UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1994
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 0-12252
PATHE COMMUNICATIONS CORPORATION
(Exact name of registrant as specified in its charter)
DELAWARE 13-2624802
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
c/o The Law Offices of Fredric S. Newman
10 E. 40th Street, 43rd Floor
New York, New York 10016
(Address of principal executive offices)
(Zip Code)
(212) 545-1900
(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
As of August 12, 1994 there were 116,746,810 shares of common stock, par
value $.01 per share, of the registrant outstanding.
PATHE COMMUNICATIONS CORPORATION
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INDEX
Page No.
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PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Balance Sheets -
June 30, 1994 and December 31, 1993 . . . . . . . . . . . . . . . 3
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Condensed Statements of Operations -
Quarter Ended June 30, 1994 and 1993 . . . . . . . . . . . . . . . 4
Six Months Ended June 30, 1994 and 1993 . . . . . . . . . . . . . 5
Condensed Statements of Cash Flows -
Six Months Ended June 30, 1994 and 1993 . . . . . . . . . . . . . 6
Notes to Condensed Financial Statements . . . . . . . . . . . . . 7
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations . . . . . . . . . . 17
PART II - OTHER INFORMATION
Item 1. Legal Proceedings . . . . . . . . . . . . . . . . . . . . . . . . 19
Item 6. Exhibits and Reports on Form 8-K . . . . . . . . . . . . . . . . . 19
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PATHE COMMUNICATIONS CORPORATION
CONDENSED BALANCE SHEETS
(in thousands)
June 30, December 31,
1994 1993
(unaudited)
ASSETS:
<S> <C> <C>
Cash and cash equivalents . . . . . . . . . . . . . . . . . $ 108 $ 343
Accounts and notes receivable . . . . . . . . . . . . . . . - 264
Other assets . . . . . . . . . . . . . . . . . . . . . . . 657 749
$ 765 $ 1,356
LIABILITIES AND STOCKHOLDERS' DEFICIT:
Liabilities:
Accounts payable and accrued
liabilities . . . . . . . . . . . . . . . . . . . . . . . $ 54,694 $ 47,930
Bank and other debt . . . . . . . . . . . . . . . . . . . . 175,544 173,412
Other liabilities . . . . . . . . . . . . . . . . . . . . . 564 564
Subordinated debt . . . . . . . . . . . . . . . . . . . . . 47,559 47,156
Total liabilities . . . . . . . . . . . . . . . . . . 278,361 269,062
Stockholders' Deficit:
Preferred stock - $.01 par value,
authorized 200,000,000 shares,
none outstanding . . . . . . . . . . . . . . . . . . . . - -
Common stock - $.01 par value,
authorized 200,000,000 shares,
issued and outstanding
116,746,810 shares in 1994
and 1993 . . . . . . . . . . . . . . . . . . . . . . . . 1,167 1,167
Additional paid-in capital . . . . . . . . . . . . . . . . 906,808 906,808
<PAGE>
Accumulated deficit . . . . . . . . . . . . . . . . . . . (1,185,572) (1,175,681)
Total stockholders' deficit . . . . . . . . . . . . . . (277,597) (267,706)
$ 765 $ 1,356
The accompanying Notes to Condensed Financial Statements are an integral part of these statements.
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PATHE COMMUNICATIONS CORPORATION
CONDENSED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
(unaudited)
Quarter Quarter
Ended Ended
June 30, June 30,
1994 1993
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General corporate
administration expenses . . . . . . . . . . . . . . . . . $ 376 $ 4,346
Operating loss . . . . . . . . . . . . . . . . . . . . . . (376) (4,346)
Other income (expenses):
Interest expense, net . . . . . . . . . . . . . . . . . . (4,825) (4,044)
Interest and other income
(expense), net . . . . . . . . . . . . . . . . . . . . . - 9
Loss before income taxes . . . . . . . . . . . . . . . . . (5,201) (8,381)
Provision for income taxes . . . . . . . . . . . . . . . . - -
Net loss . . . . . . . . . . . . . . . . . . . . . . . . . $ (5,201) $ (8,381)
Net loss per common share . . . . . . . . . . . . . . . . . $ (0.04) $ (0.07)
The accompanying Notes to Condensed Financial Statements are an integral part of these statements.
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PATHE COMMUNICATIONS CORPORATION
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CONDENSED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
(unaudited)
Six Months Six Months
Ended Ended
June 30, June 30,
1994 1993
<S> <C> <C>
General corporate
administration expenses . . . . . . . . . . . . . . . . . $ 914 $ 4,787
Operating loss . . . . . . . . . . . . . . . . . . . . . . (914) (4,787)
Other income (expenses):
Interest expense, net . . . . . . . . . . . . . . . . . . (8,976) (7,959)
Interest and other income
(expense), net . . . . . . . . . . . . . . . . . . . . . - 26
Loss before income taxes . . . . . . . . . . . . . . . . . (9,891) (12,720)
Provision for income taxes . . . . . . . . . . . . . . . . - -
Net loss . . . . . . . . . . . . . . . . . . . . . . . . . $ (9,891) $ (12,720)
Net loss per common share . . . . . . . . . . . . . . . . . $ (0.08) $ (0.11)
The accompanying Notes to Condensed Financial Statements are an integral part of these statements.
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PATHE COMMUNICATIONS CORPORATION
CONDENSED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
Six Months Six Months
Ended Ended
June 30, June 30,
1994 1993
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Net cash used in
operating activities . . . . . . . . . . . . . . . . . . $ (2,367) $ (9,156)
Financing activities:
Net additions to borrowed
funds . . . . . . . . . . . . . . . . . . . . . . . . 2,132 9,140
Cash provided by
financing activities . . . . . . . . . . . . . . . . . . 2,132 9,140
Increase (decrease) in cash from
operating and financing
activities . . . . . . . . . . . . . . . . . . . . . . (235) (16)
Beginning balance -
cash and cash equivalents . . . . . . . . . . . . . . . . 343 44
Ending balance -
cash and cash equivalents . . . . . . . . . . . . . . . . $ 108 $ 28
The accompanying Notes to Condensed Financial Statements are an integral part of these statements.
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PATHE COMMUNICATIONS CORPORATION
NOTES TO CONDENSED FINANCIAL STATEMENTS
NOTE 1 - ORGANIZATION AND BASIS OF PRESENTATION
Pathe Communications Corporation ("Pathe" or the "Company") has no operating
assets or sources of operating income, and the Company is currently dependent
on Credit Lyonnais Bank Nederland N.V. ("CLBN") to fund its ongoing cash
requirements. CLBN controls the voting rights with respect to approximately
97% of the Company's common stock. On May 7, 1992, CLBN foreclosed on
59,100,000 shares constituting 98.5% of the common stock of Metro-Goldwyn-
Mayer, Inc. ("MGM"), which shares constituted substantially all of the assets
of the Company. The accompanying unaudited condensed financial statements
should be read in conjunction with the audited financial statements included
in the Company's Annual Report on Form 10-K for the fiscal year ended December
31, 1993.
NOTE 2 - MARKET FOR THE COMPANY'S COMMON STOCK
On August 28, 1992, the Securities and Exchange Commission, in response to the
application by the New York Stock Exchange (the "Exchange"), issued an order
<PAGE>
removing the Company's common stock from listing and registration on the
Exchange. At this time the Company has no knowledge of the existence of any
established public trading market for the Company's common stock. The Company
does not have any present plans that would result in the repurchase or
redemption of its common stock or in the admission for trading of such stock
on other exchanges or markets.
NOTE 3 - BANK AND OTHER DEBT
The Company's bank and other debt are summarized as follows (in thousands):
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June 30, December 31,
1994 1993
(unaudited)
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Credit facilities $ 25,544 $ 23,412
Bank note payable 150,000 150,000
$ 175,544 $ 173,412
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Credit facilities. The Company has an arrangement with CLBN upon which the
Company's borrowings are made under the form of demand promissory notes, with
interest accruing quarterly at LIBOR plus two percent. Any future advances
are at the absolute discretion of CLBN. CLBN provided funding to the Company
to enable it to make interest payments under the Company's subordinated debt
agreements during the period through May 1, 1994 on such obligations not
beneficially owned by CLBN. CLBN has made no commitment to the Company that
it will fund any future interest or principal payments with respect to the
Company's debt, or other obligations, and the Company currently has no other
source of funding.
Bank note payable. In November 1990, the Company borrowed $150,000,000 from
Sealion Corporation N.V. ("Sealion"), a company affiliated with SASEA Holding,
S.A. (SASEA), which is affiliated with prior management of the Company, and
lent the proceeds to Melia International N.V. ("Melia"), the Company's major
stockholder. Sealion assigned, as collateral security, its receivable from
the Company to Credit Lyonnais S.A., the parent of CLBN. The obligation is
guaranteed by Melia and collateralized by approximately 51 percent of the
Company's outstanding stock. The obligation bears interest at LIBOR plus 2
percent payable monthly and, as amended, calls for principal payments of
$30,000,000 a month beginning in January 1992. None of these interest or
principal payments have been made by the Company, and this facility is
currently in default.
NOTE 4 - SUBORDINATED DEBT
Subordinated debt is summarized as follows (in thousands, net of original
issue discount):
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June 30, December 31,
1994 1993
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12.375% senior subordinated notes
due November 1, 1994 . . . . . . . . . . . . . . . . . . $ 16,937 16,709
12.875% senior subordinated
debentures . . . . . . . . . . . . . . . . . . . . . . . 26,861 26,686
8.875% convertible senior
subordinated debentures . . . . . . . . . . . . . . . . . 3,761 3,761
$ 47,559 $ 47,156
<PAGE>
</TABLE>
NOTE 5 - RELATED PARTY TRANSACTIONS
The Company has a credit arrangement with CLBN (see Note 3). Interest of
approximately $422,000 and $744,000 was charged on such facility in the
quarter and six months ended June 30, 1994, respectively.
In connection with the foreclosure by CLBN on the shares of MGM common stock
owned by the Company, the Company acquired, by right of subrogation, a claim
against Melia in the amount of $343,125,754. This claim represented the
amount of Melia debt owed to CLBN, which amount was secured by the pledge of
the Company's MGM common stock, and which was bid-in at the foreclosure
auction on May 7, 1992. On April 16, 1993, the Company filed a bankruptcy
petition against Melia with the Bankruptcy Chamber of the Amsterdam District
Court. Subsequent to this petition, which was joined by CLBN and other
creditors, Melia was declared bankrupt on April 27, 1993 (see Note 6).
NOTE 6 - COMMITMENTS AND CONTINGENCIES
Litigation. The Company is subject to a consent decree (the "Consent
Decree") entered in the United States District Court for the Central District
of California ("California District Court") in a Securities and Exchange
Commission civil action commenced against the Company on November 19, 1987,
entitled Securities and Exchange Commission v. The Cannon Group. Inc. et al.,
Case No. 87-07590. This proceeding against the Company and certain of its
former directors and officers alleged, among other things, violations or
aiding and abetting of violations of the antifraud, reporting, proxy, record
keeping and internal controls provisions of the federal securities laws.
Without admitting or denying the allegations in the Commission's complaint,
the Company and certain individuals settled the action and consented to the
entry of a final judgment enjoining them from violating the aforementioned
provisions of the federal securities laws.
The Consent Decree required the Company to appoint an independent
person to examine transactions between the Company and related parties for the
period January 1, 1984 through December 31, 1986. The independent person is
required to deliver a report to the Company's Board of Directors regarding
such transactions together with recommendations regarding what action the
Board should take as a result of the examination. The Company appointed a law
firm as the independent person. In November 1991, the independent person
resigned without having delivered a report to the Board of Directors. In its
resignation letter, the independent person stated it had been unable to
complete their examination because of the Company's failure to pay the
independent person's fees and because certain members of the former management
of the Company had failed to cooperate in the examination.
Current management also believes that the Company under prior
management may have violated other provisions of the Consent Decree.
Violations of the Consent Decree could result in further proceedings by the
Commission. If the Company were found to have violated the Consent Decree,
the Company could be held in contempt of court and could be subjected to
substantial penalties. The Company has informed the Commission of its
concerns regarding compliance with the Consent Decree and is cooperating with
the Commission in its review of this matter. While no assurances can be
given, management believes that any punitive measures which may be imposed as
a result of violations of the Consent Decree would be imposed upon those
persons responsible for such violations (as opposed to the Company's current
management) and would not have a material adverse effect upon the Company.
The Commission is currently conducting an investigation into certain
transactions effected by prior management of the Company. The Company is
cooperating fully with the Commission in its investigation. The Company
cannot presently determine what, if any, action the Commission might take as a
<PAGE>
result of its investigation.
On January 22, 1991, Century West Financial Corporation ("Century
West") filed a complaint in Los Angeles Superior Court against the Company,
Renta Properties and others for breach of contract, breach of third party
beneficiary contract, bad faith denial of contract, breach of the implied
covenant of good faith and fair dealing, and tortious interference with
prospective economic advantage. Century West alleges that it acted as broker
for the sale of 6420 Wilshire Boulevard and is owed a commission. Century
West seeks compensatory damages in the amount of $470,000, interest thereon
and punitive damages. A Third Amended Complaint was filed in this action on
January 14, 1994. Cross-complaints have been filed against the Company, and
the Company has filed cross-claims. A First Amended Cross-Complaint was filed
on August 3, 1994. In addition, the Company is advancing defense costs to a
former employee and will indemnify him subject to an undertaking for
reimbursement under certain circumstances. Discovery is currently underway. A
trial date has been set for October 24, 1994. The discovery cut-off and
motion cut-off date is October 7, 1994. The Company intends vigorously to
defend this action.
On June 18, 1991, a complaint was filed in the United States
District Court for the Central District of California against the Company,
MGM, Messrs. Parretti, Fiorini, Globus and Aurelio Germes and Maria Cecconi
(Mr. Parretti's wife) on behalf of a purported class which acquired MGM's 13%
Subordinated Debentures due 1996. On October 10, 1991, J. Phillip Williams,
on behalf of a group of MGM bondholders, filed a complaint in the United
States District Court for the Central District of California against the
Company, MGM, CLBN and Mr. Parretti which alleges that the defendants violated
U.S. securities laws, and conspired to deceive plaintiffs about MGM's
financial condition, markets, and business prospects, thereby artificially
inflating the price of MGM's securities. The complaint seeks unspecified
damages. The Company answered the complaint on February 3, 1992. Limited
discovery was conducted regarding class certification. On March 23, 1992, the
court heard and denied Williams' motion for class certification. On May 18,
1992, the court denied Williams' motion for reconsideration. On July 22,
1992, another bondholder, Herbert Eisen, moved to intervene in the lawsuit.
After limited discovery was conducted regarding intervention, the court
granted Mr. Eisen's motion to intervene. On December 15, 1992, Mr. Eisen
filed a complaint-in-intervention that mirrors the allegations in the
Williams' complaint. The Company and MGM answered Eisen's complaint-in-
intervention on December 29, 1992. On October 26, 1993, the parties entered
into a Stipulation of Settlement which would dispose of this matter subject to
Court approval. The settlement, if approved, would create a fund of
$4,500,000 against which injured class members may make a claim. Any
unclaimed portion of the fund will be returned to the contributing defendants.
The Company and MGM have funded the settlement.
On September 25, 1991, Century Insurance Ltd. ("Century") filed a
complaint in Superior Court against the Company, MGM, Melia, Comfinance S.A.
("Comfinance"), CLBN and Mr. Parretti alleging, among other things, breach of
contract, fraud, constructive fraud, conversion and conspiracy. The claims
arise out of certain defendants' failure to pay a purported $1.75 million
premium in connection with plaintiff's purported issuance of a completion
guarantee bond in connection with the financing of the Merger and alleged
unpaid premiums in connection therewith. In addition to payment of this
alleged premium, the plaintiff seeks $34,200,000 in alleged management fees on
three purported insurance investment bonds and declaratory relief. MGM was
voluntarily dismissed from the action on January 3, 1992. The plaintiff
served a second amended complaint on February 3, 1992. In addition, on
December 6, 1991, this case was consolidated with an earlier declaratory
relief suit filed by CLBN against Century. The Company was not a party to
this earlier suit. On February 3, 1993, the court dismissed with prejudice
Century's complaint against the Company and all of the other defendants, for
failure to comply with discovery orders. On July 14, 1993, Century moved to
vacate the judgment in the Company's and other defendants' favor, which motion
was denied. Century has filed a notice of appeal of denial of its motion to
<PAGE>
vacate. The parties have not completed the appeal briefing and no date has
been set for the hearing of the appeal.
On January 18, 1991, Andrea Kune, a stockholder of the Company,
filed a derivative lawsuit on behalf of the Company against Messrs. Parretti,
Fiorini, Globus, Valentina Parretti, Ms. Cecconi, Antonio Pares-Neira and
Lewis P. Horwitz, alleging breach of fiduciary duty, abuse of control, waste
of corporate assets, fraud and deceit, negligent misrepresentation and
constructive fraud. Certain other individuals formerly associated with the
Company were subsequently named as defendants. The Company was named as a
nominal defendant only. On September 16, 1991, the Company filed a Statement
of Non-Response asserting that it had no obligation to respond to the
complaint because the complaint seeks no relief from the Company. A second
amended complaint was filed on July 27, 1992 against the same defendants in
which the Company was again named as a nominal defendant. Kune alleges claims
for breach of fiduciary duty, fraud and deceit, negligent misrepresentation
and constructive fraud against the defendants. The amended complaint seeks
unspecified damages. The Company remains a nominal defendant only and no
claims for monetary relief are asserted against it. A tentative settlement of
the case has been reached in the amount of $4,000,000, less plaintiff's
attorneys' fees, costs and expenses to be awarded, subject to Court review and
approval.
On January 27, 1992, Linda Carter filed an application for award for
employer violation of Section 132(a) of the Labor Code before the Workers'
Compensation Appeals Board of the State of California against the Company and
MGM seeking reinstatement of employment, back wages at approximately $21,000
per year plus benefits, and costs of suit. The application alleges Ms. Carter
was laid off on March 4, 1991, in retaliation for filing a workers'
compensation claim. The Company is vigorously defending this action.
On January 21, 1992, CLBN filed an action in the Delaware Chancery
Court in which CLBN asserted various claims against the Company, Gestione
Nuove Attivita Finanziarie S.a.r.l. (a company controlled by Ms. Cecconi)
("GENAF"), Melia and certain subsidiaries of Melia seeking, among other
things, a judicial declaration that: (i) a purported transfer of common stock
of the Company from Melia and certain of its subsidiaries to GENAF (the
"Subject Stock") is null, void and without effect; and (ii) the Company should
issue new stock certificates to CLBN representing the Subject Stock or impose
a constructive trust on the Subject Stock held by GENAF. On April 3, 1992, a
final judgment was entered in CLBN's favor. On or about February 6, 1992, Mr.
Parretti and GENAF applied to the Civil Court in Rome for the appointment of a
custodian of issued shares in the Company and MGM purportedly held by Mr.
Parretti and GENAF and for precautionary measures to protect the assets of the
Company and MGM against further alleged diminution in value being caused by
CLBN. The Court on or about February 24 and March 6, 1992 issued temporary ex
parte orders decreeing that the shares of the Company and MGM are validly
within the custody of the Court, and appointing Paolo Picozza as custodian of
the shares in dispute. With consent of the court of March 6, 1992, Mr.
Picozza purported to take action to amend Pathe's By-Laws to increase the
number of directors of the Company to thirty and to appoint eight additional
directors of the Company. Mr. Picozza also purported to take action to remove
the current directors of MGM and to replace them with seven new directors. On
March 12, 1992, CLBN filed a special appearance with the Court objecting to
the decrees on the ground, among other things, that the stock certificates
presented to the Court as evidence of Mr. Parretti's controlling interest in
the Company and MGM were either already sequestered by the Delaware Chancery
Court on February 12, 1992, pursuant to an order of that court dated February
4, 1992 or previously certified lost and replaced, as well as on various
procedural and jurisdictional grounds. A hearing was held on Friday, March
20, 1992 regarding CLBN's special appearance. On March 18, 1992, Mr. Parretti
and GENAF filed an appeal with the Italian Supreme Court on jurisdictional
issues and CLBN filed a counter appeal (no hearing has so far been fixed by
the Supreme Court). A new temporary order was rendered on April 28, 1992
confirming the two earlier decisions. The April 28, 1992 order provided for
an 180 day time period during which Mr. Parretti and GENAF should bring an
<PAGE>
action on the merits. On October 18, 1992, Mr. Parretti filed an action for
damages against CLBN and a hearing was held in March 1993. On June 10, 1993
the Italian Supreme Court ruled that the original Italian court did not have
jurisdiction over these claims, nullified the earlier orders issued by the
Italian courts and awarded court costs and attorneys' fees to CLBN.
On May 6, 1992, Robert Solomon filed a complaint in Delaware
Chancery Court against the Company, CLBN, Dennis Stanfill, Alan Ladd, Jr.,
Charles Meeker, Kenneth Meyer, Jay Kanter, William Jones, Thomas Carson, Rene
Claude Jouannet, Bahman Naraghi, Guy Etienne Dufour, G. Goirand and Jacques
Bertholier for breach of defendants' duties of fair dealing and breach of
fiduciary duties to the public stockholders of the Company in connection with
the Foreclosure and CLBN's Tender Offer for the Company's stock at a price of
$1.50 per share. Plaintiff filed the action on his own behalf and as a class
action on behalf of a purported class of public stockholders of the Company.
On March 15, 1994, Solomon filed an amended class action complaint against the
Company, CLBN and certain of the previously named individuals, but no monetary
relief is sought against the Company. The Company plans vigorously to defend
the action.
On December 7, 1992, MGM filed an action against Tracinda
Corporation, Jeffrey Barbakow, Kirk Kerkorian, Stephen Silbert (the "Kerkorian
Defendants") and Houlihan, Lokey, Howard & Zukin, Inc. ("HLHZ") in the
Superior Court. The complaint, last amended in December, 1992, sets forth
claims for breach of fiduciary duty, aiding and abetting breach of fiduciary
duty, breach of contract and negligence in connection with the sale of MGM to
the Company in the fall of 1990. MGM alleges, among other things, that the
Kerkorian Defendants engaged in a scheme to induce the independent members of
MGM's Board to approve the merger to MGM's detriment. MGM seeks damages in an
amount of $750,000,000, punitive damages according to proof at trial, and a
declaration that the indemnity provisions of certain agreements executed in
connection with the merger do not cover any judgment, settlement, fees or
costs incurred by the Kerkorian Defendants in a legal action. On January 27,
1993, HLHZ filed an answer denying the allegations of the complaint and a
cross-complaint against MGM, the Company and CLBN for declaratory relief,
fraud, negligent misrepresentation and equitable indemnity. The Company
answered HLHZ's cross-complaint on March 29, 1993. In the cross-complaint,
HLHZ sought, among other things, indemnification from the Company under the
terms of an engagement letter between HLHZ and the Company and damages for
fraud, negligent misrepresentation and equitable indemnity in an amount
according to proof at trial, plus attorneys fees, costs and expenses. On
October 13, 1993, a Special Referee in this matter recommended that the Court
enter an order declaring that the Company be required to advance to HLHZ its
reasonable attorneys' fees in this matter pursuant to the engagement letter,
subject to repayment if HLHZ were later found to have committed fraud. The
Court did enter such an order, and the Company moved for reconsideration of
that decision. Subsequently MGM, CLBN, the Company and HLHZ entered into a
global agreement to settle all claims pending. The terms of settlement are
confidential, but the Company is not obligated to pay any consideration to any
of the other parties to the agreement or to any third parties. On July 5,
1994, the court entered an order approving the settlement. Consequently,
while the MGM action is still pending, the Company is no longer a party to it.
On April 16, 1993, the Company filed a bankruptcy petition against
Melia with the Bankruptcy Chamber of the Amsterdam District Court. This
petition was joined by the Dutch tax authorities, Scotti International N.V.,
Cannon Cinema B.V. and CLBN. At a hearing on April 27, 1993, the Court found
that Melia had ceased to pay its debts and declared Melia officially bankrupt.
The Court appointed Mr. R.W. De Ruuk as official receiver in the bankruptcy.
The appeal period under the governing Dutch Bankruptcy Code has lapsed. Mr.
De Ruuk has deposited four public reports with the Dutch authorities. It
appears to the Company from such reports that no material recovery benefitting
it will be forthcoming.
On June 29, 1993, Aurelio Germes, a former officer of the Company,
filed a declaratory relief action against the Company in the United States
<PAGE>
District Court for the Central District of California. Mr. Germes seeks a
declaratory judgment that the Company is obligated to pay Mr. Germes' legal
fees in connection with the SEC investigation and in defense of the Kune
matter. The Company filed an answer to this complaint on August 12, 1993.
Subsequently, upon motion by the Company, the Court determined that the claims
relating to the SEC investigation were not ripe, but that those relating to
the Kune case were. Trial of the action is now set for September 26, 1994,
and the Company has moved to stay the action pending the final dismissal of
the Kune action upon its settlement. The Company intends to vigorously defend
this action.
On March 30, 1994, Giancarlo Parretti, Valentina Parretti, Maria
Cecconi and Comfinance, S.A. filed suit in Los Angeles Superior Court against
the Company and numerous other defendants, including CLBN, CLBN's parent
company Credit Lyonnais S.A., MGM and former officers and directors of the
Company and of MGM. Plaintiffs' complaint arises from alleged acts in
connection with the Company's merger with MGM in November 1990 and subsequent
events by which plaintiffs lost ownership and control of MGM and the Company.
Plaintiffs assert causes of action for violation of the Racketeer Influenced
and Corrupt Organizations Act, fraud, conspiracy to defraud, rescission,
injunctive relief, spoliation of evidence, malicious prosecution, breach of
employment contract, intentional interference with contract, intentional
interference with prospective economic advantage and indemnification.
Plaintiffs also purport to bring derivative claims on the Company's behalf for
breach of fiduciary duty, constructive fraud and waste of corporate assets.
The Company believes that plaintiffs' claims are largely barred because they
were previously adjudicated in a Delaware court. The Company demurred to
several of the causes of action and the court's ruling is pending. The
Company also intends to move the court to dismiss the complaint and intends
otherwise to defend this lawsuit vigorously.
By Third Party Complaint dated July 25, 1994 the Company was named
as a third party defendant in an action captioned Credit Lyonnais Bank
Nederland N.V. v. Tracinda Corporation et al., Ca. No. CV 94-2957 R (BQRx)
pending in the United States District Court for the Central District of
California (the "Federal Action"). In that case Credit Lyonnais Bank
Nederland N.V. ("CLBN"), as plaintiff, sued certain former shareholders of
MGM/UA Communications Co., including its majority shareholder Tracinda
Corporation and former officers and directors of MGM/UA, for fraudulent
conveyance in connection with the November 1990 merger between MGM/UA and the
Company. The complaint charges that the defendants engaged in fraudulent
transfers including receipt of cash for their shares in violation of
California Civil Code Sections 3439.04 and 3439.05. The complaint alleges
that in order to finance the merger, defendants caused or permitted MGM/UA
first to purchase the Company's principal operating subsidiaries, Pathe
Entertainment Inc. ("PEI") and Cannon Entertainment, Inc. ("CEI") for $625
million which amount far exceeded the fair value of those two companies. The
complaint further alleges that in order to pay for PEI and CEI, defendants
caused MGM to enter into long term licenses of its distribution rights in the
MGM/UA film library at below fair value. MGM/UA then sold the receivables
under those licenses for current, discounted cash payments which were applied
toward the purchase price of PEI and CEI. As the selling MGM/UA shareholders,
defendants were the ultimate recipients of the proceeds of the sale of such
assets. The complaint charges that as a result of these transactions and the
net transfer of moneys from MGM/UA to defendants for less than fair value, the
combined company was rendered insolvent. As a creditor of MGM, CLBN charges
that the Tracinda Defendants caused such transfers with actual and
constructive intent to hinder, delay or defraud it in violation of
California's fraudulent transfer laws (Cal. Civ. Code Section 3439 et seq).
In the Federal Action CLBN seeks $625 million plus punitive damages from the
defendants.
In addition to filing an answer and counterclaim against CLBN, the
Tracinda Defendants have brought a third party complaint against the Company.
Defendants have sued the Company for contractual indemnity, breach of
contract, breach of warranty, declaratory relief, equitable indemnity and
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equitable contribution. On the contractual indemnity claims, defendants
charge that, under certain agreements executed in connection with the merger,
the Company expressly agreed to indemnify them against costs of legal defense
or any liability arising out of claims based on the merger transaction,
including those potentially arising out of the Federal Action. In particular,
defendants charge that the Company agreed to such indemnity under the
Agreement and Plan of Merger and the Stock Purchase Agreement. The Third
Party Complaint further alleges that the Company also agreed under the Stock
Purchase Agreement to ensure that the total consideration exchanged by the
Company for the $625 million payment would be worth at least that amount and
if it subsequently proved to be inadequate, the Company would deliver
sufficient additional assets to cover the difference (the "Makeup Provision").
Defendants charge that if it is determined in the Federal Action that MGM did
not receive reasonably equivalent value for PEI and CEI, then the Company will
be liable for damages proximately caused by its breach of the Makeup
Provision.
As to the breach of the warranty claim, defendants allege that under
the Agreement and Plan of Merger, the Company warranted MGM would be solvent
post-closing (the "Warranty Provision") and that any finding in the CLBN case
that MGM was insolvent constitutes a breach of such warranty. Defendants also
seek declaratory relief regarding the parties' rights and obligations under
the aforementioned indemnity provisions, the Makeup Provision and the Warranty
Provision and that the Company and CLBN, as its alter ego, are obligated under
such provisions to pay the costs of defense of the Federal Action and to
indemnify them for any prospective judgment or settlement reached.
Defendants finally allege that the misconduct of the Company and
CLBN both prior to and post merger led to the harm alleged in the complaint
and, thus, defendants are entitled to equitable indemnity and contribution
against judgment rendered in favor of CLBN in the CLBN case. Defendants
charge as acts of misconduct that the Company and CLBN misrepresented the
financing for the merger pre-merger and misappropriated funds post-merger.
As to all of these claims, defendants allege that CLBN's control
over the Company and the Company's inability to cover any potential liability
to defendants constitute grounds for treating the Company and CLBN as alter
egos. Thus, defendants seek a ruling that CLBN is liable for any
determination that the Company is liable to defendants.
The Company denies the allegations of the third party complaint and
will vigorously defend the claims asserted against it.
Demands for the advancement of legal fees and indemnification in the
defense of the Kune and Williams actions have been made by Giancarlo Parretti,
Maria Cecconi, and Valentina Parretti (collectively, the "Parrettis"). In
addition, a demand for the advancement of legal fees for defense of the Kune
case has been made by Yoram Globus. The Company has rejected these demands.
In addition, there have been additional claims for indemnification and/or the
advancement of expenses and legal fees which have been asserted from time to
time by former officers, directors and/or employees of the Company, and the
Company reviews each demand on a case by case basis.
NOTE 7 - SUPPLEMENTARY CASH FLOW INFORMATION
Interest paid was approximately $913,000 and $3,288,000 during the six-month
periods ended June 30, 1994 and 1993, respectively.
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
<PAGE>
Condensed Financial Statements and the related notes thereto. References to
Notes refer to the notes to such statements.
General
The Company has no operating assets or sources of income (see "Liquidity and
Capital Resources" below; Note 1).
Results of Operations
The Company reported net losses for the quarters ended June 30, 1994 and 1993
of ($5,201,000) and ($8,381,000), or ($.04) and ($.07) per common share,
respectively, based on 116,747,000 weighted average common shares outstanding.
For the six-month periods ended June 30, 1994 and 1993, the Company reported
net losses of ($9,891,000) and ($12,720,000), or ($.08) and ($.11),
respectively.
General Corporate Administration Expenses
General corporate administration expenses compared to the 1993 periods
decreased by approximately $4,000,000, or 90%, for the quarter, and
$3,900,000, or 80%, for the six-month period, because the Company had incurred
higher legal fees and certain settlement costs associated with litigation
during the 1993 periods.
Other Income (Expense)
The increase in the net interest expense by approximately $800,000 for the
quarter and $1,000,000 for the six-month period is due primarily to an
increase in the principal amount borrowed from CLBN and an increase in the
applicable interest rates.
Liquidity and Capital Resources
The Company is currently dependent on CLBN for additional capital to fund its
cash requirements. CLBN may, in its absolute discretion, decide whether or
not to advance additional funds to the Company.
The Company's subordinated debt agreements contain cross acceleration
provisions which generally provide that if holders of certain other debt of
the Company accelerate the maturity of such debt, such acceleration would be a
default with respect to the subordinated debt. If such event were to occur
and certain notices are given under the various agreements and indentures, a
substantial portion of the Company's subordinated debt could be accelerated.
The Company has not received any such notices.
The Company currently does not meet the minimum net worth covenant under its
12 7/8% and 8 7/8% debenture Indentures as its net worth has been below
$37,500,000 for more than two consecutive quarters. Upon the occurrence of
such event, such Indentures, as amended, require the Company to redeem 10
percent of the aggregate principal amount of the debentures then outstanding
(at 100 percent of the principal amount) plus accrued interest by the last day
of the following quarterly period. Similar payments must be made semi-annually
thereafter until all outstanding debentures are redeemed, unless the net worth
is above $37,500,000 as of the last day of any subsequent quarter. The Company
can satisfy the redemption requirement through previously acquired and
canceled debentures. Due to the significant amount of such debentures
previously acquired by the Company, the Company will not be required to make
any cash redemptions for the foreseeable future.
Additionally, the Company is currently in default on its existing indebtedness
to Sealion.
Commitments and Contingencies
<PAGE>
The Company is a party to various lawsuits (see Note 6). A significant
adverse judgment in one or more of the cases could have a material impact on
the Company's liquidity.
Impact of Interest Rates
Any significant increase in interest rates would have a substantial adverse
effect on the Company's financial position.
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
See Note 6 regarding various material legal proceedings.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
11 - Computation of loss per common share.
(b) Reports on Form 8-K
No reports on Form 8-K have been filed during the quarter ending
June 30, 1994.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
PATHE COMMUNICATIONS CORPORATION
Date: August 12, 1994 s/ Fredric S. Newman
Fredric S. Newman
President
(Principal Financial
and Accounting Officer)
EXHIBIT INDEX
Exhibit Description Page
11 Computation of Loss Per Common
Share 1
Exhibit 11
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PATHE COMMUNICATIONS CORPORATION
COMPUTATION OF LOSS PER COMMON SHARE
(in thousands, except per share data)
Quarter Quarter
Ended Ended
June 30, June 30,
1994 1993
<S> <C> <C>
Net loss . . . . . . . . . . . . . . . . . . . . . . . . . $ (5,201) $ (8,381)
Weighted average
common shares outstanding . . . . . . . . . . . . . . . . 116,747 116,747
Primary loss per
common share . . . . . . . . . . . . . . . . . . . . . . $ (.04) $ (.07)
Six Months Six Months
Ended Ended
June 30, June 30,
1994 1993
Net loss . . . . . . . . . . . . . . . . . . . . . . . . . $ (9,891) $ (12,720)
Weighted average
common shares outstanding . . . . . . . . . . . . . . . . 116,747 116,747
Primary loss per
common share . . . . . . . . . . . . . . . . . . . . . . $ (.08) $ (.11)
</TABLE>
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