EXHIBIT 1
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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K/A
AMENDMENT NO. 1
(▇▇▇▇ 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
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METROMEDIA INTERNATIONAL GROUP, INC.
(Exact name of registrant, as specified in its charter)
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DELAWARE ▇▇-▇▇▇▇▇▇▇
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
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▇▇▇ ▇▇▇▇▇▇▇▇▇▇▇ ▇▇▇▇▇, ▇▇▇▇ ▇▇▇▇▇▇▇▇▇▇, ▇▇▇ ▇▇▇▇▇▇ ▇▇▇▇▇-▇▇▇▇
(Address and zip code of principal executive offices)
(▇▇▇) ▇▇▇-▇▇▇▇
(Registrant's telephone number, including area code)
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SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
TITLE OF EACH CLASS NAME OF EACH EXCHANGE
ON WHICH REGISTERED
Common Stock, $1.00 par value American Stock Exchange
Pacific Stock Exchange
9 1/2% Subordinated Debentures, due August 1, 1998 New York Stock Exchange
10% Subordinated Debentures, due October 1, 1999 New York Stock Exchange
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SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
None
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Indicate by check ▇▇▇▇ 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 ▇▇▇▇ 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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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 ▇▇▇ ▇▇▇▇▇▇▇▇▇▇▇ ▇▇▇▇▇,
▇▇▇▇ ▇▇▇▇▇▇▇▇▇▇, ▇▇▇ ▇▇▇▇▇▇ ▇▇▇▇▇-▇▇▇▇, telephone: (▇▇▇) ▇▇▇-▇▇▇▇.
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:
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
----------------------------------------- ------------------- ----- ----- --------- --------- --------- ---------
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
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(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.
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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
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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
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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
8
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
9
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 ▇▇▇▇-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
10
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 ▇▇▇▇ 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
11
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.
12
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
MITI
OWNERSHIP AMOUNT AMOUNT TOTAL
VENTURE(1) AMOUNT CONTRIBUTED LOANED INVESTMENT(12)
--------------------------------------------------------- ----------- ------------ ------------ --------------
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
▇▇▇▇ 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
▇▇▇▇ 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 (▇▇▇▇▇, 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
13
MITI
OWNERSHIP AMOUNT AMOUNT TOTAL
VENTURE(1) AMOUNT CONTRIBUTED LOANED INVESTMENT(12)
--------------------------------------------------------- ----------- ------------ ------------ --------------
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
------------------------
(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, ▇▇▇▇ TV. All amounts contributed and loaned to
▇▇▇▇ 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
14
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
15
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 ▇▇▇▇▇▇▇ HILLS NINJA, DUMB AND DUMBER and the Academy
Award-Registered Trademark- winning THE MADNESS OF KING ▇▇▇▇▇▇. 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
16
and marketing costs are highest. This strategy is based on management's success
with producing such films as ▇▇▇▇▇▇▇ 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 ▇▇▇▇▇▇ and EAT DRINK MAN WOMAN.
The Entertainment Group intends to produce or acquire and release an average of
approximately 10-15 theatrical features per year, in which the Company's portion
of the production cost will generally range from $5.0 million to $10.0 million.
The Company also expects to spend on average, between $3.5 million and $10.0
million on print and advertising costs for feature films it produces or
acquires. The Company's acquisition program contemplates output arrangements
with producers and the acquisition of existing catalogs, as well as film-by-film
acquisitions. In addition, in order to expand its production capabilities and
minimize its exposure to the performance of any particular film, the Company
intends to finance a significant portion of each film's budget by "pre-selling"
or pre-licensing foreign distribution rights. Furthermore, certain of the
Company's executives will, on behalf of the Company, enter into "producer-
for-hire" agreements with other studios for which the Company and such
executives will receive a fee. See "--United States Motion Picture Industry
Overview--Motion Picture Production and Financing" and "-- Motion Picture
Distribution" below. The Entertainment Group believes that its ability to
successfully produce or acquire and distribute a significant number of feature
films each year will enhance the marketability of its existing library as it
markets these films with films already in the library.
17
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 ▇▇▇▇
Disney Pictures, THE PREACHER'S WIFE, starring ▇▇▇▇▇▇ ▇▇▇▇▇▇▇▇▇▇ and ▇▇▇▇▇▇▇
▇▇▇▇▇▇▇ and directed by ▇▇▇▇▇ ▇▇▇▇▇▇▇▇, 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 ▇▇▇▇▇▇ ▇▇▇▇▇.
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 ▇▇▇▇ ▇▇▇▇▇▇, 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 ▇▇▇ ▇▇▇▇▇, which will be
distributed to between 1,500 and 1,800 screens nationwide, and GANG RELATED, a
police action thriller starring ▇▇▇ ▇▇▇▇▇▇▇, ▇▇▇▇▇▇ ▇▇▇▇▇, and the late ▇▇▇▇▇
▇▇▇▇▇▇ in his last screen performance.
18
The following is a list of the Entertainment Group's scheduled 1997 releases:
EXPECTED RELEASE
RELEASE DATE TITLE CAST DESCRIPTION LABEL
--------------- ------------------ ---------------------- --------------------------------- ----------------
January 31 Prisoner of the ▇▇▇▇ ▇▇▇▇▇▇▇▇▇ ▇▇▇▇▇▇ 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 ▇▇▇▇▇▇▇
▇▇▇▇▇▇▇ follows the experiences
of two Russian soldiers who are
captured and held hostage in a
Chechen mountain community.
February 28 Hard Eight(2) ▇▇▇▇▇▇▇ ▇▇▇▇▇▇▇ ▇▇▇▇▇▇ ▇ ▇▇▇▇ noir story of a seasoned Goldwyn
▇. ▇▇▇▇▇▇▇ ▇▇▇▇ ▇. gambler whose friendship with a
▇▇▇▇▇▇ ▇▇▇▇▇▇▇ ▇▇▇▇▇ ▇▇▇▇▇ man is threatened by a dark
Hall secret from his past.
March 7 City of ▇▇▇▇▇▇ ▇▇▇▇▇▇ ▇▇▇▇▇▇▇ A hard-edged film-noir thriller Orion
Industry(1) Dorff ▇▇▇▇▇▇▇ ▇▇▇▇▇▇ concerning two brothers, small
▇▇▇▇▇ ▇▇▇▇▇▇▇ 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) ▇▇▇▇▇ ▇▇▇▇▇▇ A story of a striking young woman Goldwyn
▇▇▇▇▇ ▇▇▇▇▇▇▇▇▇▇▇ 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 ▇▇▇ ▇▇▇▇▇ A raucous comedy about a mob bag Orion
Duffle Bag(3) ▇▇▇▇▇ ▇▇▇▇▇ man whose luggage containing
▇▇▇▇▇▇ ▇▇▇▇▇▇▇ eight human heads, crucial proof
▇▇▇▇▇▇ ▇▇▇▇▇▇▇▇ of a recent hit, gets switched at
▇▇▇▇ ▇▇▇▇▇▇ the airport and goes south of the
▇▇▇▇ ▇▇▇▇▇▇ border with a family vacationing
in Mexico.
May Rough Magic(2) ▇▇▇▇▇▇▇ ▇▇▇▇▇ ▇▇▇▇▇▇▇ A romantic adventure involving Goldwyn
▇▇▇▇▇ magic, mysticism and Mexico.
▇▇▇ ▇▇▇▇▇▇▇▇▇
▇.▇. ▇▇▇▇▇▇
▇▇▇▇ ▇▇▇▇▇▇▇▇▇
19
EXPECTED RELEASE
RELEASE DATE TITLE CAST DESCRIPTION LABEL
--------------- ------------------ ---------------------- --------------------------------- ----------------
August Paperback ▇▇▇▇▇▇▇ ▇▇▇▇▇▇▇▇ 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) ▇▇▇▇▇ ▇▇▇▇▇ ▇▇▇▇▇▇▇▇ A ▇▇▇▇▇▇▇▇ ▇▇▇▇▇ (Academy Orion
▇▇▇▇▇▇▇▇▇▇ 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
▇▇▇▇▇▇▇ ▇▇▇▇▇▇▇ an adorable puppy who gets lost
▇▇▇▇▇ ▇▇▇▇▇ ▇▇▇▇▇▇ in the wild Australian outback.
▇▇▇▇▇▇ ▇▇▇▇▇▇ Befriended by exotic animals,
▇▇▇▇ ▇▇▇▇▇▇ Napoleon overcomes his fears and
discovers the magic of nature.
September 7 Gang Related(4) ▇▇▇ ▇▇▇▇▇▇▇ An exciting, thought- provoking Orion
▇▇▇▇▇ ▇▇▇▇▇▇ thriller about two detectives in
▇▇▇▇ ▇▇▇▇▇▇ a metropolitan police department
▇▇▇▇▇▇ ▇▇▇▇▇ who get in over their heads when
▇▇▇▇▇ ▇▇▇▇ ▇▇▇▇▇ their money-on-the-side scheme
involving murder and stolen
police evidence horribly
backfires with the unintended
death of an undercover DEA agent.
This film is ▇▇▇▇▇ ▇▇▇▇▇▇'▇ final
film role.
Fall The Locusts(3) ▇▇▇▇▇ ▇▇▇▇▇▇ A dark tale of romance and Orion
▇▇▇▇▇▇ ▇▇▇▇ mystery set in 1960 rural Kansas.
▇▇▇▇ ▇▇▇▇ When a drifter with a mysterious
▇▇▇▇▇▇ ▇▇▇▇▇▇ past comes to the feedlot of a
▇▇▇▇ ▇▇▇▇▇▇▇ sultry, black widow figure with a
strangely withdrawn son, family
secrets and painful truths are
revealed as a trio of damaged
souls search for love and
respect, desperately trying to
connect.
20
EXPECTED RELEASE
RELEASE DATE TITLE CAST DESCRIPTION LABEL
--------------- ------------------ ---------------------- --------------------------------- ----------------
Fall The Big Red(5) ▇▇▇▇▇▇▇▇▇ ▇▇▇▇▇▇▇ A twisted road comedy by the Goldwyn
director of Adventures of
▇▇▇▇▇▇▇▇▇, 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) ▇▇▇▇ ▇▇▇▇▇▇▇▇▇ A film about five lifelong Orion
▇▇▇▇ ▇▇▇▇ friends in a nowhere town headed
▇▇▇▇ ▇▇▇▇▇▇ for the buddies' wedding whose
▇▇▇▇ ▇▇▇▇▇▇▇ ▇▇▇▇▇▇▇ lives take a major detour as they
▇▇▇▇ ▇▇▇▇ find themselves holding up a bank
▇▇▇▇▇▇▇▇ ▇▇▇▇▇▇▇▇▇ in a rebellious search for
▇▇▇▇ ▇▇▇▇ independence.
TBA Storefront ▇▇▇▇▇ ▇▇▇▇▇▇▇▇▇ A concert/performance film Orion Classics
▇▇▇▇▇▇▇▇▇(4) showcasing the singular personal
style of British
singer/songwriter ▇▇▇▇▇
▇▇▇▇▇▇▇▇▇, directed by ▇▇▇▇▇▇▇▇
▇▇▇▇▇, who directed Orion's
Academy
Award-Registered Trademark-
winning film Silence of the Lambs
as well as ▇▇▇▇▇ ▇▇▇▇▇ in Stop
Making Sense, one of the all-time
favorite concert/performance
films ever made.
TBA This world, then ▇▇▇▇▇ ▇▇▇▇ A film-noir potboiler, set in the Orion Classics
the fireworks(1) ▇▇▇▇ ▇▇▇▇▇▇▇ 1950's, based on one of master
▇▇▇▇▇▇ ▇▇▇ crime writer ▇▇▇ ▇▇▇▇▇▇▇▇'▇ most
▇▇▇ ▇▇▇▇▇▇▇▇▇▇ riveting stories, involving
sexual perversity, dysfunctional
family ties, greed and lust.
TBA I Love You... ▇▇▇▇▇ ▇▇▇▇▇ 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
▇▇▇▇▇ ▇▇▇▇▇.
21
EXPECTED RELEASE
RELEASE DATE TITLE CAST DESCRIPTION LABEL
--------------- ------------------ ---------------------- --------------------------------- ----------------
TBA Music From ▇▇▇▇▇▇ ▇▇▇▇▇▇▇ A comedy which follows a Orion
Another ▇▇▇▇ ▇▇▇ man's search for his one
Room(3) ▇▇▇▇▇▇▇▇ ▇▇▇▇▇ true love, whose birth he
▇▇▇▇▇▇ ▇▇▇▇▇▇▇▇ assisted in as a 5 year
▇▇▇ ▇▇▇▇▇▇ old.
▇▇▇▇▇▇ ▇▇▇▇▇
------------------------
(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 ▇▇▇-▇▇▇▇▇▇ 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
22
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:
LOCATION THEATERS SCREENS
-------------------------------------------------------------------------- ------------- -----------
Belmont, California....................................................... 1 3
Berkeley, California...................................................... 6 19
Los Angeles, California................................................... 3 7
Corona Del Mar, California................................................ 1 1
Palo Alto, California..................................................... 4 6
Pasadena, California...................................................... 1 1
Sacramento, California.................................................... 2 6
San Diego, California..................................................... 5 9
San Francisco, California................................................. 5 14
Denver, Colorado.......................................................... 3 8
New Orleans, Louisiana.................................................... 1 4
Cambridge, Massachusetts.................................................. 1 9
Minneapolis, Minnesota.................................................... 2 6
Cleveland, Ohio........................................................... 1 3
Dallas, Texas............................................................. 1 3
Houston, Texas............................................................ 2 6
Seattle, Washington....................................................... 9 28
Milwaukee, Wisconsin...................................................... 2 5
--
---
50 138
The exhibition of first-run specialized motion pictures and art films is a niche
in the film exhibition business that is distinct from the exhibition of higher
budget, wide-release films. For the most part, specialized motion pictures and
art films are marketed by different distributors and exhibited in different
23
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 ▇▇▇▇ 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
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,
25
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
Motion pictures may continue to play in theaters for up to six months following
their initial release. Concurrently with their release in the United States,
motion pictures generally are released in Canada and may also be released in one
or more other foreign markets. Typically, the motion picture then becomes
available for distribution in other markets as follows:
MONTHS AFTER APPROXIMATE
INITIAL RELEASE RELEASE PERIOD
--------------- ---------------
Domestic home video............................................................ 4-6 months --
Domestic pay-per-view.......................................................... 6-9 months 3 months
Domestic pay television........................................................ 10-18 months 12-21 months
Domestic network or basic cable................................................ 30-36 months 18-36 months
Domestic syndication........................................................... 30-36 months 3-15 years
Foreign home video............................................................. 6-12 months --
Foreign television............................................................. 18-24 months 3-12 years
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
27
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
28
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, ▇▇▇▇▇▇▇ and Co., Deere and Company, Ariens Company,
Honda Corporation, ▇▇▇▇▇▇ 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
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 ▇-▇, ▇-▇ 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
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.
31
ITEM 2. PROPERTIES
The following table contains a list of the Company's principal properties.
NUMBER
------------------------
DESCRIPTION OWNED LEASED LOCATION
------------------------------------------------------------ ----------- ----------- ---------------------------------
The Entertainment Group:
Office space................................................ -- 4 Los Angeles, California
Sales office................................................ -- 1 New York, New York
The Communications Group:
Office space................................................ -- 1 Stamford, Connecticut
Office space................................................ -- 1 Moscow, Russia
Office space................................................ -- ▇ ▇▇▇▇▇▇, ▇▇▇▇▇▇▇
Office space................................................ -- 1 Hong Kong
Office space................................................ -- 1 New York, New York
General Corporate:..........................................
Office space................................................ -- ▇ ▇▇▇▇ ▇▇▇▇▇▇▇▇▇▇, ▇▇▇ ▇▇▇▇▇▇
Snapper:
Manufacturing plant......................................... 1 -- ▇▇▇▇▇▇▇▇▇, Georgia
Distribution facility....................................... -- 1 ▇▇▇▇▇▇▇▇▇, Georgia
Distribution facility....................................... -- 1 Dallas, Texas
Distribution facility....................................... -- 1 Greenville, Ohio
Three of Orion's offices will be combined into one facility during 1997. Of
Landmark's 50 theaters, four and one-half are owned and the remainder are
located in leased or subleased premises. Landmark owns the Seven Gables Theatre,
the Crest Theatre, the Guild Theatres and a one-half interest in the Harvard
Exit Theatre, all in Seattle, Washington, and it owns the Sacramento Inn Theater
in Sacramento, California. The leased and subleased theaters have remaining
terms ranging from two months to 30 years or more and, in some cases, renewal
options for additional periods of from five to 20 years. The renewal options
generally provide for increased rent. Rent is sometimes calculated as a
percentage of sales or profits, subject to an annual minimum. Assuming the
exercise of all the options, ten leases will expire between January 1, 1997 and
December 31, 1998 and the balance thereafter.
The Company's management believes that the facilities listed above are generally
adequate and satisfactory for their present usage and are generally well
utilized.
ITEM 3. LEGAL PROCEEDINGS
▇▇▇▇▇ INDUSTRIES, INC. SHAREHOLDER LITIGATION
Between February 25, 1991 and March 4, 1991, three lawsuits were filed against
the Company (formerly named ▇▇▇▇▇ Industries, Inc.) in the Delaware Chancery
Court. On May 1, 1991, these three lawsuits were consolidated by the Delaware
Chancery Court in re ▇▇▇▇▇ 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
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 ▇▇. ▇.▇.
▇▇▇▇▇ 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.
▇▇▇▇▇▇▇ ▇▇▇▇▇▇ V. ▇▇▇▇▇▇ ▇▇▇▇▇▇▇ 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 ▇▇▇▇▇▇▇ ▇▇▇▇▇▇ v. ▇▇▇▇▇▇ ▇▇▇▇▇▇▇ 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. ▇▇▇▇▇▇
▇▇▇▇▇▇▇, Jr., the ▇▇▇▇▇▇ ▇▇▇▇▇▇▇ Family Trust and ▇▇. ▇▇▇▇▇ ▇▇▇▇▇▇▇▇ 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.
▇▇▇▇▇ ▇▇▇▇ v. ▇▇▇▇ ▇. ▇▇▇▇▇, ▇▇▇▇▇▇ ▇▇▇▇▇▇, ▇▇▇▇ ▇. ▇▇▇▇▇▇, ▇▇▇▇▇▇▇ ▇. ▇▇▇▇▇▇,
▇▇▇▇▇▇▇ ▇. ▇▇▇▇▇▇, ▇▇▇▇▇▇ ▇▇▇▇▇▇▇▇▇, ▇▇▇▇▇▇ ▇. ▇▇▇▇▇▇, ▇▇▇▇▇▇▇ ▇▇▇▇▇▇▇▇▇▇,
▇▇▇▇▇▇▇ ▇▇▇▇▇ 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.
▇▇▇▇▇ ▇▇▇▇▇ v. ▇▇▇▇ ▇. ▇▇▇▇▇, ▇▇▇▇▇▇▇ ▇▇▇▇▇, ▇▇▇▇▇▇ ▇▇▇▇▇▇▇▇▇, ▇▇▇▇▇▇ ▇▇▇▇▇▇,
▇▇▇▇ ▇. ▇▇▇▇▇▇, ▇▇▇▇▇▇▇ ▇. ▇▇▇▇▇▇, ▇▇▇▇▇▇▇ ▇. ▇▇▇▇▇▇, ▇▇▇▇▇▇ ▇. ▇▇▇▇▇▇, ▇▇▇▇▇▇▇
▇▇▇▇▇▇▇▇▇▇, 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.
33
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.
▇▇▇▇▇ ▇. ▇▇▇▇▇▇▇, Trustee of ▇▇▇▇▇ ▇▇▇▇▇▇▇ Defined Benefit Plan Trust v. ▇▇▇▇ ▇.
▇▇▇▇▇▇▇▇, ▇▇▇▇▇▇▇▇▇ ▇. ▇▇▇▇▇▇▇▇▇, III, ▇▇▇▇ ▇. ▇▇▇▇▇▇▇▇, ▇▇▇▇▇▇▇ ▇. ▇▇▇▇, ▇.▇.
▇▇▇▇▇▇, III, ▇▇▇▇ ▇. ▇▇▇▇▇, ▇▇., ▇▇▇▇▇ ▇. ▇▇▇▇▇▇▇, ▇▇▇▇▇▇▇ ▇. ▇▇▇▇, ▇▇▇▇▇▇▇
▇▇▇▇▇▇, ▇▇▇▇ ▇. ▇▇▇▇▇▇▇, 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.
34
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.
POSITION
NAME AGE OFFICE HELD SINCE
----------------------------------- --- ----------------------------------- -----------------------------------
▇▇▇▇ ▇. ▇▇▇▇▇...................... 82 Chairman November 1995
▇▇▇▇▇▇ ▇▇▇▇▇▇▇▇▇................... 55 Vice Chairman, President and Chief November 1995 (Vice
Executive Officer Chairman)
December 1996 (President and
Chief Executive Officer)
▇▇▇▇▇▇ ▇▇▇▇▇▇...................... 46 Executive Vice President, Chief November 1995
Financial Officer and Treasurer
▇▇▇▇▇▇ ▇. ▇▇▇▇▇▇................... 53 Executive Vice President, General November 1995
Counsel and Secretary
▇▇▇▇▇▇ ▇. ▇▇▇▇▇▇▇.................. 62 Senior Vice President (Chief November 1995
Accounting Officer)
▇▇. ▇▇▇▇▇ 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,
▇▇. ▇▇▇▇▇ has served as Chairman and President of Metromedia Company
("Metromedia") and its predecessor-in-interest, Metromedia, Inc. for over five
years. ▇▇. ▇▇▇▇▇ is also a director of The Bear ▇▇▇▇▇▇▇ Companies, Inc.,
Occidental Petroleum Corporation and Conair Corporation. ▇▇. ▇▇▇▇▇ is Chairman
of the Company's Executive Committee.
▇▇. ▇▇▇▇▇▇▇▇▇ 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, ▇▇. ▇▇▇▇▇▇▇▇▇ has served as Executive Vice President of
Metromedia and its predecessor-in-interest, Metromedia, Inc., for over five
years. ▇▇. ▇▇▇▇▇▇▇▇▇ is also a director of Carnival Cruise Lines, Inc. and RDM
Sports Group, Inc. ▇▇. ▇▇▇▇▇▇▇▇▇ is Chairman of the Audit Committee and a member
of the Executive and Nominating Committees of the Company.
▇▇. ▇▇▇▇▇▇ 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 ▇▇▇▇▇ & Company since January 1994. Prior to that time,
▇▇. ▇▇▇▇▇▇ served as Senior Vice President of Orion from June 1991 to November
1992 and Managing Director of ▇▇▇▇▇ & Company (and its predecessor) from April
1990 to January 1994. ▇▇. ▇▇▇▇▇▇ is also a director of RDM Sports Group, Inc.
▇▇. ▇▇▇▇▇▇ is a member of the Nominating Committee of the Company.
▇▇. ▇▇▇▇▇▇ 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. ▇▇. ▇▇▇▇▇▇ is
Chairman of the Nominating Committee of the Company.
▇▇. ▇▇▇▇▇▇▇ has served as a Senior Vice President and Chief Accounting Officer
of the Company since November 1, 1995. ▇▇. ▇▇▇▇▇▇▇ has served as a Senior Vice
President-Finance of Metromedia and its predecessor-in-interest, Metromedia,
Inc. for over five years.
35
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS.
Since November 2, 1995, the Common Stock has been listed and traded on the
American Stock Exchange and the Pacific Stock Exchange (the "AMEX" and "PSE",
respectively) under the symbol "MMG" and "MIG", respectively. Prior to November
2, 1995, the Common Stock was listed and traded on both the New York Stock
Exchange (the "NYSE") and the PSE under the symbol "ACT." The following table
sets forth the quarterly high and low closing sales prices per share for the
Company's Common Stock according to the NYSE Composite Tape for the period from
January 1, 1995 through November 1, 1995 and the quarterly high and low closing
sales prices per share of the Company's Common Stock as reported by the AMEX
from November 2, 1995 through the present.
MARKET PRICE OF COMMON STOCK
------------------------------------------
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
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
ITEM 6. SELECTED FINANCIAL DATA
SELECTED FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE DATA)
YEARS ENDED
DECEMBER 31 YEARS ENDED FEBRUARY 28
---------------------- ----------------------------------
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
------------------------
(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
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, ▇▇▇▇▇▇, ▇▇▇/▇▇▇▇▇ ▇, ▇▇▇▇▇▇▇
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:
POPULATION/HH
COVERED (MM)
JOINT VENTURE BUSINESS MARKET 1996(1)
--------------------------- --------------------------- --------------------------------------- -----------------
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
------------------------
(1) Information for Romsat and Vilnius Cable are households covered. All other
information is for population covered.
38
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
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)
CALENDAR YEAR CALENDAR YEAR FISCAL YEAR
1996 1995 1995
------------- ------------- -----------
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)
------------- ------------- -----------
------------- ------------- -----------
40
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
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
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
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
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
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:
WIRELESS
CABLE TV PAGING TELEPHONY
----------- --------- -----------
December 31, 1995.................................................................. 37,900 14,460 --
March 31, 1996..................................................................... 44,632 20,683 --
June 30, 1996...................................................................... 53,706 29,107 --
September 30, 1996................................................................. 62,568 37,636 6,104
December 31, 1996.................................................................. 69,118 44,836 6,642
FOREIGN CURRENCY
The Communications Group's strategy is to minimize its foreign currency exposure
risk. To the extent possible, in countries that have experienced high rates of
inflation, the Communications Group bills and collects all revenues in United
States ("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
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
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
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
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
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
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
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
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, ▇▇▇▇ ▇. ▇▇▇▇▇.
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
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
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
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
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
▇▇▇▇ ▇. ▇▇▇▇▇▇▇▇ as President and Chief Executive Officer of the Company and
the appointment of ▇▇▇▇▇▇ ▇▇▇▇▇▇▇▇▇ 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
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/ ▇▇▇▇▇▇ ▇▇▇▇▇▇
-----------------------------------------
▇▇▇▇▇▇ ▇▇▇▇▇▇
EXECUTIVE VICE PRESIDENT
Dated: June 18, 1997
59
METROMEDIA INTERNATIONAL GROUP, INC. AND SUBSIDIARIES
INDEX TO FINANCIAL STATEMENTS
PAGE
-----
Report of Independent Auditors'............................................................................ F-1
Consolidated Statements of Operations for the years ended December 31, 1996, December 31, 1995 and February
28, 1995................................................................................................. F-2
Consolidated Balance Sheets as of December 31, 1996 and December 31, 1995.................................. F-3
Consolidated Statements of Cash Flows for the years ended December 31, 1996, December 31, 1995 and February
28, 1995................................................................................................. F-4
Consolidated Statements of Stockholders' Equity for the years ended December 31, 1996, December 31, 1995
and February 28, 1995.................................................................................... F-5
Notes to Consolidated Financial Statements................................................................. F-6
Consolidated Financial Statement Schedules:
I. Condensed Financial Information of Registrant...................................................... S-1
II. Valuation and Qualifying Accounts.................................................................. S-5
All other schedules have been omitted either as inapplicable or not required
under the Instructions contained in Regulation S-X or because the information
included in the Consolidated Financial Statements or the Notes thereto listed
above.
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
METROMEDIA INTERNATIONAL GROUP, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
YEARS ENDED
----------------------------------------
DECEMBER 31, DECEMBER 31, FEBRUARY 28,
1996 1995 1995
------------ ------------ ------------
(NOTE 1)
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)
------------ ------------ ------------
------------ ------------ ------------
See accompanying notes to consolidated financial statements
F-2
METROMEDIA INTERNATIONAL GROUP, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
DECEMBER 31, DECEMBER 31,
1996 1995
------------ ------------
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
------------ ------------
------------ ------------
See accompanying notes to consolidated financial statements.
F-3
METROMEDIA INTERNATIONAL GROUP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
YEARS ENDED
----------------------------------------
DECEMBER 31, DECEMBER 31, FEBRUARY 28,
1996 1995 1995
------------ ------------ ------------
Operations:
Net loss............................................................. $ (115,243) $ (412,976) $ (69,411)
Adjustments to reconcile net loss to net cash provided by (used in)
operating activities:
Loss on disposal of assets held for sale............................. 16,305 293,570 --
Equity in losses of Joint Ventures................................... 11,079 7,981 2,257
Amortization of film costs........................................... 61,472 91,466 140,318
Amortization of bank guarantee....................................... -- 2,956 4,951
Amortization of debt discounts....................................... 4,850 10,436 12,153
Depreciation and amortization........................................ 13,232 2,795 1,916
Loss on early extinguishment of debt................................. 4,505 32,382 --
Changes in assets and liabilities, net of effect of acquisitions and
consolidation of Snapper:
Decrease in accounts receivable.................................... 15,211 15,114 21,575
Increase in inventories............................................ (2,697) (224) --
Increase in other assets........................................... (10,079) -- --
Decrease in accounts payable and accrued expenses.................. (621) (4,723) (3,160)
Accrual of participations and residuals............................ 34,255 18,464 25,628
Payments of participations and residuals........................... (27,362) (20,737) (32,353)
Decrease in deferred revenues...................................... (20,984) (12,269) (30,041)
Other operating activities, net.................................... (568) (2,125) 3,112
------------ ------------ ------------
Cash provided by (used in) operations............................ (16,645) 22,110 76,945
------------ ------------ ------------
Investing activities:
Proceeds from Metromedia Company notes receivable.................. -- 45,320 --
Investments in and advances to Joint Ventures...................... (40,999) (21,949) (16,409)
Distributions from Joint Ventures.................................. 3,438 784 --
Investment in film inventories..................................... (67,176) (4,684) (22,840)
Cash paid for acquisitions......................................... (2,545) -- (7,033)
Cash acquired in acquisitions...................................... 8,238 66,702 --
Additions to property, plant and equipment......................... (8,729) (3,475) (4,808)
Other investing activities, net.................................... 4,855 (6,521) 1,233
------------ ------------ ------------
Cash provided by (used in) investing activities.................. (102,918) 76,177 (49,857)
------------ ------------ ------------
Financing activities:
Proceeds from issuance of long-term debt........................... 360,252 176,938 40,278
Proceeds from issuance of common stock............................. 190,604 2,282 17,690
Payments on notes and subordinated debt............................ (357,324) (264,856) (95,037)
Proceeds from issuance of stock related to incentive plans......... 972 -- --
Payment of deferred financing costs................................ (10,700) -- --
Other financing activities, net.................................... -- 399 184
------------ ------------ ------------
Cash provided by (used in) financing activities.................. 183,804 (85,237) (36,885)
------------ ------------ ------------
Net increase (decrease) in cash and cash equivalents............... 64,241 13,050 (9,797)
Effect of change in fiscal year.................................... -- (13,583) --
Cash and cash equivalents at beginning of year..................... 26,889 27,422 37,219
------------ ------------ ------------
Cash and cash equivalents at end of year........................... $ 91,130 $ 26,889 $ 27,422
------------ ------------ ------------
------------ ------------ ------------
See accompanying notes to consolidated financial statements.
F-4
METROMEDIA INTERNATIONAL GROUP, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(IN THOUSANDS, EXCEPT SHARE AMOUNTS))
COMMON STOCK
-----------------------
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 ▇▇▇▇▇▇ ▇▇▇▇▇▇▇ 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
------------ --------- ---------- --------- ------------ -----------
------------ --------- ---------- --------- ------------ -----------
See accompanying notes to consolidated financial statements.
F-5
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
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
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
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
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):
1996 1995
--------- ---------
Lawn and garden equipment:
Raw materials............................................................ $ 18,733 $ --
Finished goods........................................................... 34,822 --
--------- ---------
53,555 --
Telecommunications:
Pagers................................................................... 849 224
--------- ---------
$ 54,404 $ 224
--------- ---------
--------- ---------
F-10
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):
1996 1995
--------- ---------
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
--------- ---------
--------- ---------
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
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
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 ▇▇. ▇▇
("▇▇▇ ▇▇"), "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
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):
1996 1995
---------- ---------
Accrued salaries and wages............................................. $ 4,919 $ 9,627
Accrued taxes.......................................................... 25,467 11,000
Accrued interest....................................................... 7,176 9,822
Self-insurance claims payable.......................................... 29,833 31,549
Accrued warranty costs................................................. 4,317 --
Accrued film distribution costs........................................ 7,742 6,328
Other.................................................................. 28,628 27,787
---------- ---------
$ 108,082 $ 96,113
---------- ---------
---------- ---------
F-14
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):
CALENDAR CALENDAR FISCAL
1996 1995 1995
--------- --------- ---------
Cash paid during the year for:
Interest................................................... $ 32,015 $ 12,270 $ 13,108
--------- --------- ---------
--------- --------- ---------
Taxes...................................................... $ 728 $ 996 $ 1,804
--------- --------- ---------
--------- --------- ---------
Supplemental schedule of non-cash investing and financing activities (in
thousands):
CALENDAR CALENDAR FISCAL
1996 1995 1995
---------- ---------- ---------
Acquisition of business:
Fair value of assets acquired............................. $ 120,882 $ 290,456 $ --
Fair value of liabilities assumed......................... 180,591 239,109 --
---------- ---------- ---------
Net value............................................. $ (59,709) $ 51,347 $ --
---------- ---------- ---------
---------- ---------- ---------
In connection with acquisition of Motion Picture Corporation of America in 1996,
the Company issued debt of $1.2 million and restricted common stock valued at
$3.2 million.
See note 4 regarding the consolidation of Snapper.
F-15
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
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 ▇▇▇▇▇▇ ▇▇▇▇▇▇▇ 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
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):
1996 1995
(UNAUDITED) (UNAUDITED)
----------- -----------
Revenues........................................................... $ 397,410 $ 401,132
----------- -----------
----------- -----------
Loss from continuing operations.................................... (134,097) (185,865)
----------- -----------
----------- -----------
Net loss........................................................... (154,907) (511,817)
----------- -----------
----------- -----------
Net loss per share................................................. $ (2.73) $ (10.76)
----------- -----------
----------- -----------
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
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):
Cash.............................................................. $ 7,395
Accounts receivable............................................... 36,544
Inventories....................................................... 51,707
Property, plant and equipment..................................... 29,118
Other assets...................................................... 773
Accounts payable and accrued expenses............................. (25,693)
Debt.............................................................. (40,059)
Other liabilities................................................. (3,200)
---------
Excess of assets over liabilities................................. 56,585
Carrying value at November 1, 1996................................ 73,800
---------
Excess of carrying value over fair value of net assets............ $ 17,215
---------
---------
The 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):
1996 1995
---------- ----------
Net sales............................................................. $ 130,623 $ 14,385
Operating expenses.................................................... 148,556 34,646
---------- ----------
Operating loss........................................................ (17,933) (20,261)
Interest expense...................................................... (6,859) (1,213)
Other income (expenses)............................................... 1,210 (259)
---------- ----------
Loss before taxes..................................................... (23,582) (21,733)
Income taxes.......................................................... -- --
---------- ----------
Net loss.............................................................. $ (23,582) $ (21,733)
---------- ----------
---------- ----------
As part of Snapper's transition to the dealer-direct business, Snapper has from
time to time reacquired the inventories and less frequently has purchased the
accounts receivable of distributors it has canceled. The purchase of inventories
is recorded by reducing sales for the amount credited to accounts receivable
from the canceled distributor and recording the repurchased inventory at the
lower of cost or market. During 1996 and 1995, 18 and 7 distributors were
canceled, respectively. Inventories purchased (and/or credited to the account of
canceled distributors) under such arrangements amounted to (in thousands):
TEN MONTHS
TWO MONTHS ENDED TWO MONTHS
ENDED OCTOBER 31, ENDED
DECEMBER 31, 1996 1996 DECEMBER 31, 1995
----------------- --------------- -----------------
Inventories............................................... $ 2,438 $ 15,550 $ 4,596
Decrease in gross profit.................................. 2,106 5,967 1,245
F-19
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):
AS OF, AND FOR
THE
NINE MONTHS AS OF, AND FOR
ENDED THE
SEPTEMBER 28, YEAR ENDED
1996 DECEMBER 31,
(UNAUDITED) 1995
---------------- ----------------
Net sales................................................ $ 304,235 $ 730,875
Gross profit............................................. 12,369 86,607
Interest expense......................................... 19,920 35,470
Gain on sale of subsidiaries............................. 98,475 --
Net income (loss)........................................ 412 (51,004)
Current assets........................................... 209,272 406,586
Non-current assets....................................... 82,657 170,521
Current liabilities...................................... 126,144 232,502
Non-current liabilities.................................. 110,730 289,081
Total shareholders' equity............................... 55,055 55,524
6. FILM ACCOUNTS RECEIVABLE AND DEFERRED REVENUES
Film accounts receivable consists primarily of trade receivables due from film
distribution, including theatrical, home video, basic cable and pay television,
network, television syndication, and other licensing sources which have payment
terms generally covered under contractual arrangements. Film accounts receivable
is stated net of an allowance for doubtful accounts of $11.6 million at both
December 31, 1996 and 1995.
The Entertainment Group has entered into contracts for licensing of theatrical
and television product to the pay cable, home video and free television markets,
for which the revenue and the related accounts receivable will be recorded in
future periods when the films are available for broadcast or exploitation. These
contracts, net of advance payments received and recorded in deferred revenues as
described below, aggregated approximately $175.0 million at December 31, 1996.
Included in this amount is $61.5 million of license fees for which the revenue
and the related accounts receivable will be recorded only when the Entertainment
Group produces or acquires new products.
F-20
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):
1996 1995
---------- ----------
Current:
Theatrical and television product released less amortization.......... $ 60,377 $ 59,430
Completed not released................................................ 5,779 --
---------- ----------
66,156 59,430
---------- ----------
Non Current:
Theatrical and television product released less amortization.......... 133,014 137,233
Completed not released................................................ 2,476 --
In process and other.................................................. 50,653 --
---------- ----------
186,143 137,233
---------- ----------
$ 252,299 $ 196,663
---------- ----------
---------- ----------
The Entertainment Group has in prior years recorded substantial writeoffs to its
released product. As a result, approximately one-half of the gross cost of film
inventories are stated at estimated net realizable value and will not result in
the recording of gross profit upon the recognition of related revenues in future
periods. The Entertainment Group has amortized 94% of such gross cost of its
film inventories. Approximately 98% of such gross film inventory costs will have
been amortized by December 31, 1999. As of December 31, 1996, approximately 62%
of the unamortized balance of such film inventories will be amortized within the
next three-year period based upon the Company's revenue estimates at that date.
For the year ended December 31, 1996 interest costs of $1.2 million were
capitalized to film inventories.
8. INVESTMENTS IN AND ADVANCES TO JOINT VENTURES
The Communications Group has recorded its investments in Joint Ventures at cost,
net of its equity in earnings or losses. Advances to the Joint Ventures under
the line of credit agreements are reflected based on amounts recoverable under
the credit agreement, plus accrued interest.
Advances are made to Joint Ventures in the form of cash, for working capital
purposes and for payment of expenses or capital expenditures, or in the form of
equipment purchased on behalf of the Joint Ventures. Interest rates charged to
the Joint Ventures under the credit agreement range from prime rate to prime
rate plus 6%. The credit agreements generally provide for the payment of
principal and interest from 90% of the Joint Ventures' available cash flow, as
defined, prior to any substantial distributions of dividends to the Joint
Venture partners. The Communications Group has entered into credit agreements
with its Joint Ventures to provide up to $69.6 million in funding of which $18.9
million remains unfunded at December 31, 1996. Under its credit agreements the
Communications Group's funding commitments are contingent on its approval of the
Joint Ventures' business plans.
F-21
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
YEAR
VENTURE DATE OPERATIONS
JOINT VENTURE (BY SERVICE TYPE) 1996 1995 OWNERSHIP % FORMED COMMENCED
----------------------------------------------- --------- --------- ----------------- ----------- ------------------
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
▇▇▇▇-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 ▇▇▇▇
▇▇. ▇▇▇▇▇▇▇▇▇▇ ▇▇▇▇▇▇, ▇▇. 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% ▇▇▇▇ ▇▇▇▇
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
--------- ---------
--------- ---------
------------------------
(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
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
1996 1995
--------- ---------
Assets
Current assets.................................................................... $ 16,073 $ 6,937
Investments in wireless systems and equipment..................................... 38,447 31,349
Other assets...................................................................... 3,100 2,940
--------- ---------
Total Assets...................................................................... $ 57,620 $ 41,226
--------- ---------
--------- ---------
Liabilities and Joint Ventures' Equity (Deficit)
Current liabilities............................................................... $ 18,544 $ 10,954
Amount payable under MITI credit facility......................................... 41,055 33,699
Other long-term liabilities....................................................... 6,043 --
--------- ---------
65,642 44,653
Joint Ventures' Equity (Deficit).................................................. (8,022) (3,427)
--------- ---------
Total Liabilities and Joint Ventures' Equity (Deficit)............................ $ 57,620 $ 41,226
--------- ---------
--------- ---------
COMBINED STATEMENT OF OPERATIONS
1996 1995 1994
--------- ---------- ---------
Revenue......................................................................... $ 43,768 $ 19,344 $ 3,280
Expenses:
Cost of service............................................................... 15,171 9,993 2,026
Selling, general and administrative........................................... 23,387 11,746 2,411
Depreciation and amortization................................................. 7,989 3,917 1,684
Other......................................................................... 1,674 -- 203
--------- ---------- ---------
Total expenses.................................................................. 48,221 25,656 6,324
--------- ---------- ---------
Operating loss.................................................................. (4,453) (6,312) (3,044)
Interest expense................................................................ (3,655) (1,960) (632)
Other income (expense).......................................................... (391) (1,920) 47
Foreign currency translation.................................................... (356) (203) 15
--------- ---------- ---------
Net loss........................................................................ $ (8,855) $ (10,395) $ (3,614)
--------- ---------- ---------
--------- ---------- ---------
F-23
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):
CALENDAR CALENDAR FISCAL
WIRELESS RADIO 1996 1995 1995
CABLE TV PAGING BROADCASTING TELEPHONY TOTAL TOTAL TOTAL
----------- ----------- ------------- ----------- ----------- ----------- ---------
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
------------------------
(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
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:
REPUBLICS OF
FORMER
SOVIET UNION
UNITED AND OTHER
STATES EASTERN EUROPE PRC FOREIGN TOTAL
---------- -------------- --------- --------- ----------
Calendar 1996
----------------------------------------------------
Revenues............................................ $ 1,582 $ 12,413 $ -- $ 52 $ 14,047
Assets.............................................. 118,670 61,319 10,105 4,911 195,005
---------- ------- --------- --------- ----------
---------- ------- --------- --------- ----------
Calendar 1995
----------------------------------------------------
Revenues............................................ 589 4,569 -- -- 5,158
Assets.............................................. 119,280 39,269 2,384 156 161,089
---------- ------- --------- --------- ----------
---------- ------- --------- --------- ----------
Fiscal 1995
----------------------------------------------------
Revenues............................................ 417 3,128 -- -- 3,545
Assets.............................................. 12,518 27,764 -- -- 40,282
---------- ------- --------- --------- ----------
---------- ------- --------- --------- ----------
In December 1995, the Communications Group and Protocall Ventures, Ltd.
("Protocall") executed a letter of intent together with a loan agreement. The
letter of intent called for the Communications Group to loan up to $1.5 million
to Protocall and negotiate for the purchase by the Communications Group from
Protocall of 51% of Protocall for $2.6 million. This letter was amended on April
12, 1996 to allow for a total borrowing of $1.9 million against the purchase
price and to increase the Communications Group's ownership to 56% of Protocall.
Upon closing of the purchase agreement, the principal and accrued interest under
the loan were offset against the purchase price otherwise payable to Protocall.
On May 17, 1996 the acquisition of Protocall by the Communications Group was
completed with final payment of $600,000 to Protocall and all prior amounts
loaned to Protocol were offset against the purchase price of $2.6 million. The
transaction was accounted for under the purchase method of accounting.
Accordingly, the difference between the purchase price and the underlying equity
in the net assets of Protocall of approximately $1.5 million has been allocated
to goodwill and is being amortized over 25 years.
In October 1996, The Communications Group entered into a Joint Venture agreement
to design, construct, install and operate Magticom, a mobile radio network in
Tbilisi, Georgia. The equity contribution to the Joint Venture is $5.0 million
of which 49% was contributed by the Communications Group.
In December 1996, the Communications Group, through its 50% owned Moldovan Joint
Venture, Sun-TV, acquired the assets of Eurocable Moldova, Ltd., a wired cable
television company with approximately 30,000 subscribers, for approximately $1.5
million.
In January 1997, the Communication Group's 99% owned Joint Venture, Romsat Cable
TV and Radio, S.A., acquired the cable-television assets of Standard Ideal
Consulting, S.A., a wired cable television company with approximately 37,000
subscribers, for approximately $2.8 million.
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
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
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):
1996 1995
---------- ----------
MMG (excluding Communications Group, Entertainment Group and Snapper)
MMG Credit Facility....................................................................... $ -- $ 28,754
6 1/2% Convertible Debentures due 2002, net of unamortized discount of $15,261 and
$17,994................................................................................. 59,739 57,006
9 1/2% Debentures due 1998, net of unamortized discount of $86 and $140................... 59,398 59,344
9 7/8% Senior Debentures due 1997, net of unamortized premium of $38 and $217............. 15,038 18,217
10% Debentures due 1999................................................................... 5,467 6,075
MPCA Acquisition Notes Payable due 1997................................................... 1,179 --
6 1/4% Secured Note Payable due 1998 700 1,020
---------- ----------
141,521 170,416
---------- ----------
Entertainment Group
Notes payable to banks under Credit, Security and Guaranty Agreements..................... 247,500 123,700
Other guarantees and contracts payable, net of unamortized discounts of $2,699 and
$2,402.................................................................................. 16,138 9,939
---------- ----------
263,638 133,639
---------- ----------
Communications Group
Hungarian Foreign Trade Bank.............................................................. 246 588
---------- ----------
246 588
---------- ----------
Snapper
Snapper Revolver.......................................................................... 46,419 --
Industrial Development Bonds.............................................................. 1,050 --
---------- ----------
47,469 --
---------- ----------
Capital lease obligations, interest rates of 9% to 13%.................................... 6,185 --
---------- ----------
Less: current portion................................................................... 55,638 40,597
---------- ----------
Long-term debt, net of current portion.................................................. $ 403,421 $ 264,046
---------- ----------
---------- ----------
Aggregate annual repayments of long-term debt over the next five years and
thereafter are as follows (in thousands):
1997............................................. $ 56,138
1998............................................. 93,293
1999............................................. 83,464
2000............................................. 32,042
2001............................................. 130,530
Thereafter....................................... 81,600
F-27
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
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 ▇▇▇▇ ▇. ▇▇▇▇▇, 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
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. ▇▇▇▇▇ 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
METROMEDIA INTERNATIONAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
9. LONG-TERM DEBT (CONTINUED)
Company that results in (a) Messrs. ▇▇▇▇▇ and ▇▇▇▇▇▇▇▇▇ 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. ▇▇▇▇▇
and Subotnick, or (c) any person other than Messrs. ▇▇▇▇▇ and ▇▇▇▇▇▇▇▇▇ 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. ▇▇▇▇▇ 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
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:
Stock option plans.............................................. 10,067,603
6 1/2% Convertible Debentures................................... 1,801,802
Restricted stock plan........................................... 132,800
---------
12,002,205
---------
---------
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
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):
1996
-----------
Net loss:
As reported.................................................................... $ (115,243)
Pro forma...................................................................... $ (118,966)
Primary loss per common share:
As reported.................................................................... $ (2.12)
Pro forma...................................................................... $ (2.19)
Pro forma net income reflects only options granted under the MMG Plan and MITI
stock option plan in 1996. MITI and Actava stock options granted prior to the
November 1 Merger were recorded at fair value. In addition, Goldwyn stock
options granted prior to the Goldwyn Merger, were recorded at fair value and
included in the Goldwyn purchase price.
Stock option activity during the periods indicated is as follows:
WEIGHTED
AVERAGE
NUMBER EXERCISE
OF SHARES PRICE
---------- -------------
Balance at December 31, 1994...................................... 941,000 $ 2.38
Transfer of Actava options in merger.............................. 737,000 $ 8.17
Options granted................................................... 367,000 $ 5.41
Options exercised................................................. (93,000) $ 8.63
Options canceled.................................................. (89,000) $ 5.41
----------
Balance at December 31, 1995...................................... 1,863,000 $ 4.81
Transfer of Goldwyn options in acquisition........................ 202,000 $ 23.33
Options granted................................................... 2,945,000 $ 12.63
Options exercised................................................. (167,000) $ 7.46
Options canceled.................................................. (264,000) $ 13.03
----------
Balance at December 31, 1996...................................... 4,579,000 $ 10.09
----------
----------
At December 31, 1996 the range of exercise prices and the weighted-average
remaining contractual lives of outstanding options was $1.08--$97.45 and 8.4
years, respectively.
In addition to the MMG Plan, at December 31, 1996, there were 278,000 shares
that may be the subject of awards under other existing stock option plans.
F-33
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):
CALENDAR CALENDAR FISCAL
1996 1995 1995
----------- ----------- ---------
Federal........................................................ $ -- $ -- $ --
State and local................................................ 100 167 100
Foreign........................................................ 1,314 600 1,200
----------- ----------- ---------
Current........................................................ 1,414 767 1,300
Deferred....................................................... -- -- --
----------- ----------- ---------
$ 1,414 $767 $ 1,300
----------- ----------- ---------
----------- ----------- ---------
The provision for income taxes for calendar 1996, calendar 1995 and fiscal 1995
applies to continuing operations before discontinued operations and
extraordinary items.
The federal income tax portion of the provision for income taxes includes the
benefit of state income taxes provided. The Company recognizes investment tax
credits on the flow-through method.
F-34
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):
1996 1995
---------- ----------
Net operating loss carryforward....................................... $ 237,713 $ 241,877
Deferred income....................................................... 29,183 22,196
Investment credit carryforward........................................ 25,000 28,000
Allowance for doubtful accounts....................................... 7,471 4,395
Capital loss carryforward............................................. 6,292 3,850
Film costs............................................................ (29,412) (1,832)
Shares payable........................................................ 21,228 15,670
Reserves for self-insurance........................................... 10,415 10,970
Investment in equity investee......................................... 12,325 22,146
Purchase of safe harbor lease investment.............................. (7,903) (9,115)
Minimum tax credit (AMT) carryforward................................. 8,805 8,805
Other reserves........................................................ 11,790 6,331
Other................................................................. (2,628) 7,654
---------- ----------
Subtotal before valuation allowance................................... 330,279 360,947
Valuation allowance................................................... (330,279) (360,947)
---------- ----------
Deferred taxes........................................................ $ -- $ --
---------- ----------
---------- ----------
The net change in the total valuation allowance for calendar 1996, calendar 1995
and fiscal 1995 was an increase (decrease) of ($30.7) million, $119.9 million
and $51.3 million, respectively.
The Company's provision (benefit) for income taxes for calendar 1996, calendar
1995 and fiscal 1995, differs from the provision (benefit) that would have
resulted from applying the federal statutory rates
F-35
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):
CALENDAR CALENDAR FISCAL
1996 1995 1995
---------- ---------- ----------
Benefit based upon federal statutory rate of 35%.............................. $ (32,556) $ (30,190) $ (23,839)
State taxes, net of federal benefit........................................... 65 109 65
Foreign taxes in excess of federal credit..................................... 1,314 600 1,200
Amortization of goodwill...................................................... 2,510 17 --
Non-deductible direct expenses of chapter 11 filing........................... 76 448 214
Foreign operations............................................................ 1,548 656 --
Current year operating loss not benefited..................................... 17,632 26,725 22,832
Equity in losses of Joint Ventures............................................ 10,690 2,376 790
Other, net.................................................................... 135 26 38
---------- ---------- ----------
Provision for income taxes.................................................... $ 1,414 $ 767 $ 1,300
---------- ---------- ----------
---------- ---------- ----------
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
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
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
CALENDAR CALENDAR FISCAL
1996 1995 1995
---------- ---------- ----------
Entertainment Group:
Net revenues............................................................... $ 165,164 $ 133,812 $ 191,244
Direct operating costs..................................................... (164,016) (157,000) (210,365)
Depreciation and amortization.............................................. (5,555) (694) (767)
---------- ---------- ----------
Loss from operations....................................................... (4,407) (23,882) (19,888)
---------- ---------- ----------
---------- ---------- ----------
Assets at year end......................................................... 490,288 283,093 351,588
Capital expenditures....................................................... 3,648 1,151 1,198
---------- ---------- ----------
---------- ---------- ----------
Communications Group:
Net revenues............................................................... 14,047 5,158 3,545
Direct operating costs..................................................... (39,021) (26,803) (19,067)
Depreciation and amortization.............................................. (6,403) (2,101) (1,149)
---------- ---------- ----------
Loss from operations....................................................... (31,377) (23,746) (16,671)
---------- ---------- ----------
---------- ---------- ----------
Equity in losses of Joint Ventures......................................... (11,079) (7,981) (2,257)
---------- ---------- ----------
---------- ---------- ----------
Assets at year end......................................................... 195,005 161,089 40,282
Capital expenditures....................................................... 3,829 2,324 3,610
---------- ---------- ----------
---------- ---------- ----------
Snapper (1):
Net revenues............................................................... 22,544 -- --
Direct operating costs..................................................... (30,653) -- --
Depreciation and amortization.............................................. (1,256) -- --
---------- ---------- ----------
Loss from operations....................................................... (9,365) -- --
---------- ---------- ----------
---------- ---------- ----------
Assets at year end......................................................... 140,327 -- --
Capital expenditures....................................................... 1,252 -- --
---------- ---------- ----------
---------- ---------- ----------
Headquarters and Eliminations:
Net revenues............................................................... -- -- --
Direct operating costs..................................................... (9,355) (1,109) --
Depreciation and amortization.............................................. (18) -- --
---------- ---------- ----------
Income from operations..................................................... (9,373) (1,109) --
---------- ---------- ----------
---------- ---------- ----------
Assets at year end including 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
---------- ---------- ----------
---------- ---------- ----------
------------------------
(1) Represents operations from November 1, 1996 to December 31, 1996.
F-38
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):
CALENDAR CALENDAR FISCAL
1996 1995 1995
--------- --------- ---------
Canada....................................................... $ 1,995 $ 4,150 $ 3,862
Europe....................................................... 32,699 32,126 36,532
Mexico and South America..................................... 3,151 2,454 4,586
Asia and Australia........................................... 8,669 8,841 13,820
--------- --------- ---------
$ 46,515 $ 47,571 $ 58,800
--------- --------- ---------
--------- --------- ---------
Revenues and assets of the Communications Group's foreign operations are
disclosed in note 8.
Showtime Networks, Inc. ("Showtime") and Lifetime Television ("Lifetime") have
been significant customers of the Company. During calendar 1996, calendar 1995
and fiscal 1995, the Company recorded approximately $800,000, $15.4 million and
$45.5 million, respectively, of revenues under its pay cable agreement with
Showtime, and during calendar 1996, calendar 1995 and fiscal 1995, the Company
recorded approximately $1.9 million, $15.0 million and $12.5 million of
revenues, respectively, under its basic cable agreement with Lifetime.
14. COMMITMENTS AND CONTINGENT LIABILITIES
COMMITMENTS
The Company is obligated under various operating and capital leases. Total rent
expense amounted to $5.7 million, $2.6 million and $2.3 million in calendar
1996, calendar 1995, and fiscal 1995, respectively. Plant, property and
equipment included capital leases of $7.2 million and related accumulated
amortization of $1.4 million at December 31, 1996.
F-39
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):
YEAR CAPITAL LEASES OPERATING LEASES
------------------------------------------------------------ --------------- ----------------
1997........................................................ $ 1,049 $ 8,731
1998........................................................ 1,049 7,314
1999........................................................ 1,515 5,598
2000........................................................ 833 4,866
2001........................................................ 538 4,757
Thereafter.................................................. 8,761 24,187
------ -------
Total....................................................... 13,745 $ 55,453
-------
-------
Less: amount representing interest.......................... (7,560)
------
Present value of future minimum lease payments.............. $ 6,185
------
------
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
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
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
▇▇▇▇▇ INDUSTRIES, INC. SHAREHOLDER LITIGATION
Between February 25, 1991 and March 4, 1991, three lawsuits were filed against
the Company (formerly named ▇▇▇▇▇ Industries, Inc.) in the Delaware Chancery
Court. On May 1, 1991, these three lawsuits were consolidated by the Delaware
Chancery Court in re ▇▇▇▇▇ 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 ▇▇. ▇.▇. ▇▇▇▇▇ 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.
▇▇▇▇▇▇▇ ▇▇▇▇▇▇ V. ▇▇▇▇▇▇ ▇▇▇▇▇▇▇ 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 ▇▇▇▇▇▇▇ ▇▇▇▇▇▇ v. ▇▇▇▇▇▇ ▇▇▇▇▇▇▇ 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. ▇▇▇▇▇▇
▇▇▇▇▇▇▇, Jr., the ▇▇▇▇▇▇ ▇▇▇▇▇▇▇
F-42
METROMEDIA INTERNATIONAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
14. COMMITMENTS AND CONTINGENT LIABILITIES (CONTINUED)
Family Trust and ▇▇. ▇▇▇▇▇ ▇▇▇▇▇▇▇▇ 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
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):
FIRST QUARTER OF SECOND QUARTER OF
--------------------- -----------------------
1996 1995 1996 1995
---------- --------- --------- ------------
Revenues................................................ $ 30,808 $ 37,678 $ 37,988 $ 40,755
Operating loss.......................................... (10,124) (11,459 (a) (10,154) (7,628)
Interest expense, net................................... 7,034 8,119 6,520 7,353
Equity interest in losses of Joint Ventures............. (1,783) (588) (1,985) (1,633)
Net loss................................................ (19,141) (20,366) (18,850) (16,714)
Primary loss per common share:
Net loss.............................................. $ (0.45) $ (0.97) $ (0.44) $ (0.80)
THIRD QUARTER OF FOURTH QUARTER OF
--------------------- -----------------------
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)
------------------------
(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
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
EXHIBIT INDEX
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
--------------- ------------------------------------------------ ------------------------------------------------
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., ▇▇▇▇▇▇/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 ▇▇▇▇▇▇ ▇▇▇▇▇▇▇ 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.
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
--------------- ------------------------------------------------ ------------------------------------------------
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 ▇-▇▇
▇▇▇▇▇▇▇▇▇ ▇▇▇▇, ▇.▇. ▇▇▇ ▇▇▇▇▇▇ ▇▇▇▇▇▇ 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
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
--------------- ------------------------------------------------ ------------------------------------------------
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 ▇▇▇▇ ▇. ▇▇▇▇▇▇▇▇ 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 ▇▇▇▇ ▇. ▇▇▇▇▇▇▇▇.
10.17 Option Agreement between The Actava Group Inc. Current Report on Form 8-K dated April 19, 1994,
and ▇▇▇▇ ▇. ▇▇▇▇▇▇▇▇ 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 ▇▇▇▇ ▇. Exhibit 10.18
▇▇▇▇▇▇▇▇ 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
▇▇▇▇▇ ▇▇▇▇ and ▇▇▇▇▇▇ 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.
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
--------------- ------------------------------------------------ ------------------------------------------------
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 ▇▇▇▇▇▇ ▇▇▇▇▇▇▇ 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 ▇▇▇▇▇▇▇ ▇▇▇▇▇▇ and ▇▇▇▇▇▇
▇▇▇▇▇▇▇ 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
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
--------------- ------------------------------------------------ ------------------------------------------------
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
------------------------
* Filed herewith
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)
1996 1995
----------- -----------
Revenues................................................................................ $ -- $ --
Cost and Expenses:
Selling, general and administrative................................................... 9,355 1,109
Depreciation and amortization......................................................... 18 --
----------- -----------
Operating loss.......................................................................... (9,373) (1,109)
Interest expense, net................................................................... 13,313 2,208
Equity in losses of subsidiaries........................................................ (71,747) (83,707)
----------- -----------
Loss from continuing operations before discontinued operations 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)
----------- -----------
----------- -----------
The accompanying notes are an integral part of the condensed financial
information.
See notes to Condensed Financial Information on page S-4.
S-1
METROMEDIA INTERNATIONAL GROUP, INC.
SCHEDULE I--CONDENSED FINANCIAL INFORMATION OF REGISTRANT--CONTINUED
BALANCE SHEETS
DECEMBER 31, 1996 AND 1995
(IN THOUSANDS)
1996 1995
---------- ----------
Current Assets:
Cash and cash equivalents............................................................... $ 82,663 $ 16,482
Short-term investments.................................................................. -- 5,366
Other assets............................................................................ 2,765 3,010
---------- ----------
Total current assets.................................................................... 85,428 24,858
Investment in RDM Sports Group, Inc....................................................... 31,150 47,455
Investment in Snapper, Inc................................................................ -- 79,200
Investment in subsidiaries................................................................ 114,442 80,189
Intercompany accounts..................................................................... 188,065 86,102
Other assets.............................................................................. 2,542 4,525
---------- ----------
Total assets............................................................................ $ 421,627 $ 322,329
---------- ----------
---------- ----------
Current Liabilities:
Accounts payable........................................................................ $ 2,453 $ 943
Accrued expenses........................................................................ 57,581 66,750
Current portion of long term debt....................................................... 17,103 32,682
---------- ----------
Total current liabilities............................................................... 77,137 100,375
Long term debt............................................................................ 124,418 137,734
Other long term liabilities............................................................... 390 382
---------- ----------
Total liabilities....................................................................... 201,945 238,491
---------- ----------
Stockholders' equity
Common stock............................................................................ 66,153 42,614
Paid-in surplus......................................................................... 959,558 728,747
Other................................................................................... (2,680) 583
Accumulated deficit..................................................................... (803,349) (688,106)
---------- ----------
Total stockholders' equity.............................................................. 219,682 83,838
---------- ----------
Total liabilities and stockholders' equity.............................................. $ 421,627 $ 322,329
---------- ----------
---------- ----------
The accompanying notes are an integral part of the condensed financial
information.
See Notes to Condensed Financial Information on page ▇-▇
▇-▇
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)
1996 1995
----------- -----------
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
----------- -----------
----------- -----------
The accompanying notes are an integral part of the condensed financial
information.
See Notes to Condensed Financial Information on page ▇-▇
▇-▇
METROMEDIA INTERNATIONAL GROUP, INC.
SCHEDULE I--CONDENSED FINANCIAL INFORMATION OF REGISTRANT
NOTES TO CONDENSED FINANCIAL INFORMATION
DECEMBER 31, 1996 AND 1995
(A) Prior to the November 1 Merger discussed in note 2 to the consolidated
financial statements, there was no parent company. The accompanying parent
company financial statements reflect only the operations of MMG for the year
ended December 31, 1996 and from November 1, 1995 to December 31, 1995 and
the equity in losses of subsidiaries for the years ended December 31, 1996
and 1995. The calendar 1995, prior to the November 1 Merger, and fiscal 1995
amounts shown in the historical consolidated financial statements represent
the combined financial statements of Orion and MITI prior to the November 1
Merger and formation of MMG.
(B) Principal repayments of the Registrant's borrowings under debt agreements
and other debt outstanding at December 31, 1996 are expected to be required
no earlier than as follows (in thousands):
1997........................................................ 17,065
1998........................................................ 60,336
1999........................................................ 4,429
2000........................................................ --
Thereafter.................................................. 75,000
For additional information regarding the Registrant's borrowings under debt
agreements and other debt, see note 9 to the consolidated financial
statements.
S-4
METROMEDIA INTERNATIONAL GROUP, INC.
SCHEDULE II--VALUATION AND QUALIFYING ACCOUNTS
ALLOWANCES FOR DOUBTFUL ACCOUNTS, ETC. (DEDUCTED FROM CURRENT RECEIVABLES)
(IN THOUSANDS)
BALANCE AT CHARGED BALANCE AT
BEGINNING TO COSTS OTHER DEDUCTIONS/ END
OF PERIOD AND EXPENSES CHARGES WRITE-OFFS OF PERIOD
----------- ------------- ----------- ----------- -----------
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
----------- ------ ----- ----------- -----------
----------- ------ ----- ----------- -----------
S-5