At the sites currently being tested, it is management's opinion that
cleanup costs will not have a material effect on Actava's financial position or
results of operations, but an estimate of costs exceeding those previously
recognized cannot be made at this time.
The Company, through a wholly owned subsidiary, presently owns real
property in Opelika, Alabama which was previously owned by DP, a former
subsidiary of the Company. DP previously stored cement, sand and mill scale
materials needed for or resulting from the manufacture of exercise weights on
the property. Although these materials have not been determined to be hazardous
by a regulatory agency, the Company is involved in a cleanup of this site. The
Company cannot predict with certainty the total cost of this cleanup; however,
based upon, among other things, past experience and preliminary site studies,
the Company presently believes total costs will be approximately $1.9 million. A
reserve of this amount has been recorded to provide for these cleanup costs. The
Company is not entitled to any recoveries for these costs from any other party.
Although this liability has been recorded currently, cleanup expenditures
generally are incurred over an extended period of time and the Company expects
the cleanup of this site to take several years. Cleanup expenditures related to
this site were approximately $10,000 for the year ended December 31, 1994.
<PAGE>
THE ACTAVA GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
At December 31, 1994, approximately $5,000,000 of Actava's cash was
pledged to secure a Snapper credit line and approximately $12,000,000 of cash
and short-term investments were pledged to support outstanding letters of
credit.
Snapper has entered into various long-term manufacturing and purchase
agreements with certain vendors for the purchase of manufactured products and
raw materials. At December 31, 1994, non-cancelable commitments under these
agreements amounted to approximately $16,800,000.
Segment Information
A description of Actava's segments is presented in the "Operating
Segments" section of Item 7. "Management's Discussion and Analysis of Financial
Condition and Results of Operations." Additional segment information as of and
for the three years ended December 31, 1994 is presented in the tables captioned
"Segment Performance" and "Other Segment Data" which are included in Item 7.
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
<PAGE>
THE ACTAVA GROUP INC. AND SUBSIDIARIES
SUMMARY OF QUARTERLY EARNINGS AND DIVIDENDS
<TABLE>
<CAPTION>
Quarters Ended in 1994
---------------------------------------------
March 31 June 30 Sept. 30 Dec. 31
--------- --------- --------- ---------
(In thousands except per share amounts)
<S> <C> <C> <C> <C>
Net Sales .................................................. $ 155,271 $ 123,943 $ 124,497 $ 148,117
Gross Profit ............................................... 27,200 18,526 18,786 26,141
Income (loss) from continuing operations ................... (8,090) (10,173) (5,266) 73
Income (loss) from discontinued operations ................. (4,583) (36,110) -- --
Extraordinary item ......................................... -- -- -- (1,601)
--------- --------- --------- ---------
Net (loss) (a) ............................................. $ (12,673) $ (46,283) $ (5,266) $ (1,528)
========= ========= ========= =========
Earnings (loss) per share:
Income (loss) from continuing operations ................... $ (.46) $ (.56) $ (.29) $ --
Income (loss) from discontinued operations ................. (.26) (1.98) -- --
Extraordinary item ......................................... -- -- -- (.09)
--------- --------- --------- ---------
Net (loss) ................................................. $ (.72) $ (2.54) $ (.29) $ (.09)
========= ========= ========= =========
Cash Dividends ............................................. $ -- $ -- $ -- $ --
</TABLE>
<TABLE>
<CAPTION>
Quarters Ended in 1993
---------------------------------------------
March 31 June 30 Sept. 30 Dec. 31
--------- --------- --------- ---------
(In thousands except per share amounts)
(Restated)
<S> <C> <C> <C> <C>
Net Sales .................................................. $ 99,701 $ 112,753 $ 113,746 $ 139,612
Gross Profit ............................................... 20,770 21,210 12,955 9,406
Income (loss) from continuing operations ................... (1,340) (3,669) (16,283) (30,424)
Income (loss) from discontinued operations ................. (1,860) 3,712 7,236 (562)
Cumulative effect of change in accounting principle ........ (4,404) -- -- --
--------- --------- --------- ---------
Net income (loss) (a) (b) (c) .............................. $ (7,604) $ 43 $ (9,047) $ (30,986)
========= ========= ========= =========
Earnings (loss) per share:
Income (loss) from continuing operations ................... $ (.08) $ (.22) $ (.92) $ (1.73)
Income (loss) from discontinued operations ................. (.11) .22 .41 (.03)
Cumulative effect of change in accounting principle ........ (.27) -- -- --
--------- --------- --------- ---------
Net income (loss) .......................................... $ (.46) $ -- $ (.51) $ (1.76)
========= ========= ========= =========
Cash dividends ............................................. $ .09 $ .09 $ .09 $ .09
</TABLE>
- ----------
(a) Actava's lawn and garden division estimates certain sales related expenses
for the year and charges these expenses to income based upon estimated
sales for the year. Sales and expenses for 1994 were different than
estimated in the first three quarters. If the expenses had been charged to
income based upon actual sales for the year, net loss would have decreased
in the first and third quarters by $2,205,000 and $1,315,000,
respectively, and increased in the second and fourth quarters by
$1,025,000 and $2,495,000, respectively. Sales and expenses for the year
were also different in 1993 than estimated in the first three quarters. If
the expenses had been charged to income based upon actual sales for the
year, net loss would have increased in the first and second quarters by
$4,500,000 and $7,450,000, respectively, and decreased in the third and
fourth quarters by $1,750,000 and $10,200,000, respectively.
(b) During the fourth quarter of 1993, Actava's lawn and garden division
revised its estimate of accrued product warranty expense to reflect an
increase in the amount of future warranty cost to be incurred due to
increased warranty claims. This change in accounting estimate resulted in
an increase in the net loss for the fourth quarter of approximately
$4,000,000.
<PAGE>
(c) During the fourth quarter of 1993, Actava increased its valuation
allowance for an investment in a real estate development from $1,425,000
to $4,425,000, due to an accelerated plan for disposition. This change in
estimate resulted in an increase in the net loss for the fourth quarter of
approximately $3,000,000.
See Notes to Consolidated Financial Statements.
<PAGE>
EXHIBIT 6
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholders
of The SAMUEL GOLDWYN COMPANY
In our opinion, the accompanying consolidated balance sheet and the related
consolidated statements of operations, shareholders' equity and of cash flows
present fairly, in all material respects, the financial position of The Samuel
Goldwyn Company (the "Company") and its subsidiaries at March 31, 1996 and 1995,
and the results of their operations and their cash flows for each of the three
years in the period ended March 31, 1996 in conformity with generally accepted
accounting principles. These financial statements are the responsibility of the
Company's management; our responsibility is to express an opinion on these
financial statements based on our audits. We conducted our audits of these
statements in accordance with generally accepted auditing standards which
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, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for the opinion expressed above.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As described in Note 2 to the
financial statements, the Company's credit facility matures on June 28, 1996.
The Company's management believes that the credit facility may not be extended
beyond that date should the merger transaction with Metromedia International
Group Inc., which is also described in Note 2, not be consummated which causes
substantial doubt about the Company's ability to continue as a going concern.
The financial statements do not include any adjustments that might result from
the outcome of this uncertainty.
PRICE WATERHOUSE LLP
Century City, California
May 3, 1996
F-58
<PAGE>
THE SAMUEL GOLDWYN COMPANY
CONSOLIDATED BALANCE SHEET
<TABLE>
<CAPTION>
MARCH 31,
------------------------------
<S> <C> <C>
1996 1995
-------------- --------------
<CAPTION>
<S> <C> <C>
Assets
Cash and cash equivalents...................................................... $ 1,849,000 $ 6,322,000
Receivables, net............................................................... 9,021,000 11,205,000
Film costs, net................................................................ 63,899,000 74,080,000
Property and equipment, net.................................................... 32,206,000 28,153,000
Other assets................................................................... 4,875,000 6,187,000
-------------- --------------
$ 111,850,000 $ 125,947,000
-------------- --------------
-------------- --------------
Liabilities and Shareholders' Equity
Notes payable.................................................................. $ 82,029,000 $ 67,610,000
Accounts payable and accrued expenses.......................................... 9,531,000 7,179,000
Accrued film rights payable.................................................... 8,578,000 3,350,000
Participations payable to shareholder.......................................... 10,353,000 9,373,000
Participations payable to others............................................... 2,527,000 2,347,000
Income taxes payable........................................................... 558,000 259,000
Deferred revenue............................................................... 18,583,000 21,717,000
Deferred income taxes.......................................................... -- 1,552,000
-------------- --------------
132,159,000 113,387,000
-------------- --------------
Shareholders' equity:
Common stock, par value $0.20; 15,000,000 shares authorized; shares issued and
outstanding: 8,489,231 and 8,488,854......................................... 1,706,000 1,706,000
Additional paid-in capital..................................................... 24,654,000 24,654,000
Treasury stock................................................................. (532,000) (532,000)
Retained earnings (deficit).................................................... (46,137,000) (13,268,000)
-------------- --------------
(20,309,000) 12,560,000
-------------- --------------
$ 111,850,000 $ 125,947,000
-------------- --------------
-------------- --------------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements
F-59
<PAGE>
THE SAMUEL GOLDWYN COMPANY
CONSOLIDATED STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31,
------------------------------------------------
<S> <C> <C> <C>
1996 1995 1994
--------------- --------------- --------------
<CAPTION>
<S> <C> <C> <C>
Revenues...................................................... $ 107,784,000 $ 91,348,000 $ 108,791,000
--------------- --------------- --------------
Cost of revenues.............................................. 108,301,000 91,461,000 81,117,000
Selling, general and administrative expenses.................. 19,891,000 17,999,000 15,515,000
Depreciation and amortization................................. 3,770,000 3,508,000 3,129,000
--------------- --------------- --------------
131,962,000 112,968,000 99,761,000
--------------- --------------- --------------
Operating income (loss)....................................... (24,178,000) (21,620,000) 9,030,000
Interest expense.............................................. 8,490,000 5,626,000 5,632,000
--------------- --------------- --------------
Income (loss) before income taxes............................. (32,668,000) (27,246,000) 3,398,000
Income tax provision (benefit)................................ (541,000) (7,163,000) 1,912,000
--------------- --------------- --------------
Income (loss) before extraordinary items...................... (32,127,000) (20,083,000) 1,486,000
Extraordinary loss, net of applicable income tax benefit of
$40,000..................................................... (742,000) -- --
Extraordinary gain, net of applicable income tax provision of
$506,000.................................................... -- -- 759,000
--------------- --------------- --------------
Net income (loss)............................................. $ (32,869,000) $ (20,083,000) $ 2,245,000
--------------- --------------- --------------
--------------- --------------- --------------
Earnings per share:
Income (loss) before extraordinary items.................... $ (3.78) $ (2.37) $ 0.20
--------------- --------------- --------------
--------------- --------------- --------------
Net income (loss)........................................... $ (3.87) $ (2.37) $ 0.30
--------------- --------------- --------------
--------------- --------------- --------------
Weighted average shares outstanding........................... 8,489,000 8,488,000 7,386,000
--------------- --------------- --------------
--------------- --------------- --------------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements
60
<PAGE>
THE SAMUEL GOLDWYN COMPANY
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL TREASURY STOCK RETAINED
------------------------ PAID-IN --------------------- EARNINGS
SHARES AMOUNT CAPITAL SHARES AMOUNT (DEFICIT)
---------- ------------ ------------- --------- ---------- --------------
<S> <C> <C> <C> <C> <C> <C>
Balance at March 31, 1993................. 5,950,721 $ 1,213,000 $ 1,675,000 34,872 $ 274,000 $ 4,570,000
Exchange of Heritage shares for Goldwyn
shares.................................. 102,794 8,750 (8,750)
Exercise of stock options................. 1,250 250 (250)
Purchase of Heritage creditor shares
pursuant to Heritage Plan of
Reorganization.......................... 8,576 258,000
Issuance of common stock.................. 2,472,500 472,000 23,095,000
Net income................................ 2,245,000
---------- ------------ ------------- --------- ---------- --------------
Balance at March 31, 1994................. 8,527,265 1,694,000 24,761,000 43,448 532,000 6,815,000
Exchange of Heritage shares for Goldwyn
shares.................................. 5,037 12,000 (12,000)
Purchase of Class A warrants pursuant to
Heritage Plan of Reorganization......... (95,000)
Net loss.................................. (20,083,000)
---------- ------------ ------------- --------- ---------- --------------
Balance at March 31, 1995................. 8,532,302 1,706,000 24,654,000 43,448 532,000 (13,268,000)
Exchange of Heritage shares for Goldwyn
shares.................................. 377
Net loss.................................. (32,869,000)
---------- ------------ ------------- --------- ---------- --------------
Balance at March 31, 1996................. 8,532,679 $ 1,706,000 $ 24,654,000 43,448 $ 532,000 $ (46,137,000)
---------- ------------ ------------- --------- ---------- --------------
---------- ------------ ------------- --------- ---------- --------------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements
F-61
<PAGE>
THE SAMUEL GOLDWYN COMPANY
CONSOLIDATED STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31,
----------------------------------------------
<S> <C> <C> <C>
1996 1995 1994
-------------- -------------- --------------
<CAPTION>
<S> <C> <C> <C>
Cash flows from operating activities:
Net (loss) income................................................ $ (32,869,000) $ (20,083,000) $ 2,245,000
Adjustments to reconcile net (loss) income to net cash provided
by operating activities:
Extraordinary gain on retirement of debt......................... -- (1,265,000)
Amortization of film costs....................................... 50,827,000 45,886,000 38,696,000
Amortization of goodwill......................................... 229,000 229,000 233,000
Depreciation of property and equipment........................... 3,541,000 3,279,000 2,896,000
Increase (decrease) from changes in:
Receivables.................................................... 2,184,000 8,498,000 2,546,000
Other assets, excluding goodwill............................... 1,083,000 1,232,000 (464,000)
Accounts payable and accrued expenses.......................... 2,352,000 243,000 (827,000)
Accrued film rights payable.................................... 5,228,000 3,350,000 --
Participations payable to shareholder.......................... 980,000 341,000 1,135,000
Participations payable to others............................... 180,000 (951,000) (75,000)
Income taxes payable........................................... 299,000 (574,000) 489,000
Deferred revenue............................................... (3,134,000) 19,657,000 (605,000)
Deferred income taxes.......................................... (1,552,000) (7,607,000) 1,330,000
-------------- -------------- --------------
Net cash provided by operating activities........................ 29,348,000 53,500,000 46,334,000
-------------- -------------- --------------
Investing activities:
Additions to film costs........................................ (40,646,000) (49,211,000) (33,572,000)
Additions to property and equipment............................ (7,594,000) (7,054,000) (3,107,000)
Additions to treasury stock.................................... -- -- (258,000)
-------------- -------------- --------------
(48,240,000) (56,265,000) (36,937,000)
-------------- -------------- --------------
Financing activities:
Issuance of common stock....................................... -- -- 23,567,000
Purchase of warrants........................................... -- (95,000) --
Retirement of bank debt........................................ -- -- (10,800,000)
Additions to (repayment of) notes payable...................... 14,419,000 7,791,000 (22,368,000)
-------------- -------------- --------------
14,419,000 7,696,000 (9,601,000)
-------------- -------------- --------------
Net increase (decrease) in cash.................................. (4,473,000) 4,931,000 (204,000)
Cash at beginning of period...................................... 6,322,000 1,391,000 1,595,000
-------------- -------------- --------------
Cash at end of period............................................ $ 1,849,000 $ 6,322,000 $ 1,391,000
-------------- -------------- --------------
-------------- -------------- --------------
Supplemental disclosure of cash paid for:
Interest....................................................... $ 8,002,000 $ 6,136,000 $ 5,154,000
Income taxes................................................... 693,000 512,000 7,000
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements
F-62
<PAGE>
THE SAMUEL GOLDWYN COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1--DESCRIPTION OF THE BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES:
The Samuel Goldwyn Company (the "Company") is engaged in the production and
distribution of motion picture films in the theatrical, videocassette,
television and ancillary markets, the production and licensing of television
programs, and the operation of a movie theatre circuit.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of The Samuel
Goldwyn Company and its subsidiaries. All significant intercompany accounts have
been eliminated.
USE OF ESTIMATES
The preparation of these financial statements in conformity with generally
accepted accounting principles required management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of 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 these estimates.
FILM DISTRIBUTION REVENUES
Theatrical films are distributed in the various media of exhibition
depending upon the Company's distribution rights to the films. A motion picture
is initially released (licensed) in the theatrical market. Approximately six
months thereafter it is licensed to the pay-per-view and home video markets.
Approximately one year after a film's initial theatrical release, it is licensed
to the pay television market and subsequently to the syndicated television
market two or more years after pay television. Distribution of motion pictures
in foreign territories approximates the domestic release pattern.
Revenues from theatrical distribution are recognized as the films are
exhibited. Distribution of the Company's films in foreign countries is primarily
accomplished through the licensing of various distribution rights to
subdistributors. The terms of licensing agreements with such subdistributors
generally include the receipt of non-refundable guaranteed amounts by the
Company and accordingly, revenue is recognized when the film is available for
exhibition.
FILM EXHIBITION REVENUES
Theatre admission revenues, and related film rental expenses, are recognized
as films are exhibited.
TELEVISION LICENSING REVENUES
Television licensing revenues are derived from licensing the rights to
telecast a program on either a barter basis or for a cash license fee. For
programs licensed on a barter basis, typically to independent television
stations, the Company receives rights to advertising time and hires an agent to
sell on its behalf the advertising time retained within its programs (See Note
8). Television licensing revenues are generally recognized when the program
material is available for telecast by the licensee and when certain other
conditions are met. Revenue from barter basis license agreements is recorded as
the advertising within the programs is aired based on statements received from
the agent.
CASH EQUIVALENTS
The Company's cash equivalents consist of cash on hand and highly liquid
investments purchased with maturities of three months or less.
F-63
<PAGE>
THE SAMUEL GOLDWYN COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1-- DESCRIPTION OF THE BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES:--(CONTINUED)
FILM COSTS
Film costs include acquisition costs, production costs and exploitation
costs. Such costs are amortized, and participation expenses are accrued, in the
proportion that revenue recognized during the year for each film bears to the
estimated total revenue to be received from all sources under the individual
film forecast method. Estimated total revenues and costs are reviewed on a
quarterly basis and revisions to amortization rates are recorded as necessary.
Film costs are stated at the lower of unamortized cost or estimated net
realizable value.
PROPERTY AND EQUIPMENT
Property, equipment and leasehold improvements are carried at cost and
depreciated over their estimated useful lives. Buildings (asset lives of 25
years) and equipment, furniture and fixtures (asset lives of 3 to 7 years) are
depreciated on the straight-line method. Theatre leasehold interests and
leasehold improvements are amortized on a straight-line basis over the lesser of
the estimated useful lives of the improvements or the terms of the respective
leases. Maintenance and repairs are expensed as incurred.
GOODWILL AMORTIZATION
The excess of the cost of purchased businesses over their net book value at
date of acquisition (classified as other assets in the consolidated balance
sheet) is amortized over a period of 20 years. The Company periodically reviews
the value of its goodwill to determine if an impairment has occurred. In making
such determination, the Company evaluates the performance, on a non-discounted
basis, of the underlying businesses whose acquisition gave rise to such amount.
INCOME TAXES
The provision for income taxes is computed using the asset and liability
method specified by Statement of Financial Accounting Standards No. 109,
"Accounting For Income Taxes." Under SFAS 109, deferred income taxes are
provided for the temporary differences between the financial reporting basis and
the tax basis of the Company's assets and liabilities.
INCOME (LOSS) PER SHARE
Net income (loss) per share is computed based upon the weighted average
number of common and common equivalent shares outstanding during the year.
NOTE 2--MERGER WITH METROMEDIA INTERNATIONAL GROUP, INC.:
On December 19, 1995, a Letter Agreement (the "Letter Agreement") was
entered into among PolyGram Filmed Entertainment Distribution Inc. ("PolyGram"),
the Company and The Samuel Goldwyn Jr. Family Trust confirming the basic terms
set forth in a Deal Memo for the acquisition by PolyGram of certain assets of
the Company. The Deal Memo constituted an agreement in principle for PolyGram to
acquire distribution rights to the Company's film and television library
together with the assumption of certain related assets and liabilities for
$62,000,000 in cash consideration, subject to adjustment. The transaction was to
exclude the Company's other interests including its chain of theaters, film and
television projects in development and domestic and foreign distribution
operations. As no definitive documentation was entered into by January 22, 1996,
substantially all of the provisions of the Letter Agreement are of no further
force and effect, except for the Company's obligation to pay PolyGram a break up
fee of $2,000,000 plus PolyGram's costs and expenses associated with the
transaction.
F-64
<PAGE>
THE SAMUEL GOLDWYN COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 2--MERGER WITH METROMEDIA INTERNATIONAL GROUP, INC.: (CONTINUED)
On January 31, 1996 the Company and Metromedia International Group, Inc.
("MIG") entered into a definitive merger agreement providing for the merger of
the Company into a wholly owned subsidiary of MIG. The terms of the merger
agreement provide for the Company's shareholders to receive $5.00 worth of MIG
stock for each Company share, provided that the average closing price per share
of MIG stock over the 20 consecutive-day trading period ending five business
days prior to the Company's stockholder meeting to approve the merger is between
$12.50 and $16.50. If the average closing price is lower than $12.50,
shareholders of the Company will receive for each Company share 0.4 shares of
MIG common stock; if the average price is higher than $16.50 shareholders will
receive for each Company share 0.303 shares of MIG common stock.
The Boards of Directors of MIG and the Company have approved the merger. The
consummation of the merger is subject to customary closing conditions, including
approval of the transaction by the stockholders of the Company, and the receipt
of all regulatory approvals including the lapse or early termination of the
applicable waiting period under the Hart-Scott-Rodino Act (which has lapsed),
and other customary conditions. In connection with the transaction, The Samuel
Goldwyn Jr. Family Trust, which owns 60% of the outstanding common stock of the
Company, has agreed to vote in favor of the merger pursuant to the terms of a
Voting Agreement with MIG dated as of January 31, 1996. In addition, MIG has
caused Orion Pictures Corporation ("Orion") to provide the Company up to
$5,500,000 of interim financing, and in connection therewith, the Company and
Orion have entered into a six-picture distribution agreement.
Pursuant to the definitive merger agreement, it is the intention of the
parties to refinance (or extend the maturity date of) the entire outstanding
balance of the Company's bank indebtedness and it is a condition of closing that
such amounts shall have been repaid or refinanced in full.
MIG is a worldwide communications, media and entertainment company. Its core
businesses are Metromedia International Telecommunications, Inc., a company
which operates wireless cable, communications and media businesses in Eastern
Europe and former Soviet Republics; and Orion, a motion picture production and
distribution company with a film library of more than 1,000 titles.
The Company incurred a net loss of approximately $20 million in fiscal 1995
and approximately $32.8 million in fiscal 1996 and experienced a decrease in
working capital during both years. As a result, the Company has been unable to
refinance its bank debt for a period extending beyond June 28, 1996. In the
absence of alternative financing or consummation of the merger, the Company will
have insufficient liquidity to repay the loan upon maturity and may experience
liquidity shortfalls in meeting on-going obligations. Management believes that
one or more members of the Company's current bank syndicate may be unwilling to
further extend or restructure the agreement beyond the maturity date.
NOTE 3--ISSUANCE OF STOCK:
In October 1993, the Company completed a public offering of 2,472,500 shares
of common stock. The proceeds to the Company from this stock offering, net of
underwriter's discount, commissions and offering expenses were $23,567,000 and
were applied to reduce bank indebtedness.
F-65
<PAGE>
THE SAMUEL GOLDWYN COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 4--FILM COSTS:
Film costs, net of amortization, consist of the following:
<TABLE>
<CAPTION>
MARCH 31,
----------------------------
<S> <C> <C>
1996 1995
------------- -------------
Theatrical Film Costs
Released..................................................... $ 43,415,000 $ 54,600,000
Completed, not released...................................... 1,661,000 891,000
In process................................................... 2,713,000 2,075,000
------------- -------------
47,789,000 57,566,000
------------- -------------
Television Film Costs
Released..................................................... 16,049,000 14,508,000
In process................................................... 61,000 2,006,000
------------- -------------
16,110,000 16,514,000
------------- -------------
$ 63,899,000 $ 74,080,000
------------- -------------
------------- -------------
</TABLE>
The Company did not capitalize any interest in connection with the
production of films and television series during the year ended March 31, 1996.
The Company capitalized approximately $736,000 of interest incurred in
connection with the production of films and television series during the year
ended March 31, 1995. The Company currently anticipates that approximately 75%
of the unamortized costs related to released films will be amortized under the
individual film forecast method during the three years ending March 31, 1999.
F-66
<PAGE>
THE SAMUEL GOLDWYN COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 5--DETAILS OF CERTAIN BALANCE SHEET ACCOUNTS:
<TABLE>
<CAPTION>
MARCH 31,
----------------------------
<S> <C> <C>
1996 1995
------------- -------------
Receivables:
Accounts receivable.......................................... $ 10,019,000 $ 12,311,000
Allowance for doubtful accounts.............................. (998,000) (880,000)
Unamortized discount......................................... -- (226,000)
------------- -------------
$ 9,021,000 $ 11,205,000
------------- -------------
------------- -------------
Property and equipment:
Land and buildings........................................... $ 4,190,000 $ 4,190,000
Theatre leasehold interests.................................. 25,214,000 20,908,000
Leasehold improvements....................................... 8,322,000 6,018,000
Equipment, furniture and fixtures............................ 7,696,000 6,832,000
Construction in progress..................................... 84,000 898,000
------------- -------------
45,506,000 38,846,000
Accumulated depreciation..................................... (13,300,000) (10,693,000)
------------- -------------
$ 32,206,000 $ 28,153,000
------------- -------------
------------- -------------
Other assets:
Goodwill, net of amortization of $974,000 and $745,000....... $ 3,619,000 $ 3,848,000
Deferred charges............................................. -- 782,000
Other miscellaneous.......................................... 1,256,000 1,557,000
------------- -------------
$ 4,875,000 $ 6,187,000
------------- -------------
------------- -------------
Accounts payable and accrued expenses
Accounts payable............................................. $ 5,020,000 $ 5,305,000
Accrued expenses............................................. 4,511,000 1,874,000
------------- -------------
$ 9,531,000 $ 7,179,000
------------- -------------
------------- -------------
Deferred Revenue
Home video deposit........................................... $ 17,115,000 $ 20,000,000
Other deposits............................................... 1,468,000 1,717,000
------------- -------------
$ 18,583,000 $ 21,717,000
------------- -------------
------------- -------------
</TABLE>
Deferred charges at March 31, 1995 consisted of costs incurred in connection
with obtaining the Company's credit facilities. Such costs were amortized on a
straight-line basis over the applicable term of the credit agreements.
In December 1994 the Company entered into a servicing agreement with a video
distributor, Hallmark Home Entertainment ("Hallmark"), and received a deposit
against the delivery of future titles. The deposit has been classified as
deferred revenue and is being recognized as revenue upon the release of titles
by Hallmark.
F-67
<PAGE>
THE SAMUEL GOLDWYN COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 6--NOTES PAYABLE:
Notes payable consist of the following:
<TABLE>
<CAPTION>
MARCH 31,
----------------------------
<S> <C> <C>
1996 1995
------------- -------------
Notes payable to banks......................................... $ 72,900,000 $ 62,400,000
Capital lease obligations...................................... 5,950,000 1,355,000
Other notes payable............................................ 3,179,000 3,855,000
------------- -------------
$ 82,029,000 $ 67,610,000
------------- -------------
------------- -------------
</TABLE>
On April 28, 1995, the Company entered into a $77,400,000 credit facility
with its bank lenders. This facility was comprised of a $62,400,000 term loan
and a $15,000,000 revolving credit facility. The entire facility was converted
to a term loan in February 1996. The maturity date of the credit facility was
April 30, 1996. The maturity date of the credit facility has been extended to
June 28, 1996 as a result of a recent amendment to the credit agreement. The
revolving credit facility bore interest at either the bank's reference (prime)
rate plus 1% or LIBOR plus 2%. The term loan bore interest at LIBOR plus 2%.
Pursuant to an amendment to the loan agreement dated as of November 30, 1995,
the outstanding loan amount subsequent to such date bears interest at the bank's
prime rate plus 1.50% or LIBOR plus 2.5%, at the Company's option, both rates
increasing by one-half percent each month for months subsequent thereto until
maturity. At March 31, 1996, the Bank's prime rate was 8.25%. The Company's
effective interest rate for the year ended March 31, 1996 was 10.47%, including
interest related to its interest rate swap. The credit facility contains
covenants which, among other things, require adherence to certain financial
ratios and balances and impose limitations on film acquisition and production
costs and general and administrative costs. The credit facility is secured by
substantially all of the Company's assets and the films owned by The Samuel
Goldwyn Jr. Family Trust.
The Company is currently not in default under its credit agreement and on
April 26, 1996, entered into an amendment to such agreement with its bank
lenders to extend the maturity date of the credit facility to June 28, 1996 and
to continue the waiver of certain financial ratio covenants to the maturity date
of the credit agreement.
The Company has an interest rate swap agreement with its bank which had a
total notional principal amount of $15,000,000 and $35,000,000 at March 31, 1996
and 1995, respectively. The weighted average receipt and payment rates
associated with the swap agreements at March 31, 1996 and 1995 were 6.35% and
9.50%, respectively. The incremental interest expense related to the swap
agreement was $197,000, $511,000, and $630,000 for the years ended March 31,
1996, 1995 and 1994, respectively. The swap terminates on December 31, 1996 and
its fair value as of March 31, 1996 was $116,000. The Company has exposure to
credit risk but does not anticipate nonperformance by the counterparties to the
agreement.
Other notes payable at March 31, 1996 are comprised of various obligations
of the Theatre Goup. Interest and principal payments under these notes are due
monthly through October 2003. The notes accrue interest at rates ranging from 9%
to 10.5% per annum and are collateralized by various theatres and equipment.
NOTE 7--INCOME TAXES:
Effective April 1, 1993 the Company adopted Statement of Financial
Accounting Standards No. 109 (SFAS 109) "Accounting for Income Taxes." This
statement superseded SFAS 96 which the Company had
F-68
<PAGE>
THE SAMUEL GOLDWYN COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 7--INCOME TAXES: (CONTINUED)
previously adopted. The cumulative effect of adopting SFAS 109 was immaterial
and was recorded in the first quarter of fiscal 1994.
Income tax provision (benefit) consists of the following:
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31,
--------------------------------------------
<S> <C> <C> <C>
1996 1995 1994
-------------- -------------- ------------
Income (loss) before income taxes.................................. $ (32,668,000) $ (27,246,000) $ 3,398,000
-------------- -------------- ------------
-------------- -------------- ------------
Provision (benefit) for income taxes:
Current--
Federal........................................................ $ -- $ (161,000) $ 256,000
State.......................................................... 20 000 162,000 63,000
Foreign........................................................ 951,000 443,000 750,000
-------------- -------------- ------------
971,000 444,000 1,069,000
-------------- -------------- ------------
Deferred--
Federal........................................................ -- (5,582,000) 802,000
State.......................................................... (1,512,000) (2,025,000) 41,000
-------------- -------------- ------------
(1,512,000) (7,607,000) 843,000
-------------- -------------- ------------
Provision (benefit) on income before extraordinary items........... (541,000) (7,163,000) 1,912,000
Provision on extraordinary item.................................... (40,000) -- 506,000
-------------- -------------- ------------
Total tax provision (benefit)...................................... $ (581,000) $ (7,163,000) $ 2,418,000
-------------- -------------- ------------
-------------- -------------- ------------
</TABLE>
At March 31, 1996, the major tax effected components of the deferred tax
liability are as follows:
<TABLE>
<S> <C>
Deferred tax assets:
Operating loss carryforwards................................. $16,560,000
Foreign tax credits.......................................... 910,000
Investment tax credits....................................... 203,000
Participations accrued....................................... 5,577,000
Deferred revenue............................................. 5,806,000
Receivables.................................................. 1,645,000
Accruals, reserves and other................................. 75,000
----------
30,776,000
Valuation allowance.......................................... (13,710,000)
----------
17,066,000
----------
----------
Deferred tax liabilities:
Film costs................................................... 12,859,000
Depreciation and amortization................................ 4,007,000
Other........................................................ 200,000
----------
17,066,000
----------
Net deferred tax liability................................... $ 0
----------
----------
</TABLE>
F-69
<PAGE>
THE SAMUEL GOLDWYN COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 7--INCOME TAXES: (CONTINUED)
Deferred taxes reflect timing differences in the recognition of certain
income and expense items for financial reporting and income tax purposes. The
valuation allowance which has been provided against a portion of deferred tax
assets increased by $11,668,000 during fiscal 1996.
The components of the deferred income tax provision (benefit) are as
follows:
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31,
------------------------------------------
<S> <C> <C> <C>
1995 1995 1994
------------- ------------- ------------
Film cost, net........................................................ $ 29,000 $ (3,218,000) $ 333,000
Revenue recognition................................................... (1,404,000) (6,631,000) 580,000
State taxes........................................................... 119,000 1,361,000 46,000
Fixed assets.......................................................... (77,000) (601,000) 215,000
Other................................................................. (179,000) 1,482,000 156,000
------------- ------------- ------------
$ (1,512,000) $ (7,607,000) $ 1,330,000
------------- ------------- ------------
------------- ------------- ------------
</TABLE>
A reconciliation of the federal statutory tax rate to the Company's
effective tax rate is as follows:
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31,
-------------------------------
<S> <C> <C> <C>
1996 1995 1994
--------- --------- ---------
Federal statutory tax (benefit) rate.................................................. (34.0)% (34.0)% 34.0%
State taxes, net of federal benefit................................................... (3.1) (4.9) 5.1
Foreign taxes, net of federal benefit................................................. 1.9 1.1 14.6
Non-deductible expenses............................................................... 2.8 0.3 2.4
Deferred tax valuation allowance...................................................... 33.9 7.5 --
Other................................................................................. (3.2) 3.7 0.2
--------- --------- ---
Effective tax (benefit) rate.......................................................... (1.7)% (26.3)% 56.3%
--------- --------- ---
--------- --------- ---
</TABLE>
At March 31, 1996, the Company had consolidated net operating loss ("NOL")
carryovers of approximately $47,798,000 for federal tax return purposes expiring
through 2010. The Company also has investment tax credit carryovers for tax
purposes totaling approximately $200,000 expiring through 2001. However, because
of the prospective change in ownership that will result upon the completion of
the pending merger with MIG, the Company's utilization of its NOL and other tax
credits may be subject to annual limitations in periods subsequent to the
merger.
F-70
<PAGE>
THE SAMUEL GOLDWYN COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 8--SEGMENT INFORMATION:
The Company operates principally in two business segments: film and
television distribution and theatrical exhibition. Financial information
relative to these business segments is as follows:
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31,
----------------------------------------------
<S> <C> <C> <C>
1996 1995 1994
-------------- -------------- --------------
REVENUE
Film and television distribution................................ $ 56,886,000 $ 45,919,000 $ 68,465,000
-------------- -------------- --------------
Theatrical exhibition........................................... 50,898,000 45,429,000 40,326,000
-------------- -------------- --------------
$ 107,784,000 $ 91,348,000 $ 108,791,000
-------------- -------------- --------------
-------------- -------------- --------------
OPERATING INCOME (LOSS)
Film and television distribution $ (25,751,000) $ (23,492,000) $ 6,668,000
Theatrical exhibition........................................... 1,573,000 1,872,000 2,362,000
-------------- -------------- --------------
$ (24,178,000) $ (21,620,000) $ 9,030,000
-------------- -------------- --------------
-------------- -------------- --------------
DEPRECIATION AND AMORTIZATION
Film and television distribution................................ $ 201,000 $ 267,000 $ 146,000
Theatrical exhibition........................................... 3,569,000 3,241,000 2,983,000
-------------- -------------- --------------
$ 3,770,000 $ 3,508,000 $ 3,129,000
-------------- -------------- --------------
-------------- -------------- --------------
IDENTIFIABLE ASSETS
Film and television distribution................................ $ 74,916,000 $ 92,580,000 $ 94,138,000
Theatrical exhibition........................................... 36,934,000 33,367,000 29,737,000
-------------- -------------- --------------
$ 111,850,000 $ 125,947,000 $ 123,875,000
-------------- -------------- --------------
-------------- -------------- --------------
CAPITAL EXPENDITURES
Film and television distribution................................ $ 7,000 $ 291,000 $ 171,000
Theatrical exhibition........................................... 7,607,000 6,763,000 2,936,000
-------------- -------------- --------------
$ 7,614,000 $ 7,054,000 $ 3,107,000
-------------- -------------- --------------
-------------- -------------- --------------
DOMESTIC AND EXPORT REVENUES
United States................................................... $ 86,971,000 $ 79,542,000 $ 84,572,000
Export revenues (including Canada).............................. 20,813,000 11,806,000 24,219,000
-------------- -------------- --------------
$ 107,784,000 $ 91,348,000 $ 108,791,000
-------------- -------------- --------------
-------------- -------------- --------------
</TABLE>
Certain of the Company's television programming is distributed under barter
basis agreements, primarily through one barter sales agent. Barter revenue is
determined based on actual sales of advertising time as reported by the barter
sales agent, and is recognized when the advertising within the programming is
aired. Barter revenue recognized during the years ended March 31, 1996, 1995 and
1994 was $5,002,000, $10,414,000 and $10,929,000, respectively, which
constituted approximately 5%, 10% and 10%, respectively, of the Company's total
revenues for such years.
There is no country outside of the United States in which the Company does
business that individually contributed significantly to total revenues.
F-71
<PAGE>
THE SAMUEL GOLDWYN COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 9--RELATED PARTY TRANSACTIONS:
LICENSES TO FILMS BENEFICIALLY OWNED BY SAMUEL GOLDWYN JR.
The Company entered into a distribution agreement dated March 1, 1991 with
The Samuel Goldwyn Jr. Family Trust (the "Goldwyn Trust") for the worldwide
distribution in all media of the over 70 theatrical motion pictures which were
produced by Samuel Goldwyn Sr. and which are owned by the Goldwyn Trust. The
term of the agreement expires December 31, 2003, subject to automatic renewal
for an additional two year period, and thereafter for additional one-year
periods upon expiration of the initial term. The agreement provided that from
March 1, 1991 through December 31, 1993, the Goldwyn Trust received 50% of the
proceeds derived from the distribution of such films after the payment of all
costs relating to such distribution, with the Company retaining the remaining
50% of such net proceeds as its distribution fee. From January 1, 1994 until
December 31, 1996, the Goldwyn Trust will receive all gross receipts derived
from the distribution of such films, after the payment to the Company of a
distribution fee equal to 35% of gross receipts and after the Company recoups
all costs incurred in connection with such distribution. From January 1, 1997
until December 31, 2003 and during any renewal periods after December 31, 2003,
the distribution fee payable to the Company will be 30%.
The films owned by the Goldwyn Trust partially secure the Company's notes
under its credit facility. Such credit facility further provides that the amount
of participations that may be paid to the Goldwyn Trust and its beneficiaries in
any one year may not exceed $800,000 and that no distributions may be made that
will result in the aggregate participation payable being less than $8,500,000.
For the fiscal years ended March 31, 1996, 1995 and 1994, the Company accrued
obligations of $1,445,000, $1,141,000 and $1,836,000, respectively, as a result
of revenues being recognized by the Company from such films during such periods.
The Goldwyn Trust, however, received payments of $465,000, $800,000 and
$700,000, respectively from the Company during such years. As of March 31, 1996,
a profit participation in the amount of $10,353,000 remained payable by the
Company. This participation payable does not bear interest.
SAMUEL GOLDWYN PRODUCTIONS AND NIGHTLIFE, INC.
Samuel Goldwyn Productions ("Productions") is a California corporation which
is wholly owned by Samuel Goldwyn Jr. and is involved in the acquisition and
development of literary properties for production as motion pictures. Under a
non-exclusive agreement between the Company and Productions, the Company
reimburses Productions for all accountable out-of-pocket costs incurred by
Productions in connection with the development of properties undertaken at the
request and on behalf of the Company, regardless of whether such properties are
then acquired by the Company. For the years ended March 31, 1996, 1995 and 1994,
the Company reimbursed Productions $205,000, $418,000 and $446,000,
respectively, for development costs associated with properties acquired or to be
acquired by the Company.
Nightlife, Inc. is a California corporation which is wholly owned by the
President of the Company, and is involved in the production of motion pictures
and television programs. The Company reimburses Nightlife, Inc. for all
accountable out-of-pocket costs incurred in connection with any motion picture
or television program which it produces for the Company. In addition to
reimbursement for these actual costs, the Company pays Nightlife, Inc. an annual
fee of $10,000 plus a 2.5% net profit participation in the films and television
programs it produces. To date, the Company has neither paid, nor is it required
to accrue, any profit participations to Nightlife, Inc. For the years ended
March 31, 1996, 1995 and 1994, the Company made payments to Nightlife, Inc. of
$375,000, $99,000 and $249,000, respectively. These amounts include $10,000 in
fees each year.
F-72
<PAGE>
THE SAMUEL GOLDWYN COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 10--STOCK AWARDS PLANS:
The Company has a stock awards plan under which 1,000,000 shares of the
Company's common stock are available for nonqualified or incentive stock options
or other stock awards. The plan provides that awards may be granted to
consultants and key employees, including officers and directors, of the Company
upon such terms as the Stock Awards Committee of the Board of Directors may
determine. The options that are outstanding have been granted at an exercise
price at least equal to the fair market value at the date of grant and are
generally exercisable in installments over one to five years. Options generally
expire ten years after date of grant. Activity under the stock awards plan was
as follows:
<TABLE>
<CAPTION>
NUMBER OF SHARES
--------------------------------
<S> <C> <C> <C>
1996 1995 1994
---------- --------- ---------
Outstanding at beginning of year................................................ 485,400 185,525 167,800
Awards cancelled................................................................ (198,983) (25,125) (32,000)
Awards granted.................................................................. 375,250 325,000 50,975
Awards exercised................................................................ -- -- (1,250)
---------- --------- ---------
Outstanding at March 31......................................................... 661,667 485,400 185,525
---------- --------- ---------
---------- --------- ---------
</TABLE>
Options outstanding at March 31, 1996 and 1995 ranged in price from $6.00 to
$32.50 per share. Options exercised in 1994 were at $8.00 per share. At March
31, 1996, options for 97,467 shares had vested and were exercisable. There are
337,083 shares available for future awards.
The Company has a Directors' Stock Option Plan under which 25,000 shares of
the Company's common stock are available for nonqualified stock options to
nonemployee members of the Board of Directors to be awarded at the rate of 500
options per year for each Director. At March 31, 1996 and 1995, a total of 7,500
and 4,500 ten year options exercisable from $4.69 to $18.75 per share were
outstanding to the three nonemployee Directors.
Effective April 13, 1993, the Company, Samuel Goldwyn Jr., and the Goldwyn
Trust entered into an Option Agreement (the "Option Agreement") pursuant to
which the Company and Mr. Goldwyn each have unilateral six-year options
entitling (i) Mr. Goldwyn to acquire any part or all of 875,000 shares of Common
Stock at a cash exercise price of $8.00 per share (the market value of the
Common Stock on the date of the Option Agreement), and (ii) the Company to issue
up to 875,000 shares of Common Stock to the Goldwyn Trust in exchange for a
dollar-for-dollar reduction of participations payable, at an exchange price
equal to the then market price of the Common Stock, if such market price is not
greater than $9.00 per share or less than $6.50 per share and if greater or
lesser than such amounts, at $9.00 and $6.50, respectively. If the options were
exercised in their entirety by the Company, or Mr. Goldwyn, and the market price
of the Common Stock at the time of exercise were $8.00 per share, the Company
would issue 875,000 shares in exchange for $7,000,000 in cash or reduction of
participations payable by the Company, as applicable, The 875,000 shares are
considered common stock equivalents and, to the extent that they are dilutive,
have been included in the determination of weighted average number of
outstanding shares used to calculate net income (loss) per share, using the
treasury stock method.
NOTE 12--LEASES:
At March 31, 1996, the Company has long-term operating and capital leases,
primarily involving office and theatre facilities. The leases have varying terms
and contain renewal options. Future minimum lease payments under non-cancelable
operating leases consist of the following at March 31, 1996:
<TABLE>
<S> <C>
1997........................................................... $5,212,000
</TABLE>
F-73
<PAGE>
THE SAMUEL GOLDWYN COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 12--LEASES: (CONTINUED)
<TABLE>
<S> <C>
1998........................................................... 4,698,000
1999........................................................... 3,525,000
2000........................................................... 3,060,000
2001........................................................... 2,715,000
Thereafter..................................................... 21,997,000
----------
Total future minimum lease commitments......................... $41,207,000
----------
----------
</TABLE>
At March 31, 1996, future minimum lease payments under capital leases,
including interest, consist of the following:
<TABLE>
<S> <C>
1997........................................................... $ 868,000
1998........................................................... 867,000
1999........................................................... 866,000
2000........................................................... 1,364,000
2001........................................................... 769,000
Thereafter..................................................... 9,166,000
----------
13,900,000
Less amount representing interest.............................. (7,950,000)
----------
Present value of future minimum lease payments................. $5,950,000
----------
----------
</TABLE>
Total rent expense was $5,660,000, $5,284,000 and $4,717,000 for the years
ending March 31, 1996, 1995 and 1994, respectively.
NOTE 13--COMMITMENTS AND CONTINGENCIES:
As of March 31, 1996, the Company had outstanding guarantees of indebtedness
of approximately $4.7 million related to the production financing of one
theatrical motion picture.
The Company is involved in various lawsuits, claims and inquiries.
Management and its legal counsel believe that the resolution of these matters
will not have a material adverse effect on the financial position of the Company
or the results of its operations.
In December 1994, a decision was entered in the Los Angeles Superior Court
in the case entitled Virgin Vision, Ltd. vs. The Samuel Goldwyn Company
assessing damages against the Company of approximately $3,500,000 plus costs and
legal fees arising out of a complaint filed by Virgin Vision on October 26,
1990, alleging failure by the Company to provide a presentation credit in
certain territories on the foreign distribution by the Company of the motion
picture, sex, lies and videotape. The court assessed such damages after finding
on June 25, 1993 that the Company had committed unfair competition under
California law, violated the federal Lanham Act, breached its contract with
Virgin Vision and breached its fiduciary duty to Virgin Vision as its agent. The
Company has appealed the decision. In the opinion of management, the ultimate
outcome will not have a material adverse effect on the Company's financial
position or results of operations because damages are expected to be covered by
insurance.
On December 28, 1995 a shareholder derivative suit against the Company and
its directors was filed in the Delaware Court of Chancery, Kinder v. The Samuel
Goldwyn Company, et al., C.A. No. 14751. On January 2, 1996, the Company was
served with legal process in connection therewith. In the Complaint, plaintiffs
allege that the Company's deal memorandum with PolyGram Filmed Entertainment
Distribution Inc. was not in the best interests of the shareholders and thus
constituted, among other things, a breach of
F-74
<PAGE>
THE SAMUEL GOLDWYN COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 13--COMMITMENTS AND CONTINGENCIES: (CONTINUED)
the director's fiduciary duties to the Company's shareholders. Plaintiffs seek
various forms of relief, including declaratory, injunctive and compensatory
damages. The Company believes the complaint is without merit and based on
consultations with counsel, the Company believes that the resolution of this
matter will not have a material adverse effect on the Company.
F-75
<PAGE>
EXHIBIT 7
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
________________
FORM 8-A
FOR REGISTRATION OF CERTAIN CLASSES OF SECURITIES
PURSUANT TO SECTION 12(b) OR (g) OF
THE SECURITIES EXCHANGE ACT OF 1934
THE ACTAVA GROUP INC.
(Exact name of registrant as specified in its charter)
Delaware 58-0971455
(State of incorporation (I.R.S. Employer
or organization) Identification No.)
945 East Paces Ferry Road
Suite 2210
Atlanta, Georgia 30326
(Address of principal executive (Zip code)
offices)
Securities to be registered pursuant to Section 12(b) of the Act:
TITLE OF EACH CLASS NAME OF EXCHANGE ON WHICH EACH
TO BE SO REGISTERED CLASS IS TO BE REGISTERED
Common Stock, $1.00 par value American Stock Exchange
per share The Pacific Stock Exchange
Securities to be registered pursuant to Section 12(g) of the Act:
None
<PAGE>
Item 1: DESCRIPTION OF REGISTRANT'S SECURITIES TO BE REGISTERED
The registrant's common stock, $1.00 par value per share (the "Common
Stock"), is described under the heading "DESCRIPTION OF ACTAVA CAPITAL
STOCK" in the registrant's Joint Proxy Statement/Prospectus forming
part of the registrant's Registration Statement on Form S-4 (No.
33-63003) filed under the Securities Act of 1933 on September 28,
1995. Such description is incorporated herein by reference.
Item 2: EXHIBITS(1)
The Common Stock of the registrant, currently registered on the New
York Stock Exchange (the "NYSE") and the Pacific Stock Exchange (the
"PSE"), is to be registered on the American Stock Exchange (the
"AMEX") and will remain registered on the PSE. It will be delisted
from the NYSE as of the close of business on November 1, 1995. As
required by Part II of the Instructions as to Exhibits of Form 8-A,
the following exhibits have been filed with the copy of this
registration statement filed with the AMEX:
II.1 Registrant's Annual Report on Form 10-K for the fiscal year ended
December 31, 1994, Form 10-K/A Amendment No. 1 filed on April 28, 1995
and Form 10-K/A Amendment No. 2 filed July 13, 1995 amending
registrant's Form 10-K for the fiscal year ended December 31, 1994;
II.2 Registrant's Quarterly Report on Form 10-Q for the quarter ended
March 31, 1995; registrant's Quarterly Report on Form 10-Q for the
quarter ended June 30, 1995; registrant's Current Report on Form 8-K
dated April 12, 1995 and Form 8-K/A Amendment No. 1 filed on April 28,
1995 amending Registrant's Current Report on Form 8-K dated April 12,
1995; registrant's Current Report on Form 8-K dated September 27,
1995;
- -------------------
(1) Pursuant to Part II of the Instructions as to Exhibits of Form 8-A, the
exhibits listed have neither been filed with, nor incorporated by reference
in, the copies of this Form 8-A filed with the Securities Exchange
Commission.
2
<PAGE>
II.3 Registrant's definitive joint proxy statement/prospectus dated as of
September 28, 1995 included in registrant's registration statement on
Form S-4 filed with the Commission on September 28, 1995;
II.4 Registrant's restated certificate of incorporation and restated
by-laws;
II.5 Form of Stock Certificate of Common Stock, $1.00 par value per share,
of the registrant;
II.6 Registrant's 1994 annual report.
SIGNATURE
Pursuant to the requirements of Section 12 of the Securities Exchange Act
of 1934, the registrant has duly caused the registration statement to be signed
on its behalf by the undersigned, thereto duly authorized.
THE ACTAVA GROUP INC.
October 30, 1995
By: /s/ W. Tod Chmar
-----------------------------
Name: W. Tod Chmar
Title: Senior Vice President
3
<PAGE>
EXHIBIT II.1
Registrant's Annual Report on Form 10-K for the fiscal year ended December 31,
1994, Form 10-K/A Amendment No. 1 filed on April 28, 1995 and Form 10-K/A
Amendment No. 2 filed July 13, 1995 amending registrant's Form 10-K for the
fiscal year ended December 31, 1994
<PAGE>
EXHIBIT II.2
Registrant's Quarterly Report on Form 10-Q for the quarter ended March 31, 1995;
registrant's Quarterly Report on Form 10-Q for the quarter ended June 30, 1995;
registrant's Current Report on Form 8-K dated April 12, 1995 and Form 8-K/A
Amendment No. 1 filed on April 28, 1995 amending Registrant's Current Report on
Form 8-K dated April 12, 1995; registrant's Current Report on Form 8-K dated
September 27, 1995
<PAGE>
EXHIBIT II.3
Registrant's definitive joint proxy statement/prospectus dated as of September
28, 1995 included in registrant's registration statement on Form S-4 filed with
the Commission on September 28, 1995
<PAGE>
EXHIBIT II.4
Registrant's certificate of incorporation and by-laws
<PAGE>
EXHIBIT II.5
Form of Stock Certificate of Common Stock, $1.00 par value per share, of the
registrant
<PAGE>
EXHIBIT II.6
Registrant's 1994 annual report
