-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, MsZ+CdQAYvRLpACqo74MxaHz2togUM8ZwG0/ul0T59eEEwB86v51sdqB58pmnWm8 YFJG5UIxU8SuX2LGNFs4pQ== 0001005477-97-000970.txt : 19970401 0001005477-97-000970.hdr.sgml : 19970401 ACCESSION NUMBER: 0001005477-97-000970 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 8 CONFORMED PERIOD OF REPORT: 19961231 FILED AS OF DATE: 19970331 SROS: AMEX SROS: NYSE SROS: PSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: METROMEDIA INTERNATIONAL GROUP INC CENTRAL INDEX KEY: 0000039547 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-MOTION PICTURE & VIDEO TAPE PRODUCTION [7812] IRS NUMBER: 580971455 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K405 SEC ACT: 1934 Act SEC FILE NUMBER: 001-05706 FILM NUMBER: 97571374 BUSINESS ADDRESS: STREET 1: ONE MEADOWLANDS PLAZA CITY: EAST RUTHERFORD STATE: NJ ZIP: 07073 BUSINESS PHONE: 4042616190 MAIL ADDRESS: STREET 1: ONE MEADOWLANDS PLAZA CITY: EAST RUTHERFORD STATE: NJ ZIP: 07073 FORMER COMPANY: FORMER CONFORMED NAME: ACTAVA GROUP INC DATE OF NAME CHANGE: 19930723 FORMER COMPANY: FORMER CONFORMED NAME: FUQUA INDUSTRIES INC /DE/ DATE OF NAME CHANGE: 19920703 10-K405 1 FORM 10-K405 - -------------------------------------------------------------------------------- UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 ---------- FORM 10-K (Mark One) |X| ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 (FEE REQUIRED) For the fiscal year ended December 31, 1996 OR |_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 (NO FEE REQUIRED) For the transition period from _____________ to _____________ Commission File Number 1-5706 ---------- METROMEDIA INTERNATIONAL GROUP, INC. (Exact name of registrant, as specified in its charter) DELAWARE 58-0971455 (State or other jurisdiction (I.R.S. Employer of incorporation or Identification No.) organization) One Meadowlands Plaza, East Rutherford, New Jersey 07073-2137 (Address and zip code of principal executive offices) (201) 531-8000 (Registrant's telephone number, including area code) ---------- Securities registered pursuant to Section 12(b) of the Act: Title of each class Name of each exchange on which registered Common Stock, $1.00 par value American Stock Exchange Pacific Stock Exchange 9 1/2% Subordinated Debentures, due August 1, 1998 New York Stock Exchange 10% Subordinated Debentures, due October 1, 1999 New York Stock Exchange Securities registered pursuant to Section 12(g) of the Act: None Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes |X| No |_| Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K. The aggregate market value of voting stock of the registrant held by nonaffiliates of the registrant at February 28, 1997 computed by reference to the last reported sale price of the Common Stock on the composite tape on such date was $507,383,400. The number of shares of Common Stock outstanding as of February 28, 1997 was 66,157,971. Documents Incorporated by Reference Portions of the Definitive Proxy Statement to be used in connection with the Registrant's 1997 Annual Meeting of Stockholders are incorporated by reference into Part III of this Annual Report on Form 10-K. - -------------------------------------------------------------------------------- PART I Item 1. Business Metromedia International Group, Inc. Metromedia International Group, Inc. ("MMG" or "the Company") is a global communications, entertainment and media company engaged in two strategic businesses: (i) the development and operation of communications businesses, including wireless cable television, AM/FM radio, paging, cellular telecommunications, international toll calling and trunked mobile radio, in Eastern Europe, the republics of the former Soviet Union, the People's Republic of China (the "PRC") and other selected emerging markets, through its Communications Group ( the "Communications Group") and (ii) the production and worldwide distribution in all media of motion pictures, television programming and other filmed entertainment and the exploitation of its library of over 2,200 feature film and television titles, through its Entertainment Group (the "Entertainment Group"). Each of these businesses currently operates on a stand alone basis, pursuing distinct business plans designed to capitalize on the growth opportunities within their individual industries. As these industries continue to converge worldwide, the Company expects to be able to capitalize on synergies resulting from its position as a diversified company with significant operations in communications, entertainment and media services. During 1996, the Company experienced significant development in both its Communications and Entertainment Groups. For example, aggregate subscribers of the Communications Group's joint ventures various services at the end of the 1996 fiscal year was approximately 120,596, representing a growth of approximately 130% over the 1995 year end total of approximately 52,360 subscribers. The Communications Group's financial results for December 31 include the Group's joint ventures for the 12 months ending September 30th. In addition, during 1996, the Entertainment Group increased its feature film production, acquisition and distribution as it released 13 feature films and announced plans to release approximately 17 feature films in 1997. In addition to its Communications and Entertainment Groups, the Company also owns two nonstrategic businesses: Snapper, Inc. ("Snapper"), a wholly-owned subsidiary of the Company, and its investment in RDM Sports Group, Inc. (formerly known as Roadmaster Industries, Inc.) ("RDM"), each of which the Company owned prior to the November 1, 1995 Merger (as defined below) and the subsequent shift in its business focus to a global communications, entertainment and media company. Snapper manufactures Snapper(R) brand premium-priced power lawnmowers, lawn tractors, garden tillers, snowthrowers and related parts and accessories. RDM, which is listed on the New York Stock Exchange, is a leading sporting goods manufacturer of which the Company owns approximately 19.2 million shares, approximately 39%, of the outstanding shares. Following the consummation of the November 1 Merger (as defined below), the Company publicly announced that it was actively exploring a sale of both Snapper and its investment in RDM, and as a result, for accounting purposes, both assets were classified as assets held for sale and the results of operations for both assets were not consolidated with the Company's consolidated results of operations for the period from November 1, 1995 through October 31, 1996. The Company has decided not to continue to pursue its previously adopted plan to dispose of Snapper and to actively manage Snapper to maximize its long-term value. As of November 1, 1996, the Company has included Snapper's operating results in the consolidated results of operations of the Company for the two-month period ended December 31, 1996. (see "Business-Snapper"). The Company continues to pursue opportunities for a sale of its investment in RDM. In addition, the Company, consistent with its fiduciary duty to stockholders, evaluates opportunities as they arise to maximize stockholder value by disposing of other assets. 1 The Company was organized in 1929 under Pennsylvania law and reincorporated in 1968 under Delaware law. On November 1, 1995, as a result of the mergers of Orion Pictures Corporation ("Orion") and Metromedia International Telecommunications, Inc. ("MITI") with and into wholly-owned subsidiaries of the Company and the merger of MCEG Sterling Incorporated ("Sterling") with and into the Company (collectively, the "November 1 Merger"), the Company changed its name from "The Actava Group Inc." to "Metromedia International Group, Inc." The Company's principal executive offices are located at One Meadowlands Plaza, East Rutherford, New Jersey 07073-2137, telephone: (201) 531-8000. Description of Business Groups In addition to the other information contained in this Form 10-K, the following factors should be considered carefully in evaluating the Company and its business. Certain statements set forth below under this caption constitute "Forward-Looking Statements" within the meaning of the Private Securities Litigation Reform Act of 1995. See "Special Note Regarding Forward-Looking Statements" on page 55 for relating to such statements. For a complete description of the consolidated financial statements of the Company, see Part IV. The Communications Group The Communications Group was founded in 1990 to take advantage of the growing demand for modern communications services in Eastern Europe and the republics of the former Soviet Union and in other selected emerging markets and launched its first operating system in 1992. The Communications Group's markets generally have large populations, with high density and strong economic potential, but lack reliable and efficient communications services. At December 31, 1996, the Communications Group owned interests in and participated with partners in the management of joint ventures that had 29 operational systems, consisting of 9 wireless cable television systems, 6 AM/FM radio stations, 9 paging systems, 1 international toll calling service and 4 trunked mobile radio systems. In addition, the Communications Group has interests in and participates with partners in the management of joint ventures (the "Joint Ventures") that, as of December 31, 1996, had 6 pre-operational systems consisting of 1 wireless cable television system, 1 paging system, 2 cellular telecommunication systems, 1 trunked mobile radio system and 1 company providing sales, financing and service for wireless local loop equipment, each of which the Company believes will be operational during 1997. The Communications Group generally owns approximately 50% of the Joint Ventures in which it invests. The Company's objective is to establish the Communications Group as a major multiple-market provider of modern communications services in Eastern Europe, the republics of the former Soviet Union, the PRC and other selected emerging markets. The Company's Communications Group's Joint Ventures experienced significant growth in 1996. Total subscribers for the Communications Group's Joint Ventures at the end of the 1996 fiscal year was 120,596 compared with 52,360 at year end 1995, which represents an increase of approximately 130%. The Communications Group's financial results for December 31 include the Group's Joint Ventures for the 12 months ending September 30th. 2 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/ Pre-Operational Markets Households (MM) Aggregate Communications Markets at Operational at at Subscribers at Service December 31, December 31, December 31,(1) December 31, 1996 1996 1995 1996 1995 1996 1995 Wireless Cable Television(2) 1 9 7 9.5 7.2 69,118 37,900 AM/FM Radio - 6 5 23.8 22.2 n/a n/a Paging(3) 1(4) 9 6 89.5 73.3 44,836 14,460 Cellular Telecommunications 2(5) - - 8.2 - n/a n/a International Toll Calling(6) - 1 1 5.5 5.5 n/a n/a Trunked Mobile Radio(7) 1(8) 4(8) - 36.2 - 6,642 - Wireless Local Loop(9) 1 - - 72.6(10) - n/a n/a
(1) Target population is provided for paging, telephony and trunked mobile radio systems and target households is provided for wireless cable television systems and radio stations. (2) After December 31, 1996, one of the Communications Group's Joint Ventures acquired a wired network adding approximately 37,000 subscribers. (3) Target population for the Communications Group's paging joint ventures included the total population in the jurisdictions where such joint ventures are licensed to provide services. In many markets, however, the Communications Group's paging system currently only covers the capital city and is expanding into additional cities. (4) Since December 31, 1996, the Communications Group has commenced a paging operation in Vienna, Austria, which was licensed to provide paging services nationwide. (5) The Communications Group owns 23.6% of Baltcom GSM which subsequent to December 31, 1996 completed construction and launched commercial service of a national cellular telecommunications system in Latvia. The Communications Group also owns 34.3% of a joint venture that holds a license and has recently begun construction of a nationwide cellular telecommunications system in Georgia. (6) Provides international toll calling services between Georgia and the rest of the world and is the only Intelstat-designated representative in Georgia to provide such services. (7) Target population for the Communications Group's trunked mobile radio systems includes total population in the jurisdictions where such joint ventures are licensed to provide services. In many markets, the Communications Group's systems are only operational in major cities. (8) Since December 31, 1996, the Communications Group has commenced trunked mobile radio services in Almaty and Atyrau, Kazakstan. (9) The Communications Group owns a 60% interest in a pre-operational joint venture in China that provides telecommunications equipment, financing, network planning, installation and maintenance services. (10) Indicates population of the Hebei and Tianjin provinces in China in which the Communications Group's joint venture has tested it equipment. Licenses The Communications Group's operations are subject to governmental regulation in its markets and its operations require certain governmental approvals. There can be no assurance that the Communications Group will obtain necessary approvals to operate additional wireless cable television, wireless telephony or paging systems or radio broadcast stations in any of the markets in which it is seeking to establish its businesses. 3 The licenses pursuant to which the Communications Group's businesses operate are issued for limited periods, including certain licenses which are renewable annually. Certain of these licenses expire over the next several years. Two of the licenses held by the Communications Group have recently expired, although the Communications Group has been permitted to continue operations while the reissuance is pending. The Communications Group has applied for renewals and expects new licenses to be issued. Five other licenses held or used by the Communications Group will expire during 1997. While there can be no assurance on this matter, based on past experience, the Communications Group expects that all of these licenses will be renewed. For most of the licenses held or used by the Communications Group, no statutory or regulatory presumption exists for renewal by the current license holder, and there can be no assurance that such licenses will be renewed upon the expiration of their current terms. The Communications Group's partners in these ventures have not advised the Communications Group of any reason such licenses would not be renewed. The failure of such licenses to be renewed may have a material adverse effect on the Communications Group. Additionally, certain of the licenses pursuant to which the Communications Group's businesses operate contain network build-out milestone clauses. The failure to satisfy such milestones could result in the loss of such licenses which may have a material adverse effect on the Communications Group. In addition to its existing projects and licenses, the Communications Group continues to explore a number of investment opportunities in wireless telephony systems in certain markets in Eastern Europe, including Romania, the republics of the former Soviet Union, including Kazakstan, the PRC and other selected emerging markets, and has installed test systems in certain of these selected markets. The Communications Group acquired or obtained access to the right to offer its services under a total of 16 new licenses to provide its various services in 1996 in both new and existing markets. In February 1997, the Communications Group, through Metromedia Asia Corporation ("MAC"), acquired Asian America Telecommunications Corporation ("AAT"), a company which owns interests in and participates in the management of two separate joint ventures in the PRC, and which has entered into agreements with China United Telecommunications Corporation ("China Unicom") to (i) construct and develop a local telephone network for up to 1,000,000 lines in the Sichuan province in which the Communications Group will utilize fixed wireless local loop technology and (ii) construct and develop a wireless GSM system for up to 50,000 subscribers in the City of Ningbo. As a result of the consummation of the acquisition of AAT, the Communications Group owns 57% of MAC. Strategies The Communications Group intends to expand its subscriber and customer bases, as well as its revenues and cash flows, by (i) completing the build-out of existing license areas; (ii) utilizing low cost wireless technology; (iii) growing the subscriber base in existing license areas; (iv) pursuing additional licenses in existing markets; and (v) obtaining new licenses. The use of wireless technologies has allowed and will continue to allow the Communications Group to build-out its existing and future license areas more rapidly and at a lower cost than the construction of comparable wired networks. Many of the cities where the Communications Group has wireless licenses significantly limit wireline construction above and/or underground. 4 Since its formation in 1990, the Communications Group has been investing in joint ventures to obtain communications licenses in emerging markets. Since the consummation of the Company's offering of 18.4 million shares of common stock in July 1996, the Company has accelerated the construction and marketing of its communications systems. In 1996, the Company expanded the build-out of its paging operations in Uzbekistan by adding several cities as part of its long-term plan to provide nationwide paging service. The Communications Group believes it will continue to add subscribers by (i) targeting each demographic group in its markets with customized communications services; (ii) cross-marketing and bundling communications services to existing customers; (iii) providing technologically-advanced services and a high level of services to its customers; (iv) providing new and targeted programming on its radio stations to increase its advertising revenue and (v) opportunistically acquiring additional existing systems in its service areas and in other strategic areas to increase its subscriber base. The Communications Group is pursuing opportunities to provide additional communications services in regions in which it currently operates. Recently, for example, the Communications Group launched commercial service of GSM telecommunications in Latvia where it already provides wireless cable television, paging and radio broadcasting services. This strategy enables the Communications Group to leverage its existing infrastructure and to capitalize on marketing opportunities by bundling its services. The Communications Group believes that it has several competitive advantages that will enable it to obtain licenses in these markets, including: (i) established relationships with local strategic partners and local governments; (ii) a proven track record of handling and operating systems and (iii) a fundamental understanding of the regions' political, economic and cultural issues. The Communications Group is actively pursuing investments in joint ventures to obtain new licenses for wireless communications services in markets in which it presently does not have any licenses. The Communications Group is targeting emerging markets with strong economic potential, but which lack adequate communications services. In evaluating whether to enter a new market, the Communications Group assesses, among other factors, (i) the potential demand for the Communications Group's services and the availability of competitive services; (ii) the strength of local partners; and (iii) the political, social and economic environment. The Communications Group has identified several attractive opportunities in Eastern Europe and the Pacific Rim. Recently, for example, the Communications Group began to provide paging services in Austria, radio broadcasting in Prague, Czech Republic. In February 1997, the Communications Group, through MAC acquired AAT, which owns interests in and participates in the management of joint ventures which have agreements to provide wireless telephone equipment and services in certain provinces of the PRC. The Communications Group owns 57% of MAC. The Communications Group has experienced significant growth since its inception and continues to pursue additional investments in a variety of Communications Businesses in both existing and additional markets. The Group's growth strategy requires the Company to expend significant capital to enable the Communications Group to continue to develop its existing operations and to invest in additional ventures. There can be no assurance that the Company will have the funds necessary to support the current needs of the Communications Group's current investments or any of the Communications Group's additional opportunities or that the Communications Group will be able to obtain financing from third parties. If such financing is unavailable, the Group may not be able to further develop existing ventures and the number of additional ventures in which it invests may be significantly curtailed. See Item 7 Management's Discussion and Analysis of Financial Condition and Results of Operations, Liquidity and Capital Resources. 5 Wireless Cable Television General. The Communications Group commenced offering wireless cable television services in 1992 with the launch by two of its Joint Ventures of Kosmos TV in Moscow, Russia ("Kosmos") and Baltcom TV in Riga, Latvia ("Baltcom"). The Communications Group currently has interests in joint ventures which offer wireless cable television services in 10 markets in Eastern Europe and the republics of the former Soviet Union with approximately 69,118 subscribers at December 31, 1996, an increase of approximately 82% from December 31, 1995. In addition, the Communications Group has an interest in a joint venture which is licensed to provide wireless cable television service and is building a system in St. Petersburg, Russia and in January 1997, one of the Communications Group's joint ventures acquired an existing wired network system in Romania, adding a total of approximately 37,000 connected subscribers. The Communications Group believes that there is a growing demand for multi-channel television services in each of the markets where its Joint Ventures are operating, which is driven by several factors including: (i) the lack of quality television and alternative entertainment options in these markets; (ii) the growing demand for Western-type entertainment programming; and (iii) the increase in disposable income in these markets which is raising the demand for entertainment services. Technology Each of the Communications Group's wireless television joint ventures utilizes microwave multipoint distribution system ("MMDS") technology. The Communications Group believes that MMDS is the most attractive technology to utilize for multi-channel television services in these markets because (i) the initial construction costs of an MMDS system generally are lower than wireline cable or direct-to-home ("DTH") satellite transmission; (ii) the time required to construct a wireless cable network is significantly less than the time required to build a standard wireline cable television network covering a comparably sized service area; (iii) the obstacles to obtaining the required permits and rights-of-way to construct wired networks in the Communications Group's markets are substantial; (iv) the high communications tower typically utilized by the MMDS network combined with the high density of multi-family dwelling units in these markets gives the MMDS networks very high line of sight ("LOS") penetration; and (v) the wide bandwidth of the spectrum typically licensed by each of the Communications Group's Joint Ventures gives each system the ability to broadcast a wide variety of attractive international and localized programming. In each system operated by the Communications Group's Joint Ventures, encrypted multichannel signals are broadcast in all directions from a transmission tower which, in the case of such joint ventures systems, is typically the highest structure in the city and, as a result, has very high LOS penetration. Specialized compact receiving antenna systems, installed by the Communications Group on building rooftops as part of the system, receive the multiple channel signals transmitted by the transmission tower antennae and convert and route the signals to a set-top converter and a television receiver via a coaxial cabling system within the building. In each city where the Communications Group provides or expects to provide service, a substantial percentage of the population lives in large, multi-dwelling apartment buildings. This infrastructure significantly reduces installation costs and eases penetration of wireless cable television services into a city, because a single MMDS receiving location can bring service to numerous apartment buildings housing a large number of people. In order to take advantage of such benefits, in many areas the Communications Group is internally wiring buildings so that it can serve all of the apartment dwellers in such buildings through one microwave receiving location. The set-top converter descrambles the signal and is also used as a channel selector to augment televisions having a limited number of channels. The Communications Group generally utilizes the same equipment across its wireless cable television systems which enables it to realize purchasing efficiencies in the build-out of its networks. 6 In two cities in which the Communications Group's Joint Ventures operate wireless cable television systems, Bucharest, Romania and Chisinau, Moldova, where local cable television companies have been able to construct large wired networks, its Joint Ventures have also purchased wired networks and are in the process of integrating the wired operations with their wireless systems. The Communications Group believes that in these markets, the integration of these wired networks into its Communications Group's wireless operations will enable the Communications Group to build its subscriber base while delivering high quality, premium services to existing subscribers. Programming. The Communications Group believes that programming is a critical component in building successful wireless cable television systems. The Communications Group currently offers a wide variety of programming including English, French, German and Russian programming, some of which is dubbed or subtitled into the local language. In order to maximize penetration and revenues per subscriber, the cable television joint ventures generally offer multiple tiers of service including, at a minimum, a "lifeline" service, a "basic" service and a "premium" service. Generally, the lifeline service provides programming of local off-air channels and an additional two to four channels with a varied mixture of European or American sports, music, international news and general entertainment. The basic and premium services generally include the channels which make up the lifeline service, as well as an additional number of satellite channels and a movie channel that offers recent and classic movies. In most of its markets, the Communications Group offers subscribers different tiers of programming , with a variety of channels. The content of each programming tier varies from market to market, but generally include channels such as MTV, Eurosport, NBC Super Channel, Bloomberg TV, Cartoon Network/TNT, BBC World, CNN, SKY News/Discovery Channel and the Adult Channel. Each tier also offers localized programming. In one of its markets, the Communications Group offers "pay-per-view" movies and plans to add similar services to its program lineups in certain of its other markets. The subscriber pays for "pay-per-view" services in advance, and the intelligent decoders that the Communications Group uses automatically deduct the purchase of a particular service from the amount paid in advance. In addition, one of the Communications Group's Joint Ventures has created a movie channel, "TV21", consisting of U.S. and European films dubbed into Russian language and distributes this channel (dubbed in different languages) to most of the Communications Group's other wireless cable television ventures. Centralized dubbing and distribution of this movie channel has enabled the Communications Group to avoid the cost of separately providing a similar movie channel in its other markets. The Communications Group has been able to capitalize on synergies with the Entertainment Group by establishing the Metromedia Entertainment Network ("MEN") programming package which it licenses to cable television companies in Romania. MEN contains a number of subtitled channels with the main attraction being the "Orion Film Channel," a channel containing movies primarily distributed by the Entertainment Group. The Communications Group is currently exploring the roll-out of MEN in certain other markets. 7 Marketing. While each wireless cable television joint venture initially targets its wireless cable television services toward foreign national households, embassies, foreign commercial establishments and international and local hotels, each system offers multiple tiers, at least one of which is targeted toward, and within the economic reach of, a substantial and growing number of the local population in each market. The Communications Group offers several tiers of programming in each market and strives to price the lowest tier at a level that is affordable to a large percentage of the population and that generally compares in price, to alternative entertainment products. The Communications Group believes that a growing number of subscribers to local broadcast services will demand the superior quality programming and increased viewing choices offered by its MMDS service. Upon launching a particular service, the Communications Group uses a combination of event sponsorships, billboard, radio and broadcast television advertisements to increase awareness in the marketplace about its services. Competition. Each of the Communications Group's wireless cable television systems competes with off-the-air broadcast television stations. In addition, in many markets there are several existing wireline cable television providers which are generally small, undercapitalized local companies that are providing limited programming to subscribers in limited service areas. In many of its wireless cable television markets, it competes with providers of DTH programming services, which offer subscribers programming directly from satellite transponders. The Communications Group believes that it has significant competitive advantages over DTH providers via lower cost and the ability to offer localized programming. AM/FM Radio General. The Communications Group entered the radio broadcasting business in Eastern Europe through the acquisition of Radio Juventus in Hungary in 1994. It operates radio stations in Eastern Europe and the republics of the former Soviet Union and owns and operates, through joint ventures, stations in six markets. The Communications Group's radio broadcasting operations generally seek to acquire underdeveloped "stick" properties (i.e., stations with insignificant ratings and little or no positive cash flow) at attractive valuations. The Communications Group then installs experienced radio management to improve performance through increased marketing and focused programming. Management utilizes its programming expertise to specifically tailor the programming of each station utilizing sophisticated research techniques to identify opportunities within each market and programs its stations to provide complete coverage of a demographic or format type. This strategy allows each station to deliver highly effective access to a target demographic and capture a higher percentage of the radio advertising audience share. Programming. Programming in each of the Communications Group's AM and FM markets is designed to appeal to the particular interests of a specific demographic group in such markets. The Communications Group's radio programming formats generally consist of popular music from the United States, Western Europe, and the local region. News is delivered by local announcers in the language appropriate to the region, and announcements and commercials are locally produced. By developing a strong listener base comprised of a specific demographic group in each of its markets, the Communications Group believes it will be able to attract advertisers seeking to reach these listeners. The Communications Group believes that the technical programming and marketing expertise that it provides to its Joint Ventures enhances the performance of the Joint Ventures' radio stations. 8 Marketing. Radio station programming is generally targeted toward 25-to-55-year-old consumers, who are believed by management of the Communications Group to be the most affluent in the Group's radio markets. Each station's format is intended to appeal to the particular listening interests of this consumer group in its market. This is intended to enable the commercial sales departments of each Joint Venture to present to advertisers the most desirable market for their products and services, thereby heightening the value of the station's commercial advertising time. Advertising on these stations is sold to local, national and international advertisers. Competition. In each of the Communications Group's existing markets, there are either a number of stations in operation already or plans for competitive stations to be in service shortly. As additional stations are constructed and commence operations, the Communications Group expects to face significantly increased competition for listeners and advertising revenues from parties with programming, engineering and marketing expertise comparable to the Communications Group. Other media businesses, including broadcast television, cable television, newspapers, magazines and billboard advertising also compete with the Communications Group's radio stations for advertising revenues. Paging General. The Communications Group commenced offering radio paging services in 1994 with the launch of paging networks serving the countries of Romania and Estonia. Paging systems are useful in these markets as a means for one-way business/personal communications without the need for a recipient to access a telephone network, which in many of these markets is often overloaded or unavailable. At December 31, 1996, the Communications Group's paging joint ventures were licensed to offer paging services in markets containing approximately 89.5 million persons. The Communications Group's Joint Ventures generally provide service in the capital or major cities in these countries and are currently expanding the services of such operations to cover additional areas. At December 31, 1996, the Communications Group's Joint Ventures paging service operations had an aggregate of approximately 44,836 subscribers, from approximately 14,460 subscribers at December 31, 1995, an increase of approximately 210%. The Communications Group offers several types of paging services. Substantially all of the Group's subscribers choose alphanumeric pagers, which emit a variety of tones and display as many as 63 characters. Subscribers may also purchase additional services, such as paging priority, group calls and other options. The Group provides a choice of pagers, which are typically purchased by the subscriber or leased for a small monthly fee. The Communications Group also provides 24-hour operator service with operators who are capable of taking and sending messages in several languages. Technology Paging is a one-way wireless messaging technology which uses an assigned frequency and a specific pager identifier to contact a paging customer within a geographic service area. Each customer who subscribes to a paging service is assigned a specific pager number. Transmitters broadcast the appropriate signal or message to the subscriber's pager, which has been preset to monitor a designated radio frequency. Each pager has a unique number identifier, or "cap code," which allows it to pick up only those messages sent to that pager. The pager signals the subscriber through an audible beeping signal or an inaudible vibration and displays the message on the subscriber's pager. Depending on the market, the joint ventures offer alphanumeric pagers which have Latin and/or Cyrillic (Slavic language) character display. The effective signal coverage area of a paging transmitter typically encompasses a radius of between 15 and 20 miles from each transmitter site. Obstructions, whether natural, such as mountains, or man-made, such as large buildings, can interfere with the signal. Multiple transmitters are often used to cover large geographic areas, metropolitan areas containing tall buildings or areas with mountainous terrain. 9 Each of the Communications Group's paging joint ventures use either terrestrial radio frequency ("RF") control links that originate from one broadcast transmitter which is controlled by a local paging terminal and broadcast to each of the transmitters or to a satellite uplink controlled by the paging terminal, which transmits to a satellite and downlinks to a receiving dish adjacent to each of the transmitters. Once a message is received by each transmitter in a simulcast market, they in turn broadcast the paging information using the paging broadcast frequency. The RF control link frequency is different from the paging broadcast frequency. For non-contiguous regional coverage, either telephone lines or microwave communication links are also used in lieu of an RF control link or satellite link. Marketing. Paging services are targeted toward people who spend a significant amount of time outside of their offices, have a need for mobility or are business people without ready access to telephones. The Communications Group targets its paging services primarily to local businesses, the local police, the military, and expatriates. Paging provides an affordable way for local businesses to communicate with employees in the field. Subscribers are charged a monthly fee which entitles the subscriber to receive an unlimited number of pages per month. Competition. In some of the Communications Group's paging markets, the Communications Group has experienced and expects to continue to experience competition from existing small, local, paging operators who have limited areas of coverage, and, in a few cases, from paging operators established by Western European and United States investors with substantial experience in paging. The Communications Group believes it competes effectively against these companies with its high quality, reliable, 24-hour service. The Communications Group does not have or expect to have exclusive franchises with respect to its paging operations and may therefore face more significant competition in its markets in the future from highly capitalized entities seeking to provide similar services. Cellular Telecommunications Overview. The Communications Group owns a 23.6% interest in Baltcom GSM, which has recently completed construction and launched commercial service of a national cellular telephone system in Latvia. The Communications Group also owns a 34.3% interest in Magticom, a joint venture that holds a license for and has recently begun construction on a national cellular telephone system in the country of Georgia. The Communications Group is partnered in these ventures with Western Wireless, a leading U.S. cellular provider. The Communications Group believes that there is a large demand for cellular telephone service in each of Latvia and Georgia due to the limited supply and poor quality of wireline telephone service in these markets, as well as the rapidly growing demand for the mobility offered by cellular telephone service. Landline telephone penetration is approximately 25% in Latvia and 9% in Georgia. The demand for reliable and mobile telephone service is increasing rapidly and the pace is expected to continue as commerce in these regions continues to experience rapid growth. In addition, through AAT, the Communications Group has entered into a joint venture agreement with Ningbo United Telecommunications Investment Co., Ltd. to (i) finance and assist China Unicom, in the construction of an advanced GSM cellular telephone network; and (ii) provide consulting and management support services to China Unicom in its operation of such network within the City of Ningbo, PRC. This project will have a capacity of up to 50,000 subscribers. Construction of the project has recently been completed and the joint venture has begun to market the network to subscribers. This Communications Group's joint venture is entitled to 73% of the distributed cash flow, as defined in the joint venture agreement, from the network for a 15-year period. 10 Technology. The Communications Group's cellular telephone network in Latvia has been constructed and the telephone network in Georgia is being constructed using GSM technology. GSM is the standard for cellular service throughout Western Europe, which will allow the Communications Group's customers to "roam" throughout the region. GSM's mobility is a significant competitive advantage compared to competing Advanced Mobile Phone System ("AMPS") services which cannot offer roaming service in most neighboring countries in Europe or Nordic Mobile Telephone ("NMT") services which are based on what the Communications Group believes is an older and less reliable technology. Marketing. The Communications Group targets its cellular telephony services toward individuals, corporations and other organizations with a need for mobility, ready access to a high quality voice transmission service and the ability to conduct business outside of the workplace or home. The Communications Group sells cellular phones at a small mark-up to cost. This pass-through strategy encourages quick market penetration and early acceptance of cellular telephony as a desirable alternative to fixed land-based telephony systems. The Communications Group intends to market its cellular telephony service to customers of its existing wireless cable television and paging services in both Latvia and Georgia. The Group believes that this database of names will be useful in marketing its cellular telephony services, as these are customers who already have exhibited an interest in modern communications services. In addition, these joint ventures intended to market these services by providing a comprehensive set of packages with different service features which permit the subscriber to choose the package that most closely fits his or her needs. Competition. Baltcom GSM's primary competitor in Latvia is Latvia Mobile Telecom ("LMT"), which is partly owned by a state-owned enterprise. LMT commenced service in 1995 and currently has approximately 20,000 subscribers. LMT operates a second system using the older, less efficient NMT technology that the Communications Group believes will pose less of a competitive threat than LMT's GSM system. The Communications Group believes that its primary competitors in Georgia will be Geocell, a Georgian-Turkish joint venture that recently launched commercial service using a GSM system, as well as an existing smaller provider of cellular telephony service which uses the AMPs technology in its network. The Communications Group also faces competition from the primary provider of telephony services in each of its markets, which are the national PTTs. However, given the low telephone penetration rates in these markets and the underdeveloped landline telephone system infrastructure, the Communications Group believes that cellular telephony provides an attractive alternative to customers who need fast, reliable and quality telephone service. International Toll Calling General. The Communications Group owns approximately 30% of Telecom Georgia. Telecom Georgia handles all international calls inbound to and outbound from the Republic of Georgia to the rest of the world. Telecom Georgia has made interconnect arrangements with several international long distance carriers such as Sprint and Telespazio of Italy. For every international call made to the Republic of Georgia, a payment will be due to Telecom Georgia by the interconnect carrier and for every call made from the Republic of Georgia to another country, Telecom Georgia will bill its subscribers and pay a destination fee to the interconnect carrier. Since Telecom Georgia commenced operations, long distance traffic in and out of Georgia has increased dramatically as Telecom Georgia has expanded the number of available international telephone lines. Incoming call traffic increased from approximately 200,000 minutes per month in 1993 to the current rate of 1,000,000 minutes per month, and outgoing call traffic increased from approximately 100,000 minutes per month in 1993 to the current rate of 230,000 minutes. Telecom Georgia has instituted several marketing programs in order to maintain this growth. Competition. The Communications Group does not currently face any competition in the international long distance business in Georgia as Telcom Georgia is the only entity licensed to handle all international call traffic in and out of Georgia. 11 Trunked Mobile Radio General. The Communications Group currently owns interests in joint ventures which operate 4 trunked mobile radio services in Europe and certain republics of the former Soviet Union. The Group's joint ventures serviced an aggregate of approximately 6,642 subscribers at December 31, 1996. In March 1997, the Communications Group launched trunked mobile radio services in Kazakstan. Trunked mobile radio systems provide mobile voice communications among members of user groups and interconnection to the public switched telephone network and are commonly used by construction teams, security services, taxi companies, service organizations and other groups with a need for significant internal communications. Trunked mobile radio allows such users to communicate with members of a closed user group without incurring the expense or delay of the public switched telephone network, and also provides the ability to provide dispatch services (i.e. one sender communicating to a large number of users on the same network). In many cases, the Communications Group's trunked mobile radio systems are also connected to the public switched telephone network, thus providing some or all of the users the flexibility of communicating outside the closed user group. In many niche markets, trunked mobile radio has significant advantages over cellular telephony or the public switch telephone network. Competition. The Communications Group faces competition from other trunked mobile radio service providers and from private networks in all of the markets in which it operates. Trunked mobile radio also faces competition from cellular providers, especially for users who need access to the public switched telephone network for most of their needs, pagers for users who need only one-way communication and private branch exchanges (PBXs), where users do not need mobile communications. Development Opportunities Wireless Telephony. The Communications Group is currently exploring a number of investment opportunities in wireless local loop telephony systems in certain countries in Eastern Europe, the republics of the former Soviet Union, the PRC and other selected emerging markets, and has installed test systems in certain of these markets. The Communications Group believes that the wireless local loop telephony it is using is a time and cost effective means of improving the communications infrastructure in such markets. The current telephone systems in these markets are antiquated and overloaded, and consumers in these markets typically must wait several years to obtain telephone service. The fixed wireless local loop telephony the Communications Group is using offers the current telephone service provider a rapid and cost effective method to expand its service base. The wireless local loop telephony system it is using can provide telephone access to a large number of apartment dwellers through a single microwave transceiver installed on their building. This microwave transceiver sends signals to and from a receiver located adjacent to a central office of the public switched telephone network where the signal is routed from or into such network. This system eliminates the need to build fixed wireline infrastructure between the central office and the subscriber's building, thus reducing the time and expense involved in expanding telephone service to customers. 12 The Communications Group through AAT, has entered into a joint venture agreement with China Huaneng Technology Development Corporation, to (i) assist China Unicom in the development and construction of advanced telecommunications systems in Sichuan Province, PRC; (ii) provide financing to China Unicom in Sichuan Provice and (iii) provide telephone consulting services to China Unicom within Sichuan Province. With a population of over 100 million and a telephone density rate estimated at less than 2% the Sichuan Province project provides a large potential market for AAT's products and services. The project involves a 20-year period of cooperation between the Communications Group's Joint Venture and China Unicom for the development of a local telephone network in Sichuan Province with an initial capacity of 50,000 lines, and a projected growth of up to 1,000,000 lines within the next five years. The Communications Group expects that the fixed wireless local loop technology it is using will be used in the project. For its services, the Communications Group's Joint Venture is entitled to 78% of the distributable cash flow from the network for a 20-year period for each phase of the network developed. While the existing wireline telephone systems in Eastern Europe and the former Soviet Republics are often antiquated, the fact that these systems are already well-established and operated by governmental authorities means that they are a source of competition for the Communications Group's proposed wireless telephony operations. In addition, one-way paging service may be a competitive alternative which is adequate for those who do not need a two-way service, or it may be a service that reduces wireless telephony usage among wireless telephony subscribers. The Communications Group does not have or expect to have exclusive franchises with respect to its wireless telephony operations and may therefore face more significant competition in the future from highly capitalized entities seeking to provide services similar to or competitive with those of the Communications Group in its markets. In certain markets, cellular telephone operators exist and represent a competitive alternative to the Communications Group's proposed wireless local loop telephony systems. A cellular telephone can be operated in the same manner as a wireless loop telephone in that either type of service can simulate the conventional telephone service by providing local and international calling from a fixed position in its service area. However, while cellular telephony enables a subscriber to move from one place in a city to another while using the service, wireless local loop telephony is intended to provide fixed telephone services which can be deployed as rapidly as cellular telephony but at a lower cost. This lower cost makes wireless local loop telephony a more attractive telephony alternative to a large portion of the populations in the Communications Group's markets that do not require mobile communications. In addition, because the wireless local loop technology the Communications Group is using operates at 64 kilobits per second, it can be used for high speed facsimile and data transmission in the same manner as a wired telephone system. 13 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
VENTURE(1) MITI AMOUNT AMOUNT TOTAL OWNERSHIP CONTRIBUTED LOANED INVESTMENT AMOUNT (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 Alma TV (Almaty, Kazakstan) 50% 222,000 3,146,766 3,368,766 Cosmos TV (Minsk, Belarus) 50% 400,000 1,580,504 1,980,504 Viginta (Vilnius, Lithuania) 55% 433,781 1,029,316 1,463,097 Kamalak TV (Tashkent, Uzbekistan) 50% 754,156 5,489,224 6,243,380 Paging Baltcom Estonia (Estonia) 39% 396,150 3,895,192 4,291,342 CNM (Romania) 54% 490,000 3,709,443 4,199,443 Kamalak Paging (Tashkent, Samarkand, Bukhara 50% and Andijan, Uzbekistan)(2) Paging One (Tbilisi, Georgia) 45% 250,000 801,000 1,051,000 Paging Ajara (Ajara, Georgia) 35% 43,200 212,339 255,539 Raduga Poisk (Nizhni Novgorod, Russia) 45% 330,000 77,534 407,534 Alma Page (Almaty and Ust-Kamenogorsk, 50% Kazakstan)(3) Baltcom Plus (Latvia) 50% 250,000 2,576,988 2,826,988 Pt-Page (St. Petersburg, Russia) 40% 1,057,762 0 1,057,762 Radio Radio Juventus (Budapest, Siofok and Khebegy, 100% 8,106,890 274,147 8,381,037 Hungary) SAC (Moscow, Russia) 83% 630,593 2,892,258 3,522,851 Radio Katusha (St. Petersburg, Russia) 50% 132,528 768,663 901,191 Radio Nika (Socci, Russia) 51% 223,497 119,867 343,364 Radio Skonto (Riga, Latvia) 55% 302,369 227,358 529,727 Radio One (Prague, Czech Republic) 80% 283,293 0 283,293 International Toll Calling Telecom Georgia (Georgia) 30% 2,553,600 0 2,553,600 Trunk Mobile Radio (4) Belgium Trunking (Brussels and Flanders, 24% Belgium) Radiomovel Telecomunicacoes (Portugal) 14% Teletrunk Spain (Madrid, Valencia, Aragon and 6-16%(5) Catalonia, Spain) National Business Communications (Bucharest, 58% 30,097 215,000 245,097 Cluj, Brasov, Constanta and Timisoira, Romania)(6) Pre-Operational Teleplus (St. Petersburg, Russia)(Cable)(7) 45% 553,705 0 553,705 Paging One Services (Austria)(Paging)(8) 100% 1,007,434 1,048,004 2,055,438 Spectrum (Kazakstan)(Trunk Mobile)(9) 31% 36,050 0 36,050 Baltcom GSM (Latvia)(Cellular)(10) 24% 7,883,112 0 7,883,112 Magticom (Georgia)(Cellular)(11) 34% 2,450,000 0 2,450,000 Metromedia-Jinfeng (Wireless Local Loop)(13) 60% 3,018,762 0 3,018,762
(1) The parenthetical notes the area of operations for the operational joint ventures and the area for which the joint venture is licensed for the pre-operational joint ventures. (2) The Communications Group's cable and paging services in Uzbekistan are provided by the same company, Kamalak TV. All amounts contributed and loaned to Kamalak TV are listed under that joint venture's entry for cable. (3) The Company's cable and paging services in Kazakstan are provided by or through the same company, Alma TV. All amounts contributed and loaned to Alma TV are listed under that joint venture's entry for cable. (4) Most of the Company's ownership of the trunk mobile radio ventures is through Protocall Ventures, Ltd., a United Kingdom company in which the Communications Group has 56% ownership. The Communications Group's interest in Protocall Ventures, Ltd. was purchased for $2,500,000. As of 12/31/96, the Communications Group had provided Protocall Ventures, Ltd. $2,384,742 in credit to fund its operations. This chart does not separately list amounts contributed or loaned to the trunked mobile radio joint ventures by Protocall Ventures, Ltd. (5) The Communications Group's trunk mobile radio operations in Spain are provided through 4 joint ventures of Protocall Ventures, Ltd. The Company's ownership of these joint ventures ranges from 6-16%. (6) Amounts contributed and loaned are amounts contributed and loaned to National Business Communications directly by the Communications Group. (7) Teleplus was created in November 1996. (8) Paging One Services launched commercial paging service in Vienna, Austria in February 1997. (9) Spectrum launched commercial trunk mobile radio service in Almaty and Atyrau, Kazakstan in March 1997. (10) Baltcom GSM launched commercial GSM cellular service in Latvia in March 1997. (11) The Communications Group's interest in Magticom was registered in October 1996. (12) The total investment does not include any incurred losses. (13) Metromedia-Jinfeng is a pre-operational joint venture that plans to provide telecommunications equipment, financing, network planning, installation and maintenance services to telecommunications operations in China. 14 After deciding to obtain an interest in a particular communications business, the Communications Group generally enters into discussions with the appropriate ministry of communications or local parties which have interests in communications properties in a particular market. If the negotiations are successful, a joint venture agreement is entered into and is registered, and the right to use frequency licenses is contributed to the joint venture by the Communications Group's local partner or is allocated by the appropriate governmental authority to the joint venture. In some cases, the Communications Group owns or acquires interests in entities (including competitors) that are already licensed and are providing service. Generally, the Communications Group owns approximately 50% of the equity in a joint venture with the balance of such equity being owned by a local entity, many times a government-owned enterprise. Each joint venture's day-to-day activities are managed by a local management team selected by its board of directors or its shareholders. The operating objectives, business plans, and capital expenditures of a joint venture are approved by the joint venture's board of directors, or in certain cases, by its shareholders. In most cases, an equal number of directors or managers of the joint venture are selected by the Communications Group and its local partner. In other cases, a differing number of directors or managers of the joint venture may be selected by the Communications Group on the basis of the percentage ownership interest of the Communications Group in the joint venture. In many cases, the credit agreement pursuant to which the Communications Group loans funds to a joint venture provides the Communications Group with the right to appoint the general manager of the joint venture and to approve unilaterally the annual business plan of the joint venture. These rights continue so long as amounts are outstanding under the credit agreement. In other cases, such rights may also exist by reason of the Communications Group's percentage ownership interest in the joint venture or under the terms of the joint venture's governing instruments. The Communications Group's joint ventures are limited liability entities which are permitted to enter into contracts, acquire property and assume and undertake obligations in their own names. Because the joint ventures are limited liability companies, their equity holders have limited liability to the extent of their investment. Under the joint venture agreements, each of the Communications Group and the local joint venture partner is obligated to make initial capital contributions to the joint venture. In general, a local joint venture partner does not have the resources to make cash contributions to the joint venture. In such cases, the Communications Group has established or plans to establish an agreement with the joint venture whereby, in addition to cash contributions by the Communications Group, each of the Communications Group and the local partner makes in-kind contributions (usually communications equipment in the case of the Communications Group and frequencies, space on transmitting towers and office space in the case of the local partner), and the joint venture signs a credit agreement with the Communications Group pursuant to which the Communications Group loans the venture certain funds. Prior to repayment of such funds, the joint ventures are significantly limited or prohibited from distributing profits to their shareholders. Typically, such credit agreements provide for interest payments to the Company at rates ranging generally from prime to prime plus 6% and for payments of interest and principal from 90% of the joint ventures available cash flow. As of December 31, 1996, the Communications Group had obligations to fund (i) an additional $5.5 million to the equity of its joint ventures (or to complete the payment of shares purchased by the Communications Group) and (ii) up to an additional $18.9 million to fund the various credit lines the Communications Group has extended to its Joint Ventures. The Communications Group's funding commitments under such credit lines are contingent upon its approval of the joint ventures' business plans. To the extent that the Communications Group does not approve a joint venture's business plan, the Communications Group is not required to provide funds to such joint venture under the credit line. The distributions (including profits) from the joint venture to the Communications Group and the local partner are made on a pro rata basis in accordance with their respective ownership interests. 15 In addition to loaning funds to the Joint Ventures, the Communications Group provides certain services to many of the Joint Ventures, for which it charges the joint ventures a management fee. The Communications Group often does not require start-up joint ventures to reimburse it for certain services that it provides such as engineering advice, assistance in locating programming, and assistance in ordering equipment. As each joint venture grows, the Communications Group institutes various payment mechanisms to have each joint venture reimburse it for such services when they are provided. The failure of the Communications Group to obtain reimbursement of such services will not have a material impact on its results of operations. Under existing legislation in certain of the Communications Group's markets, distributions from a joint venture to its partners are subject to taxation. The laws in the Communications Group's markets vary widely with respect to the tax treatment of distributions to joint venture partners and such laws have also recently been revised significantly in many of the Communications Group's markets. There can be no assurance that such laws will not continue to undergo major changes in the future which may have a significant negative impact on the Communications Group and its operations. The Entertainment Group Overview The Company's Entertainment Group is one of the largest independent producers and distributors of motion picture and television product in the United States and one of the few entertainment companies, other than the major motion picture studios and their affiliates, that is capable of distributing entertainment product in all media worldwide. The Company also holds a valuable library of over 2,200 feature film and television titles, including Academy Award(R) winning films such as Dances with Wolves and Silence of the Lambs, action films such as the three-film RoboCop series and classic motion pictures such as Wuthering Heights, The Pride of the Yankees, Guys and Dolls and The Best Years of Our Lives. This library provides the Company with a stable stream of revenues and cash flow to support, in part, its various production operations and other activities. The Entertainment Group is a well-established, full-service distributor of motion picture and television product with access to all significant domestic and international markets. The Entertainment Group distributes feature films produced or acquired by it to domestic theatres and distributes motion pictures and television entertainment product in the domestic home video and television markets through its in-house distribution divisions and subsidiaries. Internationally, the Entertainment Group primarily distributes its feature films and other product through a combination of output deals and other distribution deals with third party licensees and subdistributors. Through its Orion, Orion Classics and Goldwyn labels, the Entertainment Group produces and acquires a full range of commercial films with well-defined target audiences with the Entertainment Group's portion of the production cost generally ranging from $5.0 million to $10.0 million per picture. The Entertainment Group's management has significant experience in the production of motion picture and television entertainment of this type and was responsible for producing the box office successes Beverly Hills Ninja, Dumb and Dumber and the Academy Award(R) winning The Madness of King George. The Entertainment Group released theatrically 13 feature films in the year ended December 31, 1996 and it expects to release theatrically approximately 17 feature films during the year ended December 31, 1997, including the Academy Award(R) nominated best foreign language feature film Prisoner of the Mountains, which was released in January 1997. The Entertainment Group also owns the Landmark Theatre Corporation, which management believes is the leading specialty theater group in the United States, consisting of 50 motion picture theaters with a total of 138 screens at December 31, 1996. 16 Production and Acquisition of Feature Films The Entertainment Group focuses on producing or acquiring commercial and specialized films with well-defined target audiences and marketing campaigns, at costs lower than those for feature films at the major motion picture studios. The Entertainment Group believes it will successfully control costs and increase returns by carefully selecting projects that: (i) are based on exploitable concepts, such as action-adventure and specialized motion pictures; (ii) are aimed at and cost-effectively marketed to specific niche audiences; (iii) employ affordable, well-recognized or emerging talent; and (iv) fit within pre-established cost/performance criteria. The Entertainment Group also currently plans to avoid peak seasonal release periods such as early summer, Christmas and other holidays, when competition for screens is most intense and marketing costs are highest. This strategy is based on management's success with producing such films as Beverly Hills Ninja and the Entertainment Group's 1996 release Big Night as well as its feature films, Much Ado About Nothing, The Madness of King George and Eat Drink Man Woman. The Entertainment Group intends to produce or acquire and release an average of approximately 10-15 theatrical features per year, in which the Company's portion of the production cost will generally range from $5.0 million to $10.0 million. The Company also expects to spend on average, between $3.5 million and $10.0 million on print and advertising costs for feature films it produces or acquires. The Company's acquisition program contemplates output arrangements with producers and the acquisition of existing catalogs, as well as film-by-film acquisitions. In addition, in order to expand its production capabilities and minimize its exposure to the performance of any particular film, the Company intends to finance a significant portion of each film's budget by "pre-selling" or pre-licensing foreign distribution rights. Furthermore, certain of the Company's executives will, on behalf of the Company, enter into "producer-for-hire" agreements with other studios for which the Company and such executives will receive a fee. See "--United States Motion Picture Industry Overview--Motion Picture Production and Financing" and "--Motion Picture Distribution" below. The Entertainment Group believes that its ability to successfully produce or acquire and distribute a significant number of feature films each year will enhance the marketability of its existing library as it markets these films with films already in the library. 17 Distribution and Release of Feature Films and Other Product Theatrical. The Entertainment Group's existing distribution system enables it to release the feature films it produces or acquires in all media in all significant domestic and international marketplaces, through its in-house domestic theatrical, television and home video distribution divisions and its international distribution division. The Entertainment Group believes that its full-service distribution system is a significant asset which gives it an advantage over other independent film companies which must generally rely upon one of the major motion picture studios to release their product theatrically and in other outlets such as home video. In addition, this distribution system allows the Entertainment Group to acquire, at low and sometimes no cost, entertainment product produced by third parties who generally bear most or all of the financial risk of producing the feature film, but who lack the distribution system to release the product in some or all of the domestic media. In addition, in certain of these "rent-a-system" arrangements, the third party producer will also advance the print and advertising costs for each such film, thereby further limiting the Entertainment Group's financial exposure in a film. For example, during 1996, the Entertainment Group theatrically released a number of films produced by Live Entertainment for which it was paid a percentage distribution fee, including two feature films, The Arrival and The Substitute, both of which grossed in excess of $10.0 million in the U.S. theatrical market. Live Entertainment bore all of the production and distribution costs of such films. Although there can be no assurance that the Entertainment Group will be successful in attracting these types of transactions on these terms, it plans to continue to enter into similar "rent a system" transactions in the future. In addition, the Entertainment Group intends to continue to co-produce (with limited financial exposure to the Entertainment Group) larger budget movies with major studios. For example, in 1996, Goldwyn produced, in conjunction with Walt Disney Pictures, The Preacher's Wife, starring Denzel Washington and Whitney Houston and directed by Penny Marshall which was released in December 1996, and had a gross profit participation in the film. Also in 1996, Goldwyn announced an agreement with New Line Cinema for the production of a remake of the Secret Life of Walter Mitty. The Entertainment Group films are released under the Orion, Orion Classics and Goldwyn labels. Orion markets primarily mainstream commercial films, Goldwyn produces and acquires specialized and "arthouse" motion pictures with crossover potential and Orion Classics focuses on specialized and "arthouse" pictures. During 1996, the Entertainment Group released 13 pictures including, I Shot Andy Warhol, Big Night, Angels & Insects, The Substitute and The Arrival. During 1997, the Entertainment Group plans to release approximately 17 pictures in the U.S. theatrical market. Its widest releases in 1997 are expected to be Eight Heads in a Duffle Bag, a comedy starring Joe Pesci, which will be distributed to between 1,500 and 1,800 screens nationwide and Gang Related, a police action thriller starring Jim Belushi, Dennis Quaid, and the late Tupac Shakur in his last screen performance. The following is a list of the Entertainment Group's scheduled 1997 releases:
Expected Title Cast Description Release Release Date Label January 31 Prisoner of the Mountains(1) Oleg Menshikov An Academy Award(R)nominee and Orion Classics Sergei Bodrov, Jr. Golden Globe nominee for Best Foreign Language Film, this adaptation of a Tolstoy novella follows the experiences of two Russian soldiers who are captured and held hostage in a Chechen mountain community. February 28 Hard Eight(2) Gwyneth Paltrow A taut noir story of a seasoned Goldwyn Samuel L. Jackson gambler whose friendship with a John C. Reilly young man is threatened by a dark Phillip Baker Hall secret from his past.
18
Expected Title Cast Description Release Release Date Label March 7 City of Industry(1) Harvey Keitel A hard-edged film-noir thriller Orion Stephen Dorff concerning two brothers, small Timothy Hutton time L.A. criminals, whose Famke Janssen plans for a final jewelry heist go awry when an unpredictable partner is brought into the deal. April 11 Kissed(1) Molly Parker A story of a striking young Goldwyn Peter Outerbridge woman who has a particular fascination with life and death. A romance with an obsessive medical student threatens to expose her secret passion and redefine the bounds of love. April 18 Eight Heads in a Joe Pesci A raucous comedy about a mob Orion Duffle Bag(3) David Spade bag man whose luggage Kristy Swanson containing eight human heads, George Hamilton crucial proof of a recent hit, Dyan Cannon gets switched at the airport Andy Comeau and goes south of the border with a family vacationing in Mexico. May Rough Magic(2) Bridget Fonda A romantic adventure involving Goldwyn Russell Crowe magic, mysticism and Mexico. Jim Broadbent D.W. Moffet Paul Rodriguez August Paperback Romance(1) Anthony LaPaglia A story of star-crossed lovers Goldwyn Gia Carides who find themselves thrown together in a madcap adventure reminiscent of the classic `30's romantic comedies. Summer Ulee's Gold(4) Peter Fonda A Jonathan Demme (Academy Orion Patricia Richardson Award(R) winning director of Orion's Silence of the Lambs) presentation, the poignant story of a stubborn, solitary beekeeper in the tupelo marshes of the Florida panhandle who must abandon his isolating routine in order to save his family and ultimately, himself. Summer Napoleon(4) Voices of A live-action adventure story Goldwyn Bronson Pinchot of an adorable puppy who gets David Odgen Stiers lost in the wild Australian Blythe Danner outback. Befriended by exotic Joan Rivers animals, Napoleon overcomes his fears and discovers the magic of nature. September 7 Gang Related(4) Jim Belushi An exciting, thought-provoking Orion Tupac Shakur thriller about two detectives Lela Rochan in a metropolitan police Dennis Quaid department who get in over James Earl Jones their heads when their money-on-the-side scheme involving murder and stolen police evidence horribly backfires with the unintended death of an undercover DEA agent. This film is Tupac Shakur's final film role. Fall The Locusts(3) Vince Vaughn A dark tale of romance and Orion Ashley Judd mystery set in 1960 rural Paul Rudd Kansas. When a drifter with a Jeremy Davies mysterious past comes to the Kate Capshaw feedlot of a sultry, black widow figure with a strangely withdrawn son, family secrets and painful truths are revealed as a trio of damaged souls search for love and respect, desperately trying to connect.
19
Expected Title Cast Description Release Release Date Label Fall The Big Red(5) Johnathon Schaech A twisted road comedy by the Goldwyn director of Adventures of Priscilla, Queen of the Desert, a con-artist escapes a deal gone wrong in New York and winds up in the Australian outback in a strange town, whose inhabitants are an oddball collection of misfits. Fall Best Men(3) Drew Barrymore A film about five lifelong freiends Orion Dean Cain in a nowhere town headed for their Luke Wilson buddies' wedding whose lives take a Sean Patrick Flanery major detour as they find themselves Andy Dick holding up a bank in a rebellious Mitchell Whitfield search for independence. Fred Ward TBA Storefront Hitchcock(4) Robyn Hitchcock A concert/performance film Orion Classics showcasing the singular personal style of British singer/songwriter Robyn Hitchcock, directed by Jonathan Demme, who directed Orion's Academy Award(R) winning film Silence of the Lambs as well as David Byrne in Stop Making Sense, one of the all-time favorite concert/performance films ever made. TBA This world, then the Billy Zane A film-noir potboiler, set in Orion Classics fireworks(1) Gina Gershon the 1950's, based on one of Sheryl Lee master crime writer Jim Rue McClanahan Thompson's most riveting stories, involving sexual perversity, dysfunctional family ties, greed and lust. TBA I Love You...Don't(1) Julie Davis A bold and sexy romantic comedy Goldwyn Touch Me about a young woman's attempt to reconcile her need for love and desire for sex. Critically acclaimed directorial debut of Julie Davis. TBA Music From Another Room(3) Brenda Blethyn A comedy which follows a man's Orion Jude Law search for his one true love, Jennifer Tilly whose birth he assisted in as Martha Plimpton a 5 year old. Jon Tenney Jeremy Piven
- ----------- (1) All domestic media, limited term (2) Domestic theatrical only (3) All domestic media, in perpetuity (4) All media worldwide, in perpetuity (5) All media worldwide, except Australia, in perpetuity Home Video. The Entertainment Group distributes its own product and product produced by third parties in the United States and Canada through its in-home video division. In addition to releasing its new product to which it owns home video rights, the Entertainment Group will continue to exploit titles from its existing library, including previously released rental titles, re-issued titles and initially released titles, in the expanding sell-through and premium market sectors and through arrangements with mail-order and other selected licensees. In addition to distribution in the traditional videocassette sector, the Entertainment Group also intends to pursue opportunities to distribute its library in video discs (see "--United States Motion Picture Industry Overview" and "--Emerging Technologies" below) emerging multimedia formats. The Entertainment Group provides exclusive distribution services for Major League Baseball Properties home video product and the Fox-Lorber catalog of foreign language and specialty films both of which the Entertainment Group believes it was able to attract because of its existing home video distribution system. 20 Pay-Per-View, Pay Television, Broadcast and Basic Cable Television and other Ancillary Markets. The Entertainment Group currently licenses its new product and product from its film and television library to both domestic and foreign pay-per-view, pay television, broadcast and basic cable television and other ancillary markets worldwide. The Entertainment Group has historically been successful in selling its library titles to the free and pay television and home video markets worldwide. The Entertainment Group believes that pay and free television markets are expected to continue to experience significant growth, primarily as a result of technological advances and the expansion of the multi-channel television industry worldwide, permitting it to market its titles in new geographic markets. With an extensive library which contains a variety of film and television titles, the Entertainment Group believes it is well-positioned to benefit from this anticipated increase in demand for programming. In addition, the Entertainment Group believes that its increased production and acquisition of feature films will enable it to better exploit its extensive library in these markets as it is able to license such new product together with existing titles from its film and television library. To date, the Entertainment Group has licensed its product with domestic pay television programmers both through output deals with pay cable providers such as Showtime and HBO and through distribution deals with a variety of television services. The emergence of digital compression, video-on-demand, DTH and other new technologies is expected to increase the worldwide demand for entertainment programming largely by increasing existing transmission capabilities and by increasing the percentage of the population which can access multi-channel television systems. Foreign Markets. The Entertainment Group distributes its new product in which it retains rights and its existing library in traditional media and established markets outside of the United States and Canada to the extent of its rights, while actively pursuing new areas of exploitation. The Entertainment Group intends to market its library in (i) new international markets in which the multi-channel television industry has recently emerged or is in the early stages of development, and (ii) territories which have not been reached by privatized free television, cable television, home video and other traditional media, but where the industry is expected to develop in the future. The Entertainment Group will also explore opportunities to acquire and distribute new product in overseas markets, adding value to the library. Other strategies include the acquisition of foreign language programming for foreign distribution in combination with the English language library product. Landmark Theatre Group The Entertainment Group believes that its Landmark Theatre Group with, at December 31, 1996, 138 screens in 50 theaters, is the largest exhibitor of specialized motion picture and art films in the United States. The operation of these theaters provides the Entertainment Group with relatively stable cash flows and allows the Entertainment Group to participate in revenues from the exhibition of its films as well as films produced and distributed by others. The Entertainment Group 's strategy is to (i) expand in existing and new major markets through internal growth and acquisitions; (ii) upgrade and multiplex existing locations where there is demand for additional screens; and (iii) maximize revenue and cash flow from its existing theaters by capitalizing on the large demand for art and specialty films in the U.S. by continuing to reduce operating and overhead costs as a percentage of revenue. 21 The Entertainment Group currently operates theaters in 18 cities in California, Colorado, Louisiana, Massachusetts, Minnesota, Ohio, Texas, Washington and Wisconsin. The Entertainment Group emphasizes the exhibition of specialized motion pictures and art films and commercial films with literary and artistic components which appeal to the specialized film audience. The seating capacity for all theaters operated by the Entertainment Group is approximately 39,000, of which 56% is in theatres located in California. The following table summarizes the location and number of theaters and screens operated by the Entertainment Group: Location Theaters Screens Belmont, California 1 3 Berkeley, California 6 19 Los Angeles, California 3 7 Corona Del Mar, California 1 1 Palo Alto, California 4 6 Pasadena, California 1 1 Sacramento, California 2 6 San Diego, California 5 9 San Francisco, California 5 14 Denver, Colorado 3 8 New Orleans, Louisiana 1 4 Cambridge, Massachusetts 1 9 Minneapolis, Minnesota 2 6 Cleveland, Ohio 1 3 Dallas, Texas 1 3 Houston, Texas 2 6 Seattle, Washington 9 28 Milwaukee, Wisconsin 2 5 -- --- 50 138 The exhibition of first-run specialized motion pictures and art films is a niche in the film exhibition business that is distinct from the exhibition of higher budget, wide-release films. For the most part, specialized motion pictures and art films are marketed by different distributors and exhibited in different theatres than commercial films produced by the major studios. Exhibitors of wide-release films typically must commit a substantial percentage of its screens to a small number of films. The Entertainment Group typically show approximately 30 to 40 different films on its screens at any given time. In the normal course of its business, the Entertainment Group actively pursues opportunities to acquire or construct new theatres in promising locations and closes theaters that are not performing well or for which it may not be feasible to renew the lease. 22 Competition and Seasonality All aspects of the Entertainment Group's operations are conducted in a highly competitive environment. To the extent that the Entertainment Group seeks to distribute the films contained in its library or acquire or produce product, the Entertainment Group will need to compete with many other motion picture distributors, including the "majors," (including producers owned or affiliated with the majors) most of which are larger and have substantially greater resources and film libraries, as well as production capabilities and significantly broader access to production, distribution and exhibition opportunities. Many of the Entertainment Group's competitors have substantially greater assets and resources. By reason of their resources, these competitors may have access to programming that would not generally be available to the Entertainment Group and may also have the ability to market programming more extensively than the Entertainment Group. Distributors of theatrical motion pictures compete with one another for access to desirable motion picture screens, especially during the summer, holiday and other peak movie-going seasons, and several of the Entertainment Group's competitors in the theatrical motion picture distribution business have become affiliated with owners of chains of motion picture theatres. In addition, program suppliers of home video product compete for the open to buy dollars of video specialty stores and mass merchant retailers. A larger portion of these dollars are designated for "megahit" theatrically based sell-thru titles, video games and other entertainment media. The success of all the Entertainment Group's product is heavily dependent upon public taste, which is both unpredictable and susceptible to change. Although there are no other nationwide exhibitors of specialty motion pictures, the Entertainment Group faces direct competition in each market from local or regional exhibitors of specialized motion pictures and art films. To a lesser degree, the Entertainment Group also competes with other types of motion picture exhibitors. Other organizations, including the national and regional circuits, major studios, production companies, television networks and cable companies are or may become involved in the exhibition of films comparable to the type of films exhibited by the Entertainment Group. Many of these companies have greater financial and other resources than the Entertainment Group. As a result of new theater development and conversion of single-screen theaters to multiplexes, there is an increasing number of motion picture screens in the geographic areas in which the Entertainment Group operates. At the same time, many motion picture exhibitors have been merging or consolidating their operations, resulting in fewer competitors with an increased number of motion picture screens competing for the available pictures. This combination of factors may tend to increase competition for films that are popular with the general public. The Entertainment Group also competes with national and regional circuits and independent exhibitors with respect to attracting patrons and acquiring new theaters. United States Motion Picture Industry Overview The United States motion picture industry encompasses the production and theatrical exhibition of feature-length motion pictures and the subsequent distribution of such pictures in home video, television and other ancillary markets. The industry is dominated by the major studios, including Universal Pictures, Warner Bros. (including New Line Cinema), Twentieth Century Fox, Sony Pictures Entertainment (including Columbia Pictures, Tri-Star Pictures and Sony Classics), Paramount Pictures and The Walt Disney Company (including Buena Vista, Touchstone Pictures, Hollywood Pictures and Miramax), and MGM (including United Artists) which historically have produced and distributed the majority of theatrical motion pictures released annually in the United States. The major studios generally own their production studios and have national or worldwide distribution organizations. Major studios typically release films with production costs ranging from $20 million to $50 million or more and provide a continual source of motion pictures to the nation's theatre exhibitors. 23 In recent years, "independent" motion picture production companies played an important role in the production of motion pictures for the worldwide feature film market. The independents do not own production studios and have more limited distribution capabilities than the major studios, often distributing their product through "majors." Independents typically produce fewer motion pictures at substantially lower average production costs than major studios. Several of the more prominent independents, including Miramax and New Line, were acquired by large entertainment companies, giving them access to greater financial resources. Motion Picture Production and Financing. The production of a motion picture begins with the screenplay adaptation of a popular novel or other literary work acquired by the producer or the development of an original screenplay having its genesis in a story line or scenario conceived of or acquired by the producer. In the development phase, the producer typically seeks production financing and tentative commitments from a director, the principal cast members and other creative personnel. A proposed production schedule and budget also are prepared during this phase. Upon completing the screenplay and arranging financial commitments, pre-production of the motion picture begins. In this phase, the producer (i) engages creative personnel to the extent not previously committed; (ii) finalizes the filming schedule and production budget; (iii) obtains insurance and secures completion guarantees; (iv) if necessary, establishes filming locations and secures any necessary studio facilities and stages; and (v) prepares for the start of actual filming. Principal photography, the actual filming of the screenplay, may extend from six to twelve weeks or more, depending upon such factors as budget, location, weather and complications inherent in the screenplay. Following completion of principal photography, the motion picture is edited, optical, dialogue, music and any special effects are added, and voice, effects and music sound tracks and picture are synchronized during post-production. This results in the production of the negative from which the release prints of the motion picture are made. The cost of a theatrical motion picture produced by an independent production company for limited distribution ranges from approximately $4 million to $10 million as compared with an average of approximately $30 million for commercial films produced by major studios for wide release. Production costs consist of acquiring or developing the screenplay, film studio rental, cinematography, post-production costs and the compensation of creative and other production personnel. Distribution expenses, which consist primarily of the costs of advertising and release prints, are not included in direct production costs and vary widely depending on the extent of the release and nature of the promotional activities. Independent and smaller production companies generally avoid incurring substantial overhead costs by hiring creative and other production personnel and retaining the other elements required for pre-production, principal photography and post-production activities on a project-by-project basis. Unlike the major studios, the independents and smaller production companies also typically finance their production activities from discrete sources. Such sources include bank loans, pre-sales, co-productions, equity offerings and joint ventures. Independents generally attempt to complete their financing of a motion picture production prior to commencement of principal photography, at which point substantial production costs begin to be incurred and must be paid. Pre-sales are used by independent film companies and smaller production companies to finance all or a portion of the direct production costs of a motion picture, thereby limiting such companies' financial exposure to the project. Pre-sales consist of fees paid to the producer by third parties in return for the right to exhibit the motion picture when completed in theaters or to distribute it in home video, television, foreign or other ancillary markets. Producers with distribution capabilities may retain the right to distribute the completed motion picture either domestically or in one or more foreign markets. Other producers may separately license theatrical, home video, television, foreign and all other distribution rights among several licensees. 24 Both major studios and independent film companies often acquire motion pictures for distribution through a customary industry arrangement known as a negative pickup, under which the studio or independent film company agrees to acquire from an independent production company all rights to a film upon completion of production. The independent production company normally finances production of the motion picture pursuant to financing arrangements with banks or other lenders in which the lender is granted a security interest in the film and the independent production company's rights under its arrangement with the studio or independent. When the studio or independent picks up the completed motion picture, it assumes the production financing indebtedness incurred by the production company in connection with the film. In addition, the independent production company is paid a production fee and generally is granted a participation in the net profits from distribution of the motion pictures. Motion Picture Distribution. Motion picture distribution encompasses the distribution of motion pictures in theaters and in ancillary markets such as home video, pay-per-view, pay television, broadcast television, foreign and other markets. The distributor typically acquires rights from the producer to distribute a motion picture in one or more markets. For its distribution rights, the distributor typically agrees to advance the producer a certain minimum royalty or guarantee, which is to be recouped by the distributor out of revenues generated from the distribution of the motion picture and is generally nonrefundable. The producer also is entitled to receive a royalty equal to an agreed-upon percentage of all revenues received from distribution of the motion picture in excess of revenues covered by the royalty advance. Theatrical Distribution. The theatrical distribution of a motion picture involves the manufacture of release prints, the promotion of the picture through advertising and publicity campaigns and the licensing of the motion picture to theatrical exhibitors. The size and success of the promotional advertising campaign can materially affect the revenues realized from the theatrical release of a motion picture. The costs incurred in connection with the distribution of a motion picture can vary significantly, depending on the number of screens on which the motion picture is to be exhibited and the ability to exhibit motion pictures during peak exhibition seasons. Competition among distributors for theaters during such peak seasons is great. Similarly, the ability to exhibit motion pictures in the most popular theaters in each area can affect theatrical revenues. The distributor and theatrical exhibitor generally enter into a license agreement providing for the exhibitor's payment to the distributor of a percentage of the box office receipts for the exhibition period, in some cases after deduction of the theater's overhead, or a flat negotiated weekly amount. The distributor's percentage of box office receipts generally ranges from an effective rate of 35% to over 50%, depending upon the success of the motion picture at the box office and other factors. Distributors carefully monitor the theatres which have licensed the picture to ensure that the exhibitor promptly pays all amounts due the distributor. Substantial delays in collections are not unusual. Motion pictures may continue to play in theaters for up to six months following their initial release. Concurrently with their release in the United States, motion pictures generally are released in Canada and may also be released in one or more other foreign markets. Typically, the motion picture then becomes available for distribution in other markets as follows: Months After Approximate Initial Release Release Period Domestic home video 4-6 months -- Domestic pay-per-view 6-9 months 3 months Domestic pay television 10-18 months 12-21 months Domestic network or basic cable 30-36 months 18-36 months Domestic syndication 30-36 months 3-15 years Foreign home video 6-12 months -- Foreign television 18-24 months 3-12 years 25 Home Video. Home video distribution consists of the promotion and sale of videocassettes and videodiscs to local, regional and national video retailers which rent or sell such products to consumers primarily for home viewing. Pay-Per-View. Pay-per-view television allows cable television subscribers to purchase individual programs, including recently released motion pictures and live sporting, music or other events, on a "per use" basis. The subscriber fees are typically divided among the program distributor, the pay-per-view operator and the cable system operator. Foreign Markets. In addition to their domestic distribution activities, some motion picture distributors generate revenues from distribution of motion pictures in foreign theaters, home video, television and other foreign markets. There has been a dramatic increase in recent years in the worldwide demand for filmed entertainment. This growth is largely due to the privatization of television stations, introduction of direct broadcast satellite services, growth of home video and increased cable penetration. In many foreign markets, a film company may also enter into a pre-sale distribution arrangement whereby a third party distributor in a foreign territory pays an advance to the film company equal to a specified percentage of a film's budget. The third party distributor is responsible for all marketing and distribution costs in such territory, recoups its advance, costs, a fee and a portion of the film receipts and pays an overage to the film company. Under this type of arrangement, the third party distributor is responsible for any shortfalls in recoupment. In these arrangements, the third party distributor receives most distribution rights to films in their territory for a period of years. Some arrangements contain carve-outs of television rights which the film company then sells directly to television programmers (sometimes in a separate similar arrangement). These arrangements provide film companies with upside potential through participations in overages. In an alternative arrangement in other foreign markets, a third party distributor will fund all marketing and distribution expenses up front, but the film company is responsible for reimbursing such expenditures if they are not recouped by the third party distributor through film receipts. The third party distributor sells the film to theatrical exhibitors, video stores and sometimes television programming outlets in the territory. The distributor receives a small fee on the film's gross receipts, recoups its marketing and distribution expenses and remits the balance of the receipts to the film company. Pay Television. Pay television allows cable television subscribers to view HBO, Cinemax, Showtime, The Movie Channel, Encore and other pay television network programming offered by cable system operators for a monthly subscription fee. The pay television networks acquire a substantial portion of their programming from motion picture distributors. Broadcast and Basic Cable Television. Broadcast television allows viewers to receive, without charge, programming broadcast over the air by affiliates of the major networks (ABC, CBS, NBC and Fox), independent television stations and cable and satellite networks and stations. In certain areas, viewers may receive the same programming via cable transmission for which subscribers pay a basic cable television fee. Broadcasters or cable systems operators pay fees to distributors for the right to air programming a specified number of times. Other Markets. Revenues also may be derived from the distribution of motion pictures to airlines, schools, libraries, hospitals and the military, licensing of rights to perform musical works and sound recordings embodied in a motion picture, and rights to manufacture and distribute games, dolls, clothing and similar commercial articles derived from characters or other elements of a motion picture. 26 Emerging Technologies Video-On-Demand. Perhaps the most important advance in the last five years has been the development of the video-on-demand technology through the creation of digital video compression. Digital compression involves the conversion of the analog television signal into digital form and the compression of more than one video signal into one standard channel for delivery to customers. Compression technology will be applied not only to cable but to satellite and over-the-air broadcast transmission systems. This offers the opportunity to dramatically expand the capacity of current transmission systems which is expected to create demand for the Company's product. DVD. Another new technology that has emerged is digital variable disc or "DVD." DVD is an MPEG-encoded, multi-layered, high density compact disc. Similar in size to an audio compact disc ("CD"), DVDs can hold up to four two-hour movies but take up less space than a videotape and do not degrade over time. Just as CDs have replaced records as the dominant medium for prerecorded music, DVD is expected to become a widely-accepted format for home video programming. The Company believes that it will experience additional demand for its library product, particularly sell-through product, as DVD equipment becomes more prevalent. DTH. Direct to Home. Recently, a number of international, well-capitalized companies have launched DTH systems in the United States (such as Direct TV, USSB, ASkyB) and in other major markets, including Japan (such as Direct TV, Perfect TV, and JSKYB). Each of these systems will require programming for their multi-channel systems, thereby creating additional demand for the Entertainment Group's library. Snapper Snapper manufactures Snapper(R) brand power lawn and garden equipment for sale to both residential and commercial customers. The residential equipment includes self-propelled and push-type walk behind lawnmowers, rear engine riding lawnmowers, garden tractors, zero turn radius lawn equipment, garden tillers, snow throwers, and related parts and accessories. The commercial mowing equipment and mid-mount commercial equipment includes commercial quality self-propelled walk-behind lawnmowers, and wide area and front-mount zero turn radius lawn equipment. Snapper products are premium-priced, generally selling at retail from $300 to $8,500, and are currently sold through three types of distribution networks. Snapper sells and supports directly a 4,000 dealer network for the distribution of its products. Snapper also has a two-step distribution process whereby it sells to eight distributors that in turn service approximately 2,000 dealers throughout the United States. The third type of distribution done by Snapper is to the Home Depot retail chain. A limited selection of residential walk-behind lawnmowers and rear engine riding lawnmowers are sold at approximately 300 Home Depot locations. A large percentage of the residential sales of lawn and garden equipment are made during a seventeen-week period from early spring to mid-summer. Although some sales are made to the dealers and distributors prior to this selling season, the largest volume of sales to the ultimate consumer are made during this time. The main sales revenues during the late fall and winter periods are related to snowthrower shipments. Snapper has an agreement with a financial institution which makes floor plan-financing for Snapper products available to dealers. This agreement provides financing for dealer inventories and accelerates cash flow to Snapper. Under the terms of this agreement, a default in payment by one of the dealers on the program is non-recourse to Snapper. If there is a default by a dealer and the equipment is retained in the dealer inventory, Snapper is obligated to repurchase any such new and unused equipment. Snapper also makes available through General Electric Credit Corporation a retail customer revolving credit plan. This credit plan allows consumers to pay for Snapper products. Consumers also receive Snapper credit cards which can be used to purchase additional Snapper products. 27 Snapper manufactures its products in McDonough, Georgia at facilities totaling approximately 1,000,000 square feet. Excluding engines and tires, Snapper manufactures a substantial portion of the component parts for its products. Most of the parts and material for Snapper's products are commercially available from a number of sources. During the three years ended December 31, 1996, Snapper has spent an average of $3.0 million per year for research and development. Although it holds several design and mechanical patents, Snapper is not dependent upon such patents, nor does it believe that patents play an important role in its business. Snapper does believe, however, that the registered trademark Snapper(R) is an important asset in its business. Snapper walk-behind mowers are subject to Consumer Product Safety Commission safety standards and are designed and manufactured in accordance therewith. The lawn and garden industry is highly competitive with the competition being based on price, image, quality, and service. Although no one company dominates the market, the Company believes that Snapper is a significant manufacturer of lawn and garden products. Approximately 50 companies manufacture products that compete with Snapper's. Snapper's principal brand name competitors in the sale of lawn and garden equipment include The Toro Company, Lawn-Boy (a product of The Toro Company), Sears, Roebuck and Co., Deere and Company, Ariens Company, Honda Corporation, Murray Ohio Manufacturing, American Yard Products, Inc., MTD Products, Inc. and Simplicity Manufacturing, Inc. Investment in RDM Sports Group, Inc. ("RDM") In December 1994, the Company acquired 19,169,000 shares of RDM common stock, or approximately 39% of the outstanding RDM common stock, in exchange for all of the issued and outstanding capital stock of four of its wholly-owned subsidiaries (the "Exchange Transaction"). RDM, through its operating subsidiaries, is a leading manufacturer of fitness equipment and toy products in the United States. RDM's common stock is listed on the New York Stock Exchange. As of December 31, 1996, the closing price per share of RDM common stock was $1 1/4 and the quoted market value of the Company's investment in Roadmaster was approximately $24.0 million. As disclosed in Amendment No. 1 to its Schedule 13D relating to RDM, filed with the SEC on March 1, 1996, MMG intends to dispose of its investment in RDM. In connection with the Exchange Transaction, the Company, RDM and certain officers of RDM entered into a Shareholders Agreement pursuant to which, among other things, the Company obtained the right to designate four individuals to serve on RDM's nine-member Board of Directors, subject to certain reductions. In addition, the Shareholders Agreement generally grants RDM a right of first refusal with respect to any proposed sale by the Company of any shares of RDM common stock received by the Company in the Exchange Transaction for as long as the MMG Designated Directors have been nominated and elected to the Board of Directors of RDM. Such right of first refusal will not, however, apply to any proposed sale, transfer or assignment of such shares to any persons who would, after consummation of such transaction, own less than 10% of the outstanding shares of RDM common stock or to any sale of such shares pursuant to a registration statement filed under the Securities Act, provided the Company has used its reasonable best efforts not to make any sale pursuant to such registration statement to any single purchaser or "Acquiring Person" who would own 10% or more of the outstanding shares of RDM common stock after the consummation of such transaction. "Acquiring Person" generally is defined in the Shareholders Agreement to mean any person or group which together with all affiliates is the beneficial owner of 5% or more of the outstanding shares of RDM common stock. 28 Also in connection with the Exchange Transaction, the Company and RDM entered into a Registration Rights Agreement (the "Registration Rights Agreement") under which RDM agreed to register such shares ("Registrable Stock") at the request of the Company or its affiliates or any transferee who acquires at least 1,000,000 shares of the RDM common stock issued to the Company in the Exchange Transaction. Under the Registration Rights Agreement, registration may be required at any time during a ten-year period beginning as of the closing date of the Exchange Transaction (the "Registration Period") by the holders of at least 50% of the Registrable Stock if a "long-form" registration statement (i.e., a registration statement on Form S-1, S-2 or other similar form) is requested or by the holders of Registrable Stock with a value of at least $500,000 if a "short-form "registration statement (i.e., a registration statement on Form S-3 or other similar form) is requested. RDM is required to pay all expenses incurred (other than the expenses of counsel, if any, for the holders of Registrable Stock, the expenses of underwriter's counsel, and underwriting fees) for any two registrations requested by the holders of Registrable Stock during the Registration Period. RDM will become obligated to pay the expenses of up to two additional registrations if RDM is not eligible to use a short-form registration statement to register the Registrable Stock at any time during the Registration Period. All other registrations will be at the expense of the holders of the Registrable Stock. RDM will have the right at least once during each twelve-month period to defer the filing of a demand registration statement for a period of up to 90 days after request for registration by the holders of the requisite number of shares of Registrable Stock. The Company has requested that RDM register its shares of RDM common stock pursuant to the terms of the Registration Rights Agreement. Environmental Protection Snapper's manufacturing plant is subject to federal, state and local environmental laws and regulations. Compliance with such laws and regulations has not, and is not expected to, materially affect Snapper's competitive position. Snapper's capital expenditures for environmental control facilities, its incremental operating costs in connection therewith and Snapper's environmental compliance costs were not material in 1996 and are not expected to be material in future years. The Company has agreed to indemnify a former subsidiary of the Company for certain obligations, liabilities and costs incurred by the subsidiary arising out of environmental conditions existing on or prior to the date on which the subsidiary was sold by the Company in 1987. Since that time, the Company has been involved in various environmental matters involving property owned and operated by the subsidiary, including clean-up efforts at landfill sites and the remediation of groundwater contamination. The costs incurred by the Company with respect to these matters have not been material during any year through and including the fiscal year ended December 31, 1996. As of December 31, 1996, the Company had a remaining reserve of approximately $1.3 million to cover its obligations to its former subsidiary. During 1995, the Company was notified by certain potentially responsible parties at a superfund site in Michigan that the former subsidiary may also be a potentially responsible party at the superfund site. The former subsidiary's liability, if any, has not been determined but the Company believes that such liability will not be material. 29 The Company, through a wholly-owned subsidiary, owns approximately 17 acres of real property located in Opelika, Alabama (the "Opelika Property"). The Opelika Property was formerly owned by Diversified Products Corporation, a former subsidiary of the Company ("DP"), and was transferred to a wholly-owned subsidiary of the Company in connection with the Exchange Transaction. DP previously used the Opelika Property as a storage area for stockpiling cement, sand, and mill scale materials needed for or resulting from the manufacture of exercise weights. In June 1994, DP discontinued the manufacture of exercise weights and no longer needed to use the Opelika Property as a storage area. In connection with the Exchange Transaction, RDM and the Company agreed that the Company, through a wholly-owned subsidiary, would acquire the Opelika Property, together with any related permits, licenses, and other authorizations under federal, state and local laws governing pollution or protection of the environment. In connection with the closing of the Exchange Transaction, the Company and RDM entered into an Environmental Indemnity Agreement (the "Indemnity Agreement") under which the Company agreed to indemnify RDM for costs and liabilities resulting from the presence on or migration of regulated materials from the Opelika Property. The Company's obligations under the Indemnity Agreement with respect to the Opelika Property are not limited. The Indemnity Agreement does not cover environmental liabilities relating to any property now or previously owned by DP except for the Opelika Property. On January 22, 1996, the Alabama Department of Environmental Management ("ADEM") wrote a letter to the Company stating that the Opelika Property contains an "unauthorized dump" in violation of Alabama environmental regulations. The letter from ADEM requires the Company to present for ADEM's approval a written environmental remediation plan for the Opelika Property. The Company has retained an environmental consulting firm to develop an environmental remediation plan for the Opelika Property. In 1997, the Company received the consulting firm's report. The Company has conducted a grading and capping in accordance with plan and has reported to ADEM that the work was completed and the Company will undertake to monitor the Property on a quarterly basis. Since quarterly testing will be conducted the Company believes that the reserves of approximately $1.8 million will be adequate to cover any further cost of remediation if required. Employees As of March 7, 1997, the Company had approximately 2,600 regular employees. Approximately 1,000 of the employees are part-time employees in the Entertainment Group's theatre business. In addition, approximately 850 employees were represented by unions under collective bargaining agreements. In general, the Company believes that its employee relations are good. Certain of the Entertainment Group's subsidiaries are signatories to various agreements with unions that operate in the entertainment industry. In addition, a substantial number of the artists and talent and crafts people involved in the motion picture and television industry are represented by trade unions with industry-wide collective bargaining agreements. Segment and Geographic Data Business segment data and information regarding the Company's foreign revenues by geographic area are included in notes 8 and 13 of the "notes to consolidated financial statements" included in Item 8 hereof. 30 Item 2. Properties The following table contains a list of the Company's principal properties. Number ------ Description Owned Leased Location - ----------- ----- ------ -------- The Entertainment Group: Office space - 4 Los Angeles, California Sales office - 1 New York, New York The Communications Group: Office space - 1 Stamford, Connecticut Office space - 1 Moscow, Russia Office space - 1 Vienna, Austria Office space - 1 Hong Kong Office space - 1 New York, New York General Corporate: Office space - 1 East Rutherford, New Jersey Snapper: Manufacturing plant 1 - McDonough, Georgia Distribution facility - 1 McDonough, Georgia Distribution facility - 1 Dallas, Texas Distribution facility - 1 Greenville, Ohio Three of Orion's offices will be combined into one facility during 1997. Of Landmark's 50 theaters, four and one-half are owned and the remainder are located in leased or subleased premises. Landmark owns the Seven Gables Theatre, the Crest Theatre, the Guild Theatres and a one-half interest in the Harvard Exit Theatre, all in Seattle, Washington, and it owns the Sacramento Inn Theater in Sacramento, California. The leased and subleased theaters have remaining terms ranging from two months to 30 years or more and, in some cases, renewal options for additional periods of from five to 20 years. The renewal options generally provide for increased rent. Rent is sometimes calculated as a percentage of sales or profits, subject to an annual minimum. Assuming the exercise of all the options, ten leases will expire between January 1, 1997 and December 31, 1998 and the balance thereafter. The Company's management believes that the facilities listed above are generally adequate and satisfactory for their present usage and are generally well utilized. 31 Item 3. Legal Proceedings Fuqua Industries, Inc. Shareholder Litigation Between February 25, 1991 and March 4, 1991, three lawsuits were filed against the Company (formerly named Fuqua Industries, Inc.) in the Delaware Chancery Court. On May 1, 1991, these three lawsuits were consolidated by the Delaware Chancery Court in re Fuqua Industries, Inc. Shareholders Litigation, Civil Action No. 11974. The named defendants are certain current and former members of the Company's Board of Directors and certain former members of the Board of Directors of Intermark, Inc. ("Intermark"). Intermark is a predecessor to Triton Group Ltd., which at one time owned approximately 25% of the outstanding shares of the Company's Common Stock. The Company was named as a nominal defendant in this lawsuit. The action was brought derivatively in the right of and on behalf of the Company and purportedly was filed as a class action lawsuit on behalf of all holders of the Company's Common Stock other than the defendants. The complaint alleges, among other things, a long-standing pattern and practice by the defendants of misusing and abusing their power as directors and insiders of the Company by manipulating the affairs of the Company to the detriment of the Company's past and present stockholders. The complaint seeks (i) monetary damages from the director defendants, including a joint and several judgment for $15.7 million for alleged improper profits obtained by Mr. J.B. Fuqua in connection with the sale of his shares in the Company to Intermark; (ii) injunctive relief against the Company, Intermark and its former directors, including a prohibition against approving or entering into any business combination with Intermark without specified approval; and (iii) costs of suit and attorneys' fees. On December 28, 1995, the plaintiffs filed a consolidated second amended derivative and class action complaint, purporting to assert additional facts in support of their claim regarding an alleged plan, but deleting their prior request for injunctive relief. On January 31, 1996, all defendants moved to dismiss the second amended complaint and filed a brief in support of that motion. A hearing regarding the motion to dismiss was held on November 6, 1996; the decision relating to the motion is pending. Michael Shores v. Samuel Goldwyn Company On May 20, 1996 a purported class action lawsuit against Goldwyn and its directors was filed in the Superior Court of the State of California for the County of Los Angeles in Michael Shores v. Samuel Goldwyn Company. et al., case no. BC 150360. In the complaint, plaintiff alleged that Goldwyn's Board of Directors breached its fiduciary duties to the stockholders of Goldwyn by agreeing to sell Goldwyn to the Company at a premium, yet providing Mr. Samuel Goldwyn, Jr., the Samuel Goldwyn Family Trust and Mr. Meyer Gottlieb with additional consideration, and sought to enjoin consummation of the Goldwyn Merger. The Company believes that the suit is without merit and intends to vigorously defend such action. Indemnification Agreements In accordance with Section 145 of the General Corporation Law of the State of Delaware, pursuant to the Company's Restated Certificate of Incorporation, the Company has agreed to indemnify its officers and directors against, among other things, any and all judgments, fines, penalties, amounts paid in settlements and expenses paid or incurred by virtue of the fact that such officer or director was acting in such capacity to the extent not prohibited by law. Litigation Relating to the November 1 Merger Three stockholder suits relating to the November 1 Merger were filed in the Delaware Chancery Court prior to the consummation of such mergers. Set forth below is a brief description of the status of such litigations. 32 Jerry Krim v. John W. Kluge, Silvia Kessel, Joel R. Packer, Michael I. Sovern, Raymond L. Steele, Stuart Subotnick, Arnold L. Wadler, Stephen Wertheimer, Leonard White and Orion Pictures Corporation (Delaware Chancery Court, C.A. No. 13721); complaint filed September 2, 1994. Orion and each of its directors were named as defendants in this purported class action lawsuit, which alleged that Orion's Board of Directors failed to use the required care and diligence in considering the November 1 Merger and sought to enjoin the consummation of such merger. The lawsuit further alleged that as a result of the actions of Orion's directors, Orion's stockholders would not receive the fair value of Orion's assets and business in exchange for their Orion Common Stock in the November 1 Merger. Harry Lewis v. John W. Kluge, Leonard White, Stuart Subotnick, Silvia Kessel, Joel R. Packer, Michael I. Sovern, Raymond L. Steele, Arnold L. Wadler, Stephen Wertheimer, The Actava Group, Inc. and Orion Pictures Corp. (Delaware Chancery Court, C.A. No. 14234); complaint filed April 17, 1995. Orion, each of its directors and Actava were named in this purported class action lawsuit which was filed after the execution of the initial merger agreement relating to the November 1 Merger. The complaint contained similar allegations and sought similar relief to the Krim case described above. On January 22, 1996, the parties to these two lawsuits executed a Memorandum of Understanding embodying a tentative settlement agreement. In the tentative settlement agreement, the plaintiffs accept the September 27, 1995 amended and restated merger agreement relating to the November 1 Merger as full settlement of all claims that were asserted or could have been asserted in such litigations. Counsel for the plaintiffs concluded confirmatory discovery during 1996 and entered into a stipulated and agreement of complaints settlement and released dated January 24, 1997. On January 31, 1997, the court ordered a settlement hearing regarding the settlement to be held on April 23, 1997 to determine the fairness, reasonableness and adequacy of the settlement, whether the action should be class action and whether the court should approve the settlement. On March 11, 1997, the Company mailed to the members of the class a notice of pending class action along with the proposed settlement to afford class members the ability to opt out of the class. James F. Sweeney, Trustee of Frank Sweeney Defined Benefit Plan Trust v. John D. Phillips, Frederick B. Beilstein, III, John E. Aderhold, Michael B. Cahr, J.M. Darden, III, John P. Imlay, Jr., Clark A. Johnson, Anthony F. Kopp, Richard Nevins, Carl E. Sanders, Orion Picture Corporation, International Telcell, Inc., Metromedia International, Inc. and MCEG Sterling Inc. (Delaware Chancery Court, C.A. No. 13765); complaint filed September 23, 1994. This class action lawsuit was filed by stockholders of the Company (then known as The Actava Group, Inc.) against the Company and its directors, and against each of Orion, MITI and Sterling, the other parties to the November 1 Merger. The complaint alleges that the terms of the November 1 Merger constitute an overpayment by the Company for the assets of Orion and, accordingly, would result in a waste of the Company's assets. The complaint further alleges that Orion, MITI and Sterling each knowingly aided, abetted and materially assisted the Company's directors in breach of their fiduciary duties to the Company's stockholders. On November 23, 1994, the Company and its directors filed a motion to dismiss the complaint. The plaintiff never responded to the motion to dismiss. On February 22, 1996, however, the plaintiff filed a status report with the Court of Chancery in Delaware indicating that the case is moot but that the plaintiff intends to pursue an application for fees and expenses. The parties entered into a settlement, which was approved by the court concerning the application for fees, which was filed in April 1996. In October, 1996 the Company notified the provisional class of the settlement and provided such persons the opportunity to object to the dismissal of the case or the settlement concerning the fees. Item 4. Submission of Matters to a Vote of Security Holders No matters were submitted to a vote of the Company's stockholders, through the solicitation of proxies or otherwise, during the fourth quarter of the year ended December 31, 1996. 33 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 - ---- --- ------ ---------- John W. Kluge 82 Chairman November 1995 Stuart Subotnick 55 Vice Chairman, President and Chief November 1995 (Vice Chairman) Executive Officer December 1996 (President and Chief Executive Officer) Silvia Kessel 46 Executive Vice President, Chief November 1995 Financial Officer and Treasurer Arnold L. Wadler 53 Executive Vice President, General November 1995 Counsel and Secretary Robert A. Maresca 62 Senior Vice President (Chief November 1995 Accounting Officer)
Mr. Kluge has served as Chairman of the Board of Directors of the Company since November 1, 1995 and as Chairman of the Board of Orion since 1992. In addition, Mr. Kluge has served as Chairman and President of Metromedia Company ("Metromedia") and its predecessor-in-interest, Metromedia, Inc. for over five years. Mr. Kluge is also a director of The Bear Stearns Companies, Inc., Occidental Petroleum Corporation and Conair Corporation. Mr. Kluge is Chairman of the Company's Executive Committee. Mr. Subotnick has served as Vice Chairman of the Board of Directors of the Company since the November 1, 1995 and President and Chief Executive Officer since December 4, 1996 and as Vice Chairman of the Board of Orion since November 1992. In addition, Mr. Subotnick has served as Executive Vice President of Metromedia and its predecessor-in-interest, Metromedia, Inc., for over five years. Mr. Subotnick is also a director of Carnival Cruise Lines, Inc. and RDM Sports Group, Inc. Mr. Subotnick is Chairman of the Audit Committee and a member of the Executive and Nominating Committees of the Company. Ms. Kessel has served as Executive Vice President, Chief Financial Officer and Treasurer since August 29, 1996 and as Senior Vice President, Chief Financial Officer and Treasurer of MMG since November 1, 1995 and as Executive Vice President of Orion since January 1993, Senior Vice President of Metromedia since 1994 and President of Kluge & Company since January 1994. Prior to that time, Ms. Kessel served as Senior Vice President of Orion from June 1991 to November 1992 and Managing Director of Kluge & Company (and its predecessor) from April 1990 to January 1994. Ms. Kessel is also a director of RDM Sports Group, Inc. Ms. Kessel is a member of the Nominating Committee of the Company. Mr. Wadler has served as Executive Vice President, General Counsel and Secretary since August 29, 1996 and Senior Vice President, General Counsel and Secretary since November 1, 1995, as a Director of Orion since 1991 and as Senior Vice President, Secretary and General Counsel of Metromedia and its predecessor-in-interest, Metromedia, Inc., for over five years. Mr. Wadler is Chairman of the Nominating Committee of the Company. Mr. Maresca has served as a Senior Vice President and Chief Accounting Officer of the Company since November 1, 1995. Mr. Maresca has served as a Senior Vice President-Finance of Metromedia and its predecessor-in-interest, Metromedia, Inc. for over five years. 34 PART II Item 5. Market for Registrant's Common Stock and Related Stockholder Matters. Since November 2, 1995, the Common Stock has been listed and traded on the American Stock Exchange and the Pacific Stock Exchange (the "AMEX" and "PSE", respectively) under the symbol "MMG" and "MIG", respectively. Prior to November 2, 1995, the Common Stock was listed and traded on both the New York Stock Exchange (the "NYSE") and the PSE under the symbol "ACT." The following table sets forth the quarterly high and low closing sales prices per share for the Company's Common Stock according to the NYSE Composite Tape for the period from January 1, 1995 through November 1, 1995 and the quarterly high and low closing sales prices per share of the Company's Common Stock as reported by the AMEX from November 2, 1995 through the present. Market Price of Common Stock Quarters Ended 1996 1995 - -------------- ---- ---- High Low High Low ----- --- ---- --- March 31..................... $ 14 1/4 $11 1/2 $ 11 $ 8 3/4 June 30...................... 16 5/8 12 1/4 13 3/8 8 5/8 September 30................. 12 1/2 9 1/2 19 1/8 13 1/4 December 31.................. 12 1/8 8 7/8 18 7/8 13 3/4 Holders of Common Stock are entitled to such dividends as may be declared by the Board of Directors and paid out of funds legally available for the payment of dividends. The Company has not paid a dividend to its stockholders since the dividend declared in the fourth quarter of 1993, and has no plans to pay cash dividends on the Common Stock in the foreseeable future. The Company intends to retain earnings to finance the development and expansion of its businesses. The decision of the Board of Directors as to whether or not to pay cash dividends in the future will depend upon a number of factors, including the Company's future earnings, capital requirements, financial condition, and the existence or absence of any contractual limitations on the payment of dividends. The Company's ability to pay dividends is limited because the Company operates as a holding company, conducting its operations solely through its subsidiaries. Certain of the Company's subsidiaries' existing credit arrangements contain, and it is expected that their future arrangements will similarly contain, substantial restrictions on dividend payments to the Company by such subsidiaries. See Item 7 -- "Management's Discussion and Analysis of Financial Condition and Results of Operations." As of March 24, 1997, there were approximately 7,790 record holders of Common Stock. The last reported sales price for the Common Stock on such date was $ 9 7/16 per share as reported by the American Stock Exchange. 35 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. 36 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations The following discussion should be read in conjunction with the Company's consolidated financial statements and related notes thereto and the "Business" section included as Item 1 herein. General On November 1, 1995 (the "Merger Date"), Orion, MITI, the Company and MCEG Sterling Incorporated ("Sterling") consummated the November 1 Merger. In connection with the November 1 Merger, the Company changed its name from "The Actava Group Inc." ("Actava") to "Metromedia International Group, Inc." ("MMG"). For accounting purposes only, Orion and MITI have been deemed to be the joint acquirers of Actava and Sterling. The acquisition of Actava and Sterling has been accounted for as a reverse acquisition. As a result of the reverse acquisition, the historical financial statements of the Company for periods prior to the November 1 Merger are the combined financial statements of Orion and MITI, rather than Actava's. The operations of Actava and Sterling have been included in the accompanying consolidated financial statements from November 1, 1995, the date of acquisition. During 1995, the Company adopted a formal plan to dispose of Snapper, Inc. ("Snapper"), a wholly-owned subsidiary of the Company, and as a result, Snapper was classified as an asset held for sale and the results of its operations were not included in the consolidated results of operations of the Company from November 1, 1995 to October 31, 1996. Subsequently, the Company announced its intention not to continue to pursue its previously adopted plan to dispose of Snapper and to actively manage Snapper to maximize its long term value to the Company. The operations of Snapper are included in the accompanying consolidated financial statements as of November 1, 1996. In addition, at November 1, 1995 the Company's investment in RDM Sports Group, Inc. (formerly Roadmaster Industries, Inc., "RDM") was deemed to be a non-strategic asset and is included in the accompanying consolidated financial statements as a discontinued operation and an asset held for sale. The Company intends to dispose of its RDM stock during 1997. The business activities of the Company consist of three business segments: (i) the development and operation of communications businesses, which include wireless cable television, paging services, radio broadcasting, and various types of telephony services, (ii) the production and distribution in all media of motion pictures, television programming and other filmed entertainment product and the exploitation of its library of over 2,200 feature film and television titles and (iii) the manufacture of lawn and garden products through Snapper. Communications Group The Company, through the Communications Group, is the owner of various interests in Joint Ventures that are currently in operation or planning to commence operations in certain republics of the former Soviet Union and in Eastern European and other emerging markets. The Joint Ventures currently offer wireless cable television, radio paging systems, radio broadcasting, and various types of telephony services including trunked mobile radio, international toll calling and wireless telephony services. Joint ventures are principally entered into with governmental agencies or ministries under the existing laws of the respective countries. 37 The consolidated financial statements include the accounts and results of operations of the Communications Group, its majority owned and controlled Joint Ventures, CNM Paging, Radio Juventas, Radio Skonto, Romsat, SAC/Radio 7, Vilnius Cable and Protocall Ventures Ltd., and its subsidiaries. The following table lists the Communications Group's majority owned and controlled Joint Ventures at September 30, 1996:
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. Investments in other companies and joint ventures which are not majority owned, or in which the Communications Group does not control, but exercises significant influence, have been accounted for using the equity method. Investments of the Communications Group or its consolidated subsidiaries over which significant influence is not exercised are carried under the cost method. See note 8 to the consolidated financial statements, "Investments in and Advances to Joint Ventures", for these Joint Ventures and their summary financial information. Entertainment Group The Entertainment Group consists of Orion and, as of July 2, 1996, Goldwyn and MPCA and their respective subsidiaries. Until November 1, 1995, Orion operated under certain agreements entered into in connection with the terms of its Modified Third Amended Joint Consolidated Plan of Reorganization (the "Plan"), which severely limited the Entertainment Group's ability to finance and produce additional feature films. Therefore, the Entertainment Group's primary activity prior to the November 1 Merger was the ongoing distribution of its library of theatrical motion pictures and television programming. The Entertainment Group believes the lack of a continuing flow of newly produced theatrical product while operating under the Plan adversely affected its results of operations. As a result of the removal of the restrictions on the Entertainment Group to finance, produce, and acquire entertainment products in connection with the November 1 Merger, the Entertainment Group has begun to produce, acquire, and release new theatrical product. In addition, the Entertainment Group operates a movie theater circuit. Theatrical motion pictures are produced initially for exhibition in theaters in the United States and Canada. Foreign theatrical exhibition generally begins within the first year after initial release. Home video distribution in all territories usually begins six to twelve months after theatrical release in that territory, with pay television exploitation beginning generally six months after initial home video release. Exhibition of the Company's product on network and on other free television outlets begins generally three to five years from the initial theatrical release date in each territory. 38 Snapper Snapper manufacturers Snapper(R) brand premium-priced power lawnmowers, lawn tractors, garden tillers, snowthrowers and related parts and accessories. The lawnmowers include rear engine riding mowers, front engine riding mowers or lawn tractors, and self-propelled and push-type walk-behind mowers. Snapper also manufactures a line of commercial lawn and turf equipment under the Snapper brand. Snapper provides lawn and garden products through distribution channels to domestic and foreign retail markets. The following table sets forth the operating results and financial condition of the Company's entertainment, communications and lawn and garden products segments. METROMEDIA INTERNATIONAL GROUP Segment Information Management's Discussion and Analysis Table (in thousands)
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) ========= ========= =========
39 MMG Consolidated - Results of Operations Year ended December 31, 1996 Compared to Year Ended December 31, 1995. During the year ended December 31, 1996 ("calendar 1996"), the Company reported a loss from continuing operations of $94.4 million, a loss from discontinued operations of $16.3 million and a loss on extinguishment of debt of $4.5 million, resulting in a net loss of $115.2 million. This compares to a loss from continuing operations of $87.0 million, a loss from discontinued operations of $293.6 million and a loss on extinguishment of debt of $32.4 million, resulting in a net loss of $413.0 million for the year ended December 31, 1995 ("calendar 1995"). The loss from continuing operations increased by $7.4 million as a result of increases in the operating losses at the Communications Group, corporate overhead and the consolidation of Snapper losses as of November 1, 1996, which were partially offset by a decrease in the operating losses at the Entertainment Group. The calendar 1996 loss from discontinued operations and extraordinary item is attributable to the writedown of the investment in RDM to its net realizable value and the loss associated with the refinancing of the Orion debt facility as part of the Goldwyn and MPCA acquisition, respectively. The calendar 1995 loss from discontinued operations represents the writedown of the portion of the purchase price of the Company allocated to Snapper on November 1, 1995 to its net realizable value. The extraordinary loss relating to the early extinguishment of debt in calendar 1995 was a result of the repayment and termination of the Plan debt, which was refinanced with funds provided under the Old Orion Credit Facility (see note 9) and a non-interest bearing promissory note from the Company, and to the charge-off of the unamortized discount associated with such obligations. Interest expense increased $3.1 million for calendar 1996. The increase in interest expense was primarily due to the interest on the debt at corporate headquarters for twelve months in calendar 1996 as compared to two months in calendar 1995. This increase was partially offset by the reduction in interest expense for the Communications Group since the funding of their operations is from MMG and for the Entertainment Group due principally to lower interest rates on their outstanding debt balance for each respective period. The average interest rates on average debt outstanding of $363.3 million and $254.8 million in calendar 1996 and calendar 1995, were 10.0% and 11.4%, respectively. Interest income increased $5.3 million principally as a result of funds invested at corporate headquarters and increased interest resulting from increased borrowings under the Communications Group's credit facilities with its Joint Ventures for their operating and investing cash requirements. Year Ended December 31, 1995 Compared to Year Ended February 28, 1995 During calendar 1995, the Company reported a loss from continuing operations of $87.0 million, a loss from discontinued operations of $293.6 million and a loss on extinguishment of debt of $32.4 million, resulting in a net loss of $413.0 million. This compares to a net loss of $69.4 million for the year ended February 28, 1995 ("fiscal 1995"), all of which came from continuing operations. The loss from continuing operations increased by $17.6 million from calendar 1995 as compared to fiscal 1995, primarily as a result of an increase in the Communications Group's operating loss in calendar 1995. The effect of the acquisitions of Actava and Sterling on calendar 1995 results of operations was to increase revenues by $198,000, to increase selling, general and administrative expenses by $1.6 million, and to increase interest expense by $2.2 million. 40 The calendar 1995 loss from discontinued operations represents the writedown of the portion of the purchase price of the Company allocated to Snapper in the November 1 Merger to its net realizable value. The extraordinary loss relating to the early extinguishment of debt in calendar 1995 was a result of the repayment and termination of the Plan debt, which was refinanced with funds provided under the Old Orion Credit Facility (see note 9) and a noninterest bearing promissory note from MMG, and to the charge-off of the unamortized discount associated with such obligations. Interest expense increased by $700,000 to $33.1 million in calendar 1995 due to increased borrowings by the Communications Group to finance operations and investment activities of its Joint Ventures and two months of interest on the debt at corporate headquarters as part of the November 1 Merger, partially offset by lower debt levels at the Entertainment Group. The average interest on average debt outstanding of $254.8 million and $245.2 million in calendar 1995 and fiscal 1995, were 11.4% and 10.9% respectively. Interest income increased $500,000 to $3.6 million in calendar 1995 due principally to interest charged by the Communications Group to the Joint Ventures for credit facilities. Entertainment Group - Results of Operations Year Ended December 31, 1996 Compared to Year Ended December 31,1995. Revenues Total revenues for calendar year 1996 were $165.2 million, an increase of $31.4 million or 23% from calendar year 1995. Revenues increased during calendar 1996, reflecting the additional revenues associated with the acquisitions of Goldwyn and MPCA ("Acquired Businesses"), including revenues from the theatrical exhibition business. This increase was partially offset by the decrease in revenues in home video and pay television, which resulted from the Entertainment Group's reduced theatrical release schedule. Although the Entertainment Group released 13 pictures theatrically during calendar 1996, several of these titles had limited releases and/or were acquired solely for domestic theatrical distribution and consequently will generate little or no ancillary revenues. The Entertainment Group anticipates that its reduced theatrical release schedule during the last few years, as well as the acquisition of limited distribution rights for certain current titles, will continue to have an adverse effect on its ancillary revenues. Theatrical revenues for calendar 1996 were $20.3 million, an increase of $15.6 million or 332% from the previous year. Such increase was due to the theatrical release of 13 pictures during calendar 1996 compared to three theatrical releases in calendar 1995. Domestic home video revenues for calendar 1996 were $30.9 million, a decrease of $9.1 million or 23% from the previous year. The decrease in domestic home video revenue is due primarily to a reduction in rental units sold for calendar 1996 video releases as compared to calendar 1995 video releases. Home video subdistribution revenues for calendar 1996 were $8.3 million, an increase of $4.4 million or 113% from calendar 1995. These revenues are generated primarily in the foreign marketplace through a subdistribution arrangement with Sony Pictures Entertainment, Inc. ("Sony"). The increase for calendar 1996 was due primarily to the release of the remaining titles under this agreement in certain major territories. All 23 pictures covered by this agreement have been released theatrically. 41 Pay television revenues were $20.5 million in calendar 1996, a decrease of $11.1 million or 35% from the previous year. The decrease in pay television revenues is due to the lack of available titles in calendar 1996 in the primary pay cable window compared to six available titles during calendar 1995. The Entertainment Group's reduced theatrical release schedule in calendar 1996 as well as limited ancillary rights to certain theatrical releases in calendar 1996 will continue to have an adverse effect on future pay television revenues. Free television revenues for calendar 1996 were $55.5 million, an increase of $1.9 million or 4% from the previous year. In both the domestic and international marketplaces, Orion derives significant revenue from the licensing of free television rights. Major international contracts in calendar 1996 that contributed to revenues include agreements with British Sky Broadcasting, LTD for rights in the U.K., Mitsubishi Corporation for rights in Japan and Principal Network for rights in Italy. In calendar 1995, the most significant agreements were TV de Catalunya for rights in Spain, RTL Plus for rights in Germany and Principal Network for rights in Italy. The Entertainment Group's reduced theatrical release schedule while operating under the Plan has had and will continue to have an adverse effect on free television revenues. Film exhibition revenues for calendar 1996 were $29.6 million. As the acquisition of this business occurred on July 2, 1996, only six months of operations has been included in the calendar 1996 statement of operations. Selling, General and Administrative Expenses Selling, general and administrative expenses were $24.7 million in calendar 1996, an increase of $700,000 from the previous year. The increase is attributed to the inclusion of the Acquired Businesses' selling, general and administrative expenses for the six months ended December 31, 1996 offset almost entirely by nonrecurring costs associated with the Plan in calendar 1995, by reductions in insurance costs and by reductions in outside computer consulting costs. Depreciation and Amortization Expense Depreciation and amortization charges were $5.6 million in calendar 1996, an increase of $4.9 million from the previous year. The increase is attributed to the inclusion of the depreciation of the theatre group property and equipment as well as the amortization of the goodwill associated with the Acquired Businesses. Operating Loss Operating loss decreased $19.5 million in calendar 1996 to $4.4 million from an operating loss of $23.9 million in calendar 1995. Two main factors contributed to the decreased operating loss in calendar 1996. First, calendar 1995 results were adversely affected by approximately $15.7 million of writedowns to estimated net realizable value of the carrying amounts on certain film product. No such writedowns occurred in calendar 1996. Secondly, the theatre group acquired on July 2, 1996 contributed positively to calendar 1996 operating results. The Entertainment Group is likely to generate operating losses until profitable new product is produced and released, as approximately one-half of its film inventories are stated at estimated net realizable value and do not generate gross profit upon recognition of revenues. Year Ended December 31, 1995 Compared to Year Ended February 28, 1995 Revenues Total revenues for calendar 1995 were $133.8 million a decrease of $57.4 million or 30% from fiscal 1995. 42 Theatrical revenues for calendar 1995 were $4.7 million, a decrease of $4.3 million or 48% from the previous year. While operating under the Plan, the Entertainment Group's ability to produce or acquire additional theatrical product was limited. This lack of product has negatively impacted theatrical revenues and will continue to do so until Orion produces or acquires significant new product for theatrical distribution. Domestic home video revenues for calendar 1995 were $40.0 million, a decrease of $11.9 million or 23% from the previous year. The decrease in domestic home video revenue was due primarily to the Entertainment Group's reduced theatrical release schedule in calendar 1995. The Entertainment Group had available only one of its theatrical releases for sale to the domestic home video rental market in calendar 1995 compared to six such titles in fiscal 1995. The Entertainment Group's reduced theatrical release schedule in both calendar 1995 and fiscal 1995 has had and will continue to have an adverse effect on home video annual revenues until new product is available for distribution. Home video subdistribution revenues for calendar 1995 were $3.9 million, a decrease of $2.8 million or 42% from fiscal 1995. These revenues are primarily generated in the foreign marketplace through a subdistribution agreement with Sony. All 23 pictures covered by this agreement have been released theatrically. The Entertainment Group's reduced theatrical release schedule in calendar 1995 and fiscal 1995 has negatively impacted home video subdistribution revenues and will continue to do so in the future until the Entertainment Group produces or acquires significant new product for theatrical distribution. Pay television revenues were $31.6 million in calendar 1995, a decrease of $29.3 million or 48% from the previous year. The decrease in pay television revenues was due to the availability of six titles during calendar 1995 in the pay cable market compared to eleven titles during fiscal 1995. The Entertainment Group's reduced theatrical release schedule in calendar 1995 and fiscal 1995 will continue to have an adverse effect on future pay television revenues. Free television revenues for calendar 1995 were $53.6 million a decrease of $9.1 million or 15% from the previous year. In both the domestic and international marketplaces, the Entertainment Group derives significant revenue from the licensing of free television rights. Major international contracts in calendar 1995 that contributed to revenues were with TV de Catalunya for rights in Spain, RTL Plus for rights in Germany and Principal Network for rights in Italy. In fiscal 1995, the most significant licensees were TV de Catalunya, Principal Network and Mitsubishi for rights in Japan. The Entertainment Group's reduced theatrical release schedule while operating under the Plan has had and will continue to have an adverse effect on free television revenues. Selling, General and Administrative Expenses Selling, general and administrative expenses increased $1.1 million to $24.0 million during calendar 1995 from $22.9 million during fiscal 1995. Depreciation and Amortization Expense Depreciation and amortization charges for calendar 1995 were $694,000 compared to $767,000 for fiscal 1995. 43 Operating Loss Operating loss increased $4.0 million in calendar 1995 to $23.9 million from an operating loss of $19.9 million in fiscal 1995. The most significant contributions to the Entertainment Group's fiscal 1995 operating results, which was absent in calendar 1995, came from the recognition of significant domestic pay television license fees pursuant to a settlement of certain litigation with the Entertainment Group's pay television licensee, Showtime Networks, Inc. (the "Showtime Settlement"). The calendar 1995 and fiscal 1995 results were adversely affected by writedowns to estimated net realizable value of the carrying amounts on certain film product totaling approximately $15.7 million for calendar 1995 compared to writedowns for fiscal 1995 totaling approximately $17.1 million. In addition, approximately two-thirds of the Entertainment Group's film inventories were stated at estimated realizable value and did not generate gross profit upon recognition of revenues. The Communications Group - Results of Operations Year Ended December 31, 1996 Compared to Year Ended December 31, 1995. Revenues Revenues increased to $14.0 million for calendar 1996 from $5.2 million for calendar 1995. Revenues of unconsolidated Joint Ventures for calendar 1996 and 1995 appear in note 8 to the consolidated financial statements. The growth in revenue of the consolidated Joint Ventures has resulted primarily from an increase in radio operations in Hungary, paging service operations in Romania and an increase in management and licensing fees. Revenue from radio operations increased to $9.4 million for calendar 1996 from $3.9 million for calendar 1995. Radio paging services generated revenues of $2.9 million for calendar 1996 as compared to $700,000 for calendar 1995. Management fees and licensing fees increased to $1.8 million for calendar 1996 from $600,000 for calendar 1995. In 1995, the Company changed its policy of consolidating these operations by recording the related accounts and results of operations based on a three month lag. As a result, the calendar 1995 consolidated statement of operations reflects nine months of these operations as compared to twelve months for calendar 1996. Had the Company applied this method from October 1, 1994 the net effect on the results of operations would not have been material. Selling, General and Administrative Expenses Selling, general and administrative expenses increased by $10.7 million or 40% for calendar 1996 as compared to calendar 1995. The increase relates principally to the hiring of additional staff and additional expenses associated with the increase in the number of Joint Ventures and the need for the Communications Group to support and assist the operations of the Joint Ventures, as well as additional staffing at the radio stations and radio paging operations. Depreciation and Amortization Expense Depreciation and amortization expense increased to $6.4 million for calendar 1996. The increase is attributed principally to the amortization of goodwill in connection with the November 1 Merger. Equity in Losses of Joint Ventures The Communications Group accounts for the majority of its Joint Ventures under the equity method of accounting since it generally does not exercise control of these ventures. Under the equity method of accounting, the Communications Group reflects the cost of its investments, adjusted for its share of the income or losses of the Joint Ventures, on its balance sheet and reflects generally only its proportionate share of income or losses of the Joint Ventures in its statement of operations. 44 The Communications Group recognized equity in losses of its Joint Ventures of approximately $11.1 million for calendar 1996 as compared to $8.0 million for calendar 1995. The losses recorded for calendar 1996 and calendar 1995 represent the Communications Group's equity in the losses of the Joint Ventures for the twelve months ended September 30, 1996 and 1995, respectively. Equity in the losses of the Joint Ventures by the Communications Group are generally reflected according to the level of ownership of the Joint Venture by the Communications Group until such Joint Venture's contributed capital has been fully depleted. Subsequently, the Communications Group recognizes the full amount of losses generated by the Joint Venture since the Communications Group is generally the sole funding source of the Joint Ventures. The increase in losses of the Joint Ventures of $3.1 million from calendar 1995 to calendar 1996 is partially attributable to the acquisition during 1996 of Protocall Ventures, Ltd., which included five new trunked mobile radio ventures and increased the loss by $600,000. Further, a loss of $500,000 was incurred in connection with the expansion of radio operations. The Communications Group's paging ventures in Estonia and Riga, and cable venture in Tblisi were responsible for $600,000, $900,000 and $1.0 million, respectively of the increased loss. These losses were attributable to increased costs associated with promotional discount campaigns at the paging ventures, which resulted ultimately in increased subscribers, and a writedown of older receivable balances at the cable venture. Losses were offset by an increase in equity in income of $1.2 million realized at the Communications Group's telephony venture in Tblisi. Revenues generated by unconsolidated Joint Ventures were $43.8 million for calendar 1996 as compared to $19.3 million for calendar 1995. Subscriber Growth Many of the Joint Ventures are in early stages of development and consequently ordinarily generate operating losses in the first years of operation. The Company believes that subscriber growth is an appropriate indicator to evaluate the progress of the subscriber based businesses. The following table presents the aggregate telephony, paging and cable TV Joint Ventures subscriber growth: Wireless Cable TV Paging Telephony -------- ------ --------- December 31, 1995 37,900 14,460 -- March 31, 1996 44,632 20,683 -- June 30, 1996 53,706 29,107 -- September 30, 1996 62,568 37,636 6,104 December 31, 1996 69,118 44,836 6,642 Foreign Currency The Communications Group's strategy is to minimize its foreign currency exposure risk. To the extent possible, in countries that have experienced high rates of inflation, the Communications Group bills and collects all revenues in United States ("US") dollars or an equivalent local currency amount adjusted on a monthly basis for exchange rate fluctuations. The Communications Group's Joint Ventures are generally permitted to maintain US dollar accounts to service their US dollar denominated credit lines, thereby reducing foreign currency risk. As the Communications Group and its Joint Ventures expand their operations and become more dependent on local currency based transactions, the Communications Group expects that its foreign currency exposure will increase. The Communications Group does not hedge against foreign exchange rate risks at the current time and therefore could be subject in the future to any declines in exchange rates between the time a Joint Venture receives its funds in local currencies and the time it distributes such funds in US dollars to the Company. 45 Year Ended December 31, 1995 Compared to Year Ended December 31, 1994. Revenues Revenues increased to $5.2 million in calendar 1995 from $3.5 million in the year ended December 31, 1994 ("calendar 1994"). This growth in revenue from calendar 1994 to calendar 1995 resulted primarily from an increase in radio operations in Hungary and paging service operations in Romania. However, in calendar 1995 the Company changed its policy of consolidating these operations by recording the related accounts and results of operations based on a three month lag. As a result, the December 31, 1995 consolidated balance sheet includes the accounts for these operations at September 30, 1995 as compared to the December 31, 1994 balances included in 1994, and the calendar 1995 statement of operations reflects nine months of these operations as compared to twelve months for calendar 1994. Had the Company applied this method from October 1, 1994, revenues would have increased over the revenues reported but the net effect on the results of operations would not have been material. Selling, General and Administrative Expenses Selling, general and administrative expenses increased by $7.7 million or 41% in calendar 1995 as compared to calendar 1994. The increases relate principally to the hiring of additional staff and additional expenses associated with the increase in the number of Joint Ventures and the need for the Communications Group to support and assist the operations of the Joint Ventures. During calendar 1995, the Communications Group completed the staffing of its Vienna office and opened an office in Hong Kong. Depreciation and Amortization Expense Depreciation and amortization expense increased to $2.1 million for calendar 1995 from $1.1 million for calendar 1994. Equity in Losses of Joint Ventures The Communications Group recognized equity in losses of its Joint Ventures of approximately $8.0 million in calendar 1995 as compared to $2.3 million in calendar 1994. The increase in losses of the Joint Ventures of $5.7 million is primarily attributable to losses of $4.0 million incurred as part of the expansion of its cable TV operations, and the opening of a radio station in Moscow which resulted in a loss of $1.3 million. As of September 30, 1995, there were six cable TV Joint Ventures in operation as compared to four in the prior year. The Communications Group's cable TV Joint Ventures in Moscow and Riga were responsible for $2.1 million and $1.3 million, respectively, of this increased loss. These losses were due to one-time writedowns of older equipment and additional expenses incurred for programming and marketing related to expanding the services provided and ultimately increasing the number of subscribers. All other cable TV operations, including two new Joint Ventures and the expansion of two others that were in their second year of operations, increased losses by $700,000. The increased loss experienced by the radio station in Moscow was attributable to a substantial revision in its programming format and the establishment of sales and related support staff needed to successfully compete in the Moscow market. Losses from the Communications Group's other operations, including five paging entities, three of which were started in calendar 1995, and one telephony operation, increased by $400,000 in calendar 1995. 46 The losses recorded for calendar 1995 represent the Communications Group's equity in losses of the Joint Ventures for the twelve months ended September 30, 1995. On January 1, 1994, the Communications Group changed its policy of accounting for the Joint Ventures by recording its equity in their losses based upon a three month lag. Accordingly, results of operations for calendar 1995, reflect equity in the losses of the Joint Ventures for the period from October 1, 1994 to September 30, 1995. Had the Communications Group applied this method from October 1, 1993, the effect on reported operating results for calendar 1994 would not have been material. Foreign Currency The Communications Group's strategy is to minimize its foreign currency exposure risk. To the extent possible, in countries that have experienced high rates of inflation, the Communications Group bills and collects all revenues in US dollars or an equivalent local currency amount adjusted on a monthly basis for exchange rate fluctuations. The Communications Group's Joint Ventures are generally permitted to maintain US dollar accounts to service their US dollar denominated credit lines, thereby reducing foreign currency risk. As the Communications Group and its Joint Ventures expand their operations and become more dependent on local currency based transactions, the Communications Group expects that its foreign currency exposure will increase. The Communications Group does not hedge against foreign exchange rate risks at the current time and therefore could be subject in the future to any declines in exchange rates between the time a Joint Venture receives its funds in local currencies and the time it distributes such funds in US dollars to the Company. Snapper - Results of Operations Operations for the Two-months Ended December 31, 1996 Revenues Snapper's 1996 period sales were $22.5 million. Snapper continued to implement its program to sell products directly to dealers. In implementing this program to restructure its distribution network, Snapper repurchased certain distributor inventory which resulted in sales reductions of $3.1 million. Sales of snowthrowers contributed the majority of the revenues during the two-month period. In addition, Snapper sold older lawn and garden equipment repurchased from distributors at close-out pricing during the period. Due to the seasonal nature of selling lawn and garden equipment, these two-months do not reflect an average sales period for Snapper. Gross profit during the period was $1.8 million. These low profit results were caused by reduced production due to the normal factory shut down periods in the holiday season. In addition, a lower sales margin was realized on the close-out pricing for the older lawn and garden equipment sold during the period. Selling, General and Administrative Expenses Selling, general, and administrative expenses were $10.0 million for the period. In addition to normal selling, general and administrative expenses, these expenses reflect expenditures relating to the acquisition of 16 distributorships during the final two-months of 1996. Operating Losses Snapper experienced an operating loss of $9.4 million during this two-month period. This loss was the result of the reduced production levels and the acquisition of the distributorships during the period. Management anticipates that Snapper will not be profitable for the full year of 1997 as it continues to repurchase certain finished goods from distributors for resale to dealers in subsequent periods. Management believes that these actions will benefit Snapper's operating and financial performance in the future. 47 Liquidity and Capital Resources MMG Consolidated Year Ended December 31, 1996 Compared to Year Ended December 31, 1995. Cash Flows from Operating Activities Cash used in operations for calendar 1996 was $16.6 million compared to cash provided by operations of $22.1 million for calendar 1995, a decrease of $38.7 million. The calendar 1996 net loss of $115.2 million includes a loss on discontinued operations of $16.3 million and a loss on early extinguishment of debt of $4.5 million. The calendar 1995 net loss of $413.0 million includes a loss on discontinued operations of $293.6 million and a loss on early extinguishment of debt of $32.4 million. The calendar 1996 net loss, exclusive of the losses on discontinued operations and extraordinary items was $94.4 million compared to a $87.0 million loss in calendar 1995. Losses from operations include significant non-cash items of depreciation, amortization and equity in losses of Joint Ventures. Non-cash items decreased $25.0 million from $115.6 million in calendar 1995 to $90.6 million in calendar 1996. The decrease in non-cash items principally relates to reduced amortization of film costs, partially offset by increased depreciation and amortization related to the November 1 Merger and the Goldwyn and MPCA acquisitions. Net changes in assets and liabilities decreased cash flows from operations in calendar 1996 and calendar 1995 by $12.8 million and $6.5 million, respectively. After adjusting net losses for discontinued operations, extraordinary items, non-cash items and net changes in assets and liabilities, the Company utilized $16.6 million of cash in operations in calendar 1996 as compared to operations providing $22.1 million of cash flow for calendar 1995. The decrease in cash flows for 1996 generally resulted from the increased losses in the Communications Group's consolidated and equity Joint Ventures due to the start-up nature of these operations and increases in selling, general and administrative expenses at the Communications Group and corporate headquarters. Net interest expense has decreased principally due to the increase in interest income resulting from the increase in borrowings by the Joint Ventures under the various credit agreements with the Communications Group for their operating and investing cash requirements and from funds invested at corporate headquarters. Cash Flows from Investing Activities Net cash used in investing activities amounted to $102.9 million for the calendar 1996. During calendar 1996 the Company collected $5.4 million from the proceeds from sale of short-term investments and paid $41.0 million and $67.2 million for investments in and advances to Joint Ventures and investments in film inventories, respectively. The increase in investment in film inventories reflects the removal of the restrictions of the Plan in connection with the November 1 Merger. The Entertainment Group has begun to increase its investing activities by increasing its investment in films as well as the related costs and expenses associated with releasing the films. Cash Flows from Financing Activities Cash provided by financing activities was $183.8 million for calendar 1996 as compared to cash used in financing activities of $85.2 million for calendar 1995. 48 The principal reason for the increase of $269.0 million for calendar 1996 was the completion of a public offering pursuant to which the Company issued 18.4 million shares of common stock, the proceeds of which, net of transaction costs, was $190.6 million. Of the $360.3 million in additions to long-term debt, $29.0 million was borrowed under the Old Orion Credit Facility, $200.0 million represents the new Entertainment Group Term Loan, and $77.3 million was borrowed under the Entertainment Group Revolving Credit Facility (see note 9). Such borrowings were principally for the acquisition, production and distribution of theatrical product as well as the payments on outstanding obligations. Of the $357.3 million payments of long term debt, $152.7 million were payments of the Old Orion Credit Facility, $87.9 million were payments on the outstanding debt of Goldwyn and MPCA, $14.8 million were payments on the new Entertainment Group Revolving Credit Facility, $15.0 million was payment under the new Entertainment Group Term Loan, $28.8 million was the repayment of the revolving credit agreement by MMG. In addition, during 1996 Snapper refinanced its credit facility which resulted in a payment of $38.6 million on the old credit facility and borrowings of $46.6 million on the new credit facility. Year Ended December 31, 1995 Compared to Year Ended February 28, 1995. Cash Flows from Operating Activities Cash provided by operating activities decreased $54.8 million or 71% from fiscal 1995 to calendar 1995. The calendar 1995 net loss of $413.0 million includes a loss on discontinued operations of $293.6 million and a loss on early extinguishment of debt of $32.4 million. The calendar 1995 net loss, exclusive of the losses on discontinued operations and extraordinary items was $87.0 million compared to a $69.4 million net loss in fiscal 1995. Losses from operations include significant non-cash items of depreciation, amortization and equity in loss of Joint Ventures. Non-cash items decreased $46.0 million or 28% from $161.6 million in fiscal 1995 to $115.6 million in calendar 1995. The decrease in non-cash items principally relates to amortization of film costs. Net changes in assets and liabilities decreased cash flows from operations in calendar 1995 and fiscal 1995 by $6.5 million and $15.2 million, respectively. After adjusting net losses for discontinued operations, extraordinary items, non-cash items and net changes in assets and liabilities, the Company's cash flow from operating activities was $22.1 million and $76.9 million in calendar 1995 and fiscal 1995, respectively. As discussed below, the decrease in cash flows in calendar 1995 generally resulted from the reduction in revenues caused by the Entertainment Group's reduced release schedule and increases in selling, general and administrative expenses at the Communications Group and the Entertainment Group. Net interest expense remained relatively constant from fiscal 1995 to calendar 1995. The Entertainment Group's reduced release schedule, which is the result of the restrictions imposed upon the Entertainment Group while operating under the Plan, has negatively impacted and will continue to negatively impact cash provided from operations. Cash Flows from Investing Activities Cash flows from investing activities increased $126.1 million from a use of funds in fiscal 1995 of $49.9 million to cash provided in calendar 1995 of $76.2 million. The principal reasons for this increase in cash from investing activities was the collection of notes receivable from Metromedia Company of $45.3 million and net cash acquired in the November 1 Merger of $66.7 million, net of advances to Snapper of $4.2 million in calendar 1995. 49 Investments in film inventories decreased $18.1 million or 79% from $22.8 million in fiscal 1995 to $4.7 million in calendar 1995. Such decrease reflects the releasing costs of the last five pictures fully or substantially financed by the Entertainment Group in fiscal 1995 compared to minimal investments in films since the removal of the restrictions of the Plan in connection with the November 1 Merger for calendar 1995. Investments in the Communications Group Joint Ventures increased $5.5 million or 34% from $16.4 million in fiscal 1995 to $21.9 million in calendar 1995. The increase represents an increase in the number of the Communications Group Joint Ventures as well as additional funding of existing ventures. In addition, fiscal 1995 included net cash paid for East News Channel Trading and Service, Kft of $7.0 million. Cash Flows from Financing Activities Cash used in financing activities increased $48.3 million or 131% from $36.9 million in fiscal 1995 to $85.2 million in calendar 1995. The increase in cash used in financing activities principally resulted from the repayment of approximately $210.0 million of Plan debt of the Entertainment Group in connection with the November 1 Merger (see note 9). The Entertainment Group repaid its outstanding plan debt with $135.0 million of proceeds from the Entertainment Group Term Loan and amounts advanced from the Company. The remaining payments on notes and subordinated debt in calendar 1995 and fiscal 1995 principally represent the Entertainment Group's repayments of Plan debt under the requirements of the Plan. In addition to the Entertainment Group Term Loan, proceeds from the issuance of long-term debt in calendar 1995 includes the Company and Entertainment Group borrowings under revolving credit agreements of $28.8 million and $11.9 million respectively. Proceeds from the issuance of long-term debt in fiscal 1995 represent borrowings by the Entertainment Group and the Communications Group from Metromedia Company. Proceeds from the issuance of stock decreased $15.4 million from $17.7 million in fiscal 1995 to $2.3 million in calendar 1995. The Company MMG is a holding company and, accordingly, does not generate cash flows. The Entertainment Group and Snapper are restricted under covenants contained in their respective credit agreements from making dividend payments or advances to MMG. The Communications Group is dependent on MMG for significant capital infusions to fund its operations and make acquisitions, as well as fulfill its commitments to make capital contributions and loans to its Joint Ventures. Such funding requirements are based on the anticipated funding needs of its Joint Ventures and certain acquisitions committed to by the Company. Future capital requirements of the Communications Group including future acquisitions will depend on available funding from the Company and on the ability of the Communications Group's Joint Ventures to generate positive cash flows. There can be no assurance that the Company will have the funds necessary to support the current needs of the Communications Group's current investments or any of the Communications Group's additional opportunities or that the Communications Group will be able to obtain financing from third parties. If such financing is unavailable, the Group may not be able to further develop existing ventures and the number of additional ventures in which it invests may be significantly curtailed. MMG is obligated to make principal and interest payments under its own various debt agreements (see note 9 in the notes to the consolidated financial statements), in addition to funding its working capital needs, which consist principally of corporate overhead and payments on self insurance claims (see note 1 in the notes in the consolidated financial statements). MMG does not currently anticipate receiving dividends from its subsidiaries but intends to use its cash on hand and proceeds from asset sales described below to meet these cash requirements. 50 MMG's 97/8% Senior Subordinated Debentures due in 1997 require it to make annual sinking fund payments in March of each year of $3,000,000. At December 31, 1996, $15.0 million remained outstanding under the 97/8% Senior Subordinated Debentures, which was subsequently paid on March 17, 1997. MMG's 9 1/2% Subordinated Debentures are due in 1998 and approximately $59.5 million remained outstanding at December 31, 1996. These debentures do not require annual principal payments. MMG's $75.0 million face value 6 1/2% Convertible Subordinated Debentures are due in 2002. The debentures are convertible into common stock at a conversion price of $415/8 per share at the holder's option and do not require annual principal payments. Interest on MMG's outstanding indebtedness is approximately $11.8 million for 1997. At December 31, 1996, the Company had $82.7 million of cash on hand remaining from the public offering of 18.4 million shares of common stock. Net proceeds from the public offering were $190.6 million. The Company anticipates disposing of its investment in RDM during 1997. The carrying value of the Company's investment in RDM at December 31, 1996 was approximately $31.2 million. However, no assurances can be given that the Company will be able to dispose of RDM in a timely fashion and on favorable terms. The Company expects that it will sell either equity or debt securities in a public or private offering during the remainder of 1997. The Company intends to use the proceeds from the sale of these securities to finance the continued build-out of the Communications Group's systems and for general corporate purposes, including working capital needs of the Company and its subsidiaries, the repayment of certain indebtedness of the Company and its subsidiaries and potential future acquisitions. However, no assurances can be given that the Company will be able to successfully complete the sale of its securities in a timely fashion or on favorable terms. Management believes that its long term liquidity needs will be satisfied through a combination of (i) the Company's successful implementation and execution of its growth strategy to become a global communications, media and entertainment company, (ii) the Communications Group's Joint Ventures achieving positive operating results and cash flows through revenue and subscriber growth and control of operating expenses, and (iii) the Entertainment Group's ability to generate positive cash flows sufficient to meet its planned film production release schedule and service the new Entertainment Group Credit Facility. If the Company is unable to successfully implement its strategy, the Company may be required to (i) seek, in addition to the offering described above, financing through public or private sale of debt or equity securities of the Company or one of its subsidiaries, (ii) otherwise restructure its capitalization or (iii) seek a waiver or waivers under one or more of its subsidiaries' credit facilities to permit the payment of dividends to the Company. The Company believes that it will report significant operating losses for the year ended December 31, 1997. In addition, because its Communications Group is in the early stages of development, the Company expects this group to generate significant net losses as it continues to build out and market its services. Accordingly, the Company expects to generate consolidated net losses for the foreseeable future. 51 The Entertainment Group Since the November 1 Merger, the restrictions imposed by the agreements entered into in connection with the Plan, which hindered the Entertainment Group's ability to produce and acquire new motion picture product, were eliminated. As a result, the Entertainment Group has begun producing, acquiring and financing theatrical films consistent with the covenants set forth in the credit agreement relating to the Entertainment Group Credit Facility. The principal sources of funds required for the Entertainment Group's motion picture production, acquisition and distribution activities will be cash generated from operations, proceeds from the presale of subdistribution and exhibition rights, primarily in foreign markets, and borrowings under the Entertainment Group's Revolving Credit Facility. In addition, the Company is exploring various off balance sheet financing arrangements to augment its resources. The cost of producing theatrical films varies depending on the type of film produced, casting of stars or established actors, and many other factors. The industry-wide trend over recent years has been an increase in the average cost of producing and releasing films. The revenues derived from the production and distribution of a motion picture depend primarily upon its acceptance by the public, which cannot be predicted, and does not necessarily correlate to the production or distribution costs incurred. The Company will attempt to reduce the risks inherent in its motion picture production activities by closely monitoring the production and distribution costs of individual films and limiting the Entertainment Group's investment in any single film. The Entertainment Group Credit Facility consists of a $200 million Term Loan which requires quarterly repayments of $7.5 million commencing September 1996 and a final payment of $50 million on maturity (June 30, 2001), and a Revolving Credit Facility, which has a final maturity of June 30, 2001. For the years ended December 31, 1997 and 1998, the Entertainment Group will be required to make principal payments of approximately $38.4 million, and $32.5 million, respectively, to meet the scheduled maturities of its outstanding long-term debt. The Entertainment Group Credit Facility contains customary covenants, including limitations on the incurrence of additional indebtedness and guarantees, the creation of new liens, restrictions on the development costs and budgets for new films, limitations on the aggregate amount of unrecouped print and advertising costs the Entertainment Group may incur, limitations on the amount of the Entertainment Group's leases, capital and overhead expenses, (including specific limitations on the capital expenditures of the Entertainment Group's theatre group subsidiary) prohibitions on the declaration of dividends or distributions by the Entertainment Group to MMG (other than $15 million of subordinated loans which may be repaid to MMG), limitations on the merger or consolidation of the Entertainment Group or the sale by the Entertainment Group of any substantial portion of its assets or stock and restrictions on the Entertainment Group's line of business, other than activities relating to the production and distribution of entertainment product and other covenants and provisions described above. See note 9 to the notes to the consolidated financial statements. The Entertainment Group Credit Facility is secured by a security interest in all of the Entertainment Group's assets and the Revolving Credit Facility is guaranteed by the Company's largest shareholder, Metromedia Company and its Chairman, John W. Kluge. At December 31, 1996, the Entertainment Group had $52.5 million available under its $100 million Revolving Credit Facility which management intends to utilize together with cash generated from operations to finance its operations in 1997. In addition to the Entertainment Group Credit Facility and cash generated from operations, management intends to explore such alternatives as increasing its revolving line of credit, obtaining off balance sheet financing, or obtaining short term funding from MMG in order to augment its resources to finance anticipated levels of production and distribution activities and to meet debt obligations as they become due during 1997 and 1998. The Communications Group The Communications Group has invested significantly (in cash through capital contributions, loans and management assistance and training) in its Joint Ventures. The Communications Group has also incurred significant expenses in identifying, negotiating and pursuing new wireless telecommunications opportunities in emerging markets. The Communications Group and primarily all of its Joint Ventures are experiencing continuing losses and negative operating cash flow since the businesses are in the development and start up phase of operations. 52 The wireless cable television, paging, fixed wireless loop telephony, GSM and international toll calling businesses are capital intensive. The Communications Group generally provides the primary source of funding for its Joint Ventures both for working capital and capital expenditures with the exception of its GSM Joint Ventures. The GSM ventures have been funded to date on a pro rata basis by western sponsors, and the Communications Group has funded its pro rata share of the GSM Joint Venture obligations. The Communications Group has and continues to have discussions with vendors, commercial lenders and international financial institutions to provide funding for the GSM Joint Ventures. The Communications Group's Joint Venture agreements generally provide for the initial contribution of assets or cash by the Joint Venture partners, and for the provision of a line of credit from the Communications Group to the Joint Venture. Under a typical arrangement, the Communications Group's Joint Venture partner contributes the necessary licenses or permits under which the Joint Venture will conduct its business, studio or office space, transmitting tower rights and other equipment. The Communications Group's contribution is generally cash and equipment, but may consist of other specific assets as required by the Joint Venture agreement. Credit agreements between the Joint Ventures and the Communications Group are intended to provide such ventures with sufficient funds for operations and equipment purchases. The credit agreements generally provide for interest to be accrued at rates ranging from the prime rate to the prime rate plus 6% and for payment of principal and interest from 90% of the Joint Venture's available cash flow, as defined, prior to any distributions of dividends to the Communications Group or its Joint Venture partners. The credit agreements also often provide the Communications Group the right to appoint the general director of the Joint Venture and the right to approve the annual business plan of the Joint Venture. Advances under the credit agreements are made to the Joint Ventures in the form of cash, for working capital purposes, as direct payment of expenses or expenditures, or in the form of equipment, at the cost of the equipment plus cost of shipping. As of December 31, 1996, the Communications Group was committed to provide funding under the various credit lines in an aggregate amount of approximately $69.6 million, of which $12.0 million remained unfunded. The Communications Group's funding commitments under a credit agreement are contingent upon its approval of the Joint Venture's business plan. The Communications Group reviews the actual results compared to the approved business plan on a periodic basis. If the review indicates a material variance from the approved business plan, the Communications Group may terminate or revise its commitment to fund the credit agreements. The Communications Group's consolidated and unconsolidated Joint Ventures' ability to generate positive operating results is dependent upon their ability to attract subscribers to their systems, and their ability to control operating expenses and the sale of commercial advertising time. Management's current plans with respect to the Joint Ventures are to increase subscriber and advertiser bases and thereby operating revenues by developing a broader band of programming packages for wireless cable and radio broadcasting and offering additional services and options for paging and telephony services. By offering the large local populations of the countries in which the Joint Ventures operate desired services at attractive prices, management believes that the Joint Ventures can increase their subscriber and advertiser bases and generate positive operating cash flow, reducing their dependence on the Communications Group for funding of working capital. Additionally, advances in wireless subscriber equipment technology are expected to reduce capital requirements per subscriber. Further initiatives to develop and establish profitable operations include reducing operating costs as a percentage of revenue and assisting Joint Ventures in developing management information systems and automated customer care and service systems. No assurances can be given that such initiatives will be successful. Additionally, if the Joint Ventures do become profitable and generate sufficient cash flows in the future, there can be no assurance that the Joint Ventures will pay dividends or return capital at any time. 53 The ability of the Communications Group and its consolidated and unconsolidated Joint Ventures to establish profitable operations is also subject to special political, economic and social risks inherent in doing business in emerging markets such as Eastern Europe, the former Soviet Republics and other emerging markets. These include matters arising out of government policies, economic conditions, imposition of or changes to taxes or other similar charges by governmental bodies, foreign exchange rate fluctuations and controls, civil disturbances, deprivation or unenforceablility of contractual rights, and taking of property without fair compensation. For the year ended December 31, 1996, the Communications Group's primary source of funds was from the Company in the form of non-interest bearing intercompany loans. Until the Communications Group's consolidated and unconsolidated operations generate positive cash flow, the Communications Group will require significant capital to fund its operations, and to make capital contributions and loans to its Joint Ventures. The Communications Group relies on the Company to provide the financing for these activities. The Company believes that as more of the Communications Group's Joint Ventures commence operations and reduce their dependence on the Communications Group for funding, the Communications Group will be able to finance its own operations and commitments from its operating cash flow and the Communications Group will be able to attract its own financing from third parties. There can, however, be no assurance that additional capital in the form of debt or equity will be available to the Communications Group at all or on terms and conditions that are acceptable to the Company, and as a result, the Communications Group will continue to depend upon the Company for its financing needs. 54 Snapper Cash flows used in operations totaled $7.1 million dollars for the two-month period ended December 31, 1996. This shortfall in cash generated by the operations was due to the seasonality of sales and related cash collections and the repurchase of distributor inventories. Snapper's liquidity is generated from operations and borrowings. On November 26, 1996, Snapper entered into a credit agreement (the "Snapper Credit Agreement") with AmSouth Bank of Alabama ("AmSouth"), pursuant to which AmSouth has agreed to make available to Snapper a revolving line of credit up to $55.0 million, upon the terms and subject to conditions contained in the Snapper Credit Agreement (the "Snapper Revolver") for a period ending on January 1, 1999 (the "Snapper Revolver Termination Date"). The Snapper Revolver is guaranteed by the Company. The Snapper Revolver contains customary covenants, including delivery of certain monthly, quarterly and annual financial information, delivery of budgets and other information related to Snapper. See note 9. At December 31, 1996 Snapper was not in compliance with certain financial covenants under the Snapper Revolver. Subsequent to December 31, 1996, Snapper and AmSouth amended the Snapper Credit Agreement. As part of the amendment to the Snapper Credit Agreement, AmSouth waived the covenant defaults as of December 31, 1996. Furthermore, the amendment replaces certain existing financial covenants with covenants regarding minimum quarterly cash flow and equity requirements, as defined. In addition, Snapper and AmSouth have agreed to the major terms and conditions of a $10.0 million credit facility. The closing of the credit facility remains subject to the execution of definitive loan documentation. Management believes that available cash on hand, borrowings from the Snapper Revolver are Working Captial Facility, and the cash flow generated by operating activities will provide sufficient funds for Snapper to meet its obligations. SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS. Certain statements under the captions "Management's Discussion and Analysis of Financial Condition and Results of Operations" and "Business" and elsewhere in this Form 10-K constitute "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995 (the "Reform Act"). Such forward-looking statements involve known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements of the Company, or industry results, to be materially different from any future results, performance or achievements expressed or implied by such forward-looking statements. Such factors include among others, general economic and business conditions, which will, among other things, impact demand for the Company's products and services; industry capacity, which tends to increase during strong years of the business cycle; changes in public taste, industry trends and demographic changes, which may influence the exhibition of films in certain areas; competition from other entertainment and communications companies, which may affect the Company's ability to generate revenues; political, social and economic conditions and laws, rules and regulations, particularly in Eastern Europe, the former Soviet Republics, the PRC and other emerging markets, which may affect the Company's results of operations; timely completion of construction projects for new systems for the Joint Ventures in which the Company has invested; developing legal structures in Eastern Europe, the former Soviet Republics, the PRC and other emerging markets, which may affect the Company's results of operations; cooperation of local partners for the Company's communications investments in Eastern Europe, the former Soviet Republics and the PRC; exchange rate fluctuations; license renewals for the Company's communications investments in Eastern Europe, the former Soviet Republics and the PRC; the loss of any significant customers (especially clients of the Communications Group); changes in business strategy or development plans; the significant indebtedness of the Company; quality of management; availability of qualified personnel; changes in, or the failure to comply with, government regulations; and other factors referenced in the Form 10-K. Item 8. Financial Statements and Supplementary Data The financial statements and supplementary data required under this item are included in Item 14 of this Report. Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure None. 55 PART III The information called for by this PART III (Items 10, 11, 12 and 13) is not set forth herein because the Company intends to file with the SEC not later than 120 days after the end of the fiscal year ended December 31, 1996 the Joint Proxy Statement/Prospectus for the 1997 Annual Meeting of Stockholders, except that certain of the information regarding the Company's executive officers called for by Item 10 has been included in Part I of this Annual Report on Form 10-K under the caption "Executive Officers of the Company." Such information to be included in the Joint Proxy Statement/Prospectus is hereby incorporated into these Items 10, 11, 12 and 13 by this reference. PART IV Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K (a)(1) and (a)(2) Financial Statements and Schedules The financial statements and schedules listed in the accompanying Index to Financial Statements are filed as part of this Annual Report on Form 10-K. (a)(3) Exhibits The exhibits listed in the accompanying Exhibit Index are filed as part of this Annual Report on Form 10-K. (b) Current Reports on Form 8-K One (1) Current Report on Form 8-K was filed during the fourth quarter of 1996: (i) On December 5,1996 a Form 8-K was filed to report the resignation of John D. Phillips as President and Chief Executive Officer of the Company and the appointment of Stuart Subotnick as President and Chief Executive Officer. (ii) On February 11, 1997, a Form 8-K was filed to report the Company's intention to actively manage the operations of its wholly-owned subsidiary, Snapper, Inc. 56 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities and Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. METROMEDIA INTERNATIONAL GROUP, INC. By: /s/ SILVIA KESSEL ------------------------------------- Silvia Kessel Executive Vice President Dated: March 31, 1997 Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated. Signature Title Date --------- ----- ---- /s/ JOHN W. KLUGE Chairman of the Board March 31, 1997 - ------------------------- John W. Kluge /s/ STUART SUBOTNICK Vice Chairman of the Board, March 31, 1997 - ------------------------- President and Chief Executive Stuart Subotnick Officer (Principal Executive Officer) /s/ SILVIA KESSEL Executive Vice President, Chief March 31, 1997 - ------------------------- Financial Officer and Director Silvia Kessel (Principal Financial Officer) /s/ ARNOLD L. WADLER Executive Vice President, March 31, 1997 - ------------------------- General Counsel, Secretary Arnold L. Wadler and Director /s/ ROBERT A. MARESCA Senior Vice President (Principal March 31, 1997 - ------------------------- Accounting Officer) Robert A. Maresca /s/ JOHN P. IMLAY, JR. Director March 31, 1997 - ------------------------- John P. Imlay, Jr. /s/ CLARK A. JOHNSON Director March 31, 1997 - ------------------------- Clark A. Johnson /s/ RICHARD J. SHERWIN Director March 31, 1997 - ------------------------- Richard J. Sherwin /s/ LEONARD WHITE Director March 31, 1997 - ------------------------- Leonard White /s/ CARL E. SANDERS Director March 31, 1997 - ------------------------- Carl E. Sanders 57 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 Quarterly Report on Form 10-Q for the dated as of July 20, 1994 by and three months ended June 30, 1994, among, The Actava Group Inc., Exhibit 99.1 Diversified Products Corporation, Hutch Sports USA Inc., Nelson/Weather-Rite, Inc., Willow Hosiery Company, Inc. and Roadmaster Industries, Inc. 2.3 Amended and Restated Agreement and Current Report on Form 8-K for event Plan of Merger dated as of occurring on September 27, 1995, September 27, 1995 by and among The Exhibit 99(a) Actava Group Inc., Orion Pictures Corporation, MCEG Sterling Incorporated, Metromedia International Telecommunications, Inc., OPG Merger Corp. and MITI Merger Corp. and exhibits thereto. The Registrant agrees to furnish copies of the schedules supplementally to the Commission on request. 2.5 Agreement and Plan of Merger dated as Current Report on Form 8-K dated of January 31, 1996 by and among January 31, 1996, Exhibit 99.1 Metromedia International Group, Inc., The Samuel Goldwyn Company and SGC Merger Corp. and exhibits thereto. The registrant agrees to furnish copies of the schedules to the Commission upon request. 3.1 Restated Certificate of Incorporation Registration Statement on Form S-3 of Metromedia International Group, (Registration No. 33-63853), Exhibit Inc. 3.1 3.2 Restated By-laws of Metromedia Registration Statement on Form S-3 International Group, Inc. (Registration No. 33-6353), Exhibit 3.2 4.1 Indenture dated as of August 1, 1973, Application of Form T-3 for with respect to 9 1/2% Subordinated Qualification of Indenture under the Debentures due August 1, 1998, Trust Indenture Act of 1939 (File between The Actava Group Inc. and No. 22-7615), Exhibit 4.1 Chemical Bank, as Trustee. 4.2 Agreement among The Actava Group, Registration Statement on Form S-14 Inc., Chemical Bank and Manufacturers (Registration No. 2-81094), Hanover Trust Company, dated as of Exhibit 4.2 September 26, 1980, with respect to successor trusteeship of the 9 1/2% Subordinated Debentures due August 1, 1998.
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, Annual Report on Form 10-K for the appointment and acceptance dated as year ended December 31, 1986, of June 9, 1986 among The Actava Exhibit 4.3 Group Inc., Manufacturers Hanover Trust Company and Irving Trust Company, with respect to successor trusteeship of the 9 1/2% Subordinated Debentures due August 1, 1998. 4.4 Indenture dated as of March 15, 1977, Registration Statement on Form S-7 with respect to 97/8% Senior (Registration No. 2-58317), Subordinated Debentures due March 15, Exhibit 4.4 1997, between The Actava Group Inc. and The Chase Manhattan Bank, N.A., as Trustee. 4.5 Agreement among The Actava Group Registration Statement on Form S-14 Inc., The Chase Manhattan Bank, N.A. (Registration No. 2-281094), and United States Trust Company of Exhibit 4.5 New York, dated as of June 14, 1982, with respect to successor trusteeship of the 97/8% Senior Subordinated Debentures due March 15, 1997. 4.6 Indenture between National Post-Effective Amendment No. 1 to Industries, Inc. and First National Application on Form T-3 for City Bank, dated October 1, 1974, Qualification of Indenture Under The with respect to the 10% Subordinated Trust Indenture Act of 1939 (File Debentures, due October 1, 1999. No. 22-8076), Exhibit 4.6 4.7 Agreement among National Industries, Registration Statement on Form S-14 Inc., The Actava Group Inc., (Registration No. 2-81094), Exhibit Citibank, N.A., and Marine Midland 4.7 Bank, dated as of December 20, 1977, with respect to successor trusteeship of the 10% Subordinated Debentures due October 1, 1999. 4.8 First Supplemental Indenture among Registration Statement on Form S-7 The Actava Group Inc., National (Registration No. 2-60566), Exhibit Industries, Inc. and Marine Midland 4.8 Bank, dated January 3, 1978, supplemental to the Indenture dated October 1, 1974 between National and First National City Bank for the 10% Subordinated Debentures due October 1, 1999. 4.9 Indenture dated as of August 1, 1987 Annual Report on Form 10-K for the with respect to 6 1/2% Convertible year ended December 31, 1987, Exhibit Subordinated Debentures due August 4, 4.9 2002, between The Actava Group Inc. and Chemical Bank, as Trustee. 10.1 1982 Stock Option Plan of The Actava Proxy Statement dated March 31, 1982, Group Inc. Exhibit A 10.2 1989 Stock Option Plan of The Actava Proxy Statement dated March 31, 1989, Group Inc. Exhibit A 10.3 1969 Restricted Stock Plan of The Annual Report on Form 10-K for the Actava Group Inc. year ended December 31, 1990, Exhibit 10.3
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 --------- ----------------------- ---------- 10.4 1991 Non-Employee Director Stock Annual Report on Form 10-K for the Option Plan. year ended December 31, 1991, Exhibit 10.4 10.5 Amendment to 1991 Non-Employee Annual Report on Form 10-K for the Director Stock Option Plan. year ended December 31, 1992, Exhibit 10.5 10.6 Snapper Power Equipment Profit Annual Report on Form 10-K for the Sharing Plan. year ended December 31, 1987, Exhibit 10.6 10.7 Retirement Plan executed November 1, Annual Report on Form 10-K for the 1990, as amended effective January 1, year ended December 31, 1990, Exhibit 1989. 10.7 10.8 Supplemental Retirement Plan of The Annual Report on Form 10-K for Actava Group Inc. the year ended December 31, 1983, Exhibit 10.8 10.9 Supplemental Executive Medical Annual Report on Form 10-K for the Reimbursement Plan. year ended December 31, 1990, Exhibit 10.9 10.10 Amendment to Supplemental Retirement Annual Report on Form 10-K for the Plan of The Actava Group Inc., year ended December 31, 1991, Exhibit effective April 1, 1992. 10.10 10.11 1992 Officer and Director Stock Annual Report on Form 10-K for the Purchase Plan. year ended December 31, 1991, Exhibit 10.11 10.12 Form of Restricted Purchase Agreement Annual Report on Form 10-K for the between certain officers of The year ended December 31, 1991, Exhibit Actava Group Inc. and The Actava 10.12 Group Inc. 10.14 Form of Indemnification Agreement Annual Report on Form 10-K for the between Actava and certain of its year ended December 31, 1993, Exhibit directors and executive officers. 10.14 10.15 Employment Agreement between The Current Report on Form 8-K dated Actava Group Inc. and John D. April 19, 1994, Exhibit 10.15 Phillips dated April 19, 1994. 10.16 First Amendment to Employment Annual Report on Form 10-K for the Agreement dated November 1, 1995 year ended December 31, 1995, Exhibit between Metromedia International 10.16 Group and John D. Phillips. 10.17 Option Agreement between The Actava Current Report on Form 8-K dated Group Inc. and John D. Phillips dated April 19, 1994, Exhibit 10.17 April 19, 1994.
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 --------- ----------------------- ---------- 10.18 Registration Rights Agreement among Current Report on Form 8-K dated The Actava Group Inc., Renaissance April 19, 1994, Exhibit 10.18 Partners and John D. Phillips dated April 19, 1994. 10.19 Shareholders Agreement dated as of Annual Report on Form 10-K for the December 6, 1994 among The Actava year ended December 31, 1994, Exhibit Group Inc., Roadmaster, Henry Fong 10.19 and Edward Shake. 10.20 Registration Rights Agreement dated Annual Report on Form 10-K for the as of December 6, 1994 between The year ended December 31, 1994, Exhibit Actava Group Inc. and Roadmaster. 10.20 10.21 Environmental Indemnity Agreement Annual Report on Form 10-K for the dated as of December 6, 1994 between year ended December 31, 1994, Exhibit The Actava Group Inc. and Roadmaster. 10.21 10.22 Lease Agreement dated October 21, Annual Report on Form 10-K for the 1994 between JDP Aircraft II, Inc. year ended December 31, 1994, Exhibit and The Actava Group Inc. 10.22 10.23 Lease Agreement dated as of October 4, Quarterly Report on Form 10-Q for the 1995 between JDP Aircraft II, Inc. and quarter ended September 30, 1995, The Actava Group Inc. Exhibit 10.23 10.37 Management Agreement dated Annual Report on Form 10-K for November 1, 1995 between Metromedia the year ended December 31, 1996, Company and Metromedia International Exhibit 10.37 Group, Inc. 10.38 The Metromedia International Group, Proxy Statement dated August 6, 1996, Inc. 1996 Incentive Stock Plan. Exhibit B 10.39 License Agreement dated November 1, Annual Report on Form 10-K for the 1995 between Metromedia Company and year ended December 31, 1996, Exhibit Metromedia International Group, Inc. 10.39 10.40 MITI Bridge Loan Agreement dated Annual Report on Form 10-K for the February 29, 1996, among Metromedia year ended December 31, 1996, Exhibit Company and MITI 10.40 10.41 Metromedia International Quarterly Report on Form 10-Q ended Telecommunications, Inc. 1994 Stock March 31, 1996, Exhibit 10.41 Plan 10.42 Amended and Restated Credit Security Quarterly Report on Form 10-Q for the and Guaranty Agreement dated as of quarter ended June 30, 1996, Exhibit November 1, 1995, by and among Orion 10.42 Pictures Corporation, the Corporate Guarantors' referred to herein, and Chemical Bank, as Agent for the Lenders. 10.43 Metromedia International Group/Motion Quarterly Report or Form 10-Q for the Picture Corporation of America quarter ended June 30, 1996, Exhibit Restricted Stock Plan 10.43 10.44 The Samuel Goldwyn Company Stock Registration Statement on Form S-8 Awards Plan, as amended (Registration No. 333-6453), Exhibit 10.44 10.45* Credit Agreement, dated November 26, 1996 between Snapper, Inc. and AmSouth Bank of Alabama
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 --------- ----------------------- ---------- 10.46* Amendment No. 1 to License Agreement dated June 13, 1996 between Metromedia Company and Metromedia International Group, Inc. 10.47* Amendment No. 1 to Management Agreement dated as of January 1, 1997 between Metromedia Company and Metromedia International Group, Inc. 10.48* Amended and Restated Agreement and Plan of Merger, dated as of May 17, 1996 between Metromedia International Group, Inc., MPCA Merger Corp. and Bradley Krevoy and Steven Stabler and Motion Picture Corporation of America 11* Statement of computation of earnings per share. 16 Letter from Ernst & Young to the Current Report on Form 8-K dated Securities and Exchange Commission. November 1, 1995 21 List of subsidiaries of Metromedia Annual Report on Form 10-K for the International Group, Inc. year ended December 31, 1996, Exhibit 21 23.1* Consent of KPMG Peat Marwick LLP regarding Metromedia International Group, Inc. 27* Financial Data Schedule
- ---------- *Filed herewith ================================================================================ Metromedia International Group, Inc. ================================================================================ METROMEDIA INTERNATIONAL GROUP, INC. AND SUBSIDIARIES INDEX TO FINANCIAL STATEMENTS Page ---- Report of Independent Auditors' ........................................... F-1 Consolidated Statements of Operations for the years ended December 31, 1996, December 31, 1995 and February 28, 1995 .................................................. F-2 Consolidated Balance Sheets as of December 31, 1996 and December 31, 1995 ................................................... F-3 Consolidated Statements of Cash Flows for the years ended December 31, 1996, December 31, 1995 and February 28, 1995 ....................................................... F-4 Consolidated Statements of Stockholders' Equity for the years ended December 31, 1996, December 31, 1995 and February 28, 1995 ................................................... F-5 Notes to Consolidated Financial Statements ................................ F-6 Consolidated Financial Statement Schedules: I. Condensed Financial Information of Registrant .................... S-1 II. Valuation and Qualifying Accounts ................................ S-5 All other schedules have been omitted either as inapplicable or not required under the Instructions contained in Regulation S-X or because the information included in the Consolidated Financial Statements or the Notes thereto listed above. 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))
Years Ended ----------------------------------------------------------------------- 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 currently translation adjustment -- -- -- 184 -- 184 Net loss -- -- -- -- (69,411) (69,411) ---------- ------- -------- ------- --------- --------- Balances, February 28, 1995 20,934,898 20,935 289,229 184 (310,138) 210 November 1 Merger: Issuance of stock related to the acquisition of Actava and Sterling 17,974,155 17,974 316,791 -- -- 334,765 Issuance of stock in exchange for MetProductions and Met International 3,530,314 3,530 33,538 -- -- 37,068 Valuation of Actava and MITI options -- -- 25,677 -- -- 25,677 Revaluation of MITI minority interest -- -- 60,923 -- 23,608 84,531 Adjustment for change in fiscal year -- -- -- -- 11,400 11,400 Issuance of stock related to incentive plans 174,371 175 2,589 -- -- 2,764 Foreign currency translation adjustment -- -- -- 399 -- 399 Net loss -- -- -- -- (412,976) (412,976) ---------- ------- -------- ------- --------- --------- Balances, December 31, 1995 42,613,738 42,614 728,747 583 (688,106) 83,838 Issuance of stock related to public offering, net 18,400,000 18,400 172,204 -- -- 190,604 Issuance of stock related to the acquisitions of the Samuel Goldwyn Company and Motion Picture Corporation of America 4,715,869 4,716 54,610 -- -- 59,326 Issuance of stock related to incentive plans 423,832 423 3,997 (3,174) -- 1,246 Foreign currency translation adjustment -- -- -- (618) -- (618) Amortization of restricted stock -- -- -- 529 -- 529 Net loss -- -- -- -- (115,243) (115,243) ---------- ------- -------- ------- --------- --------- Balances, December 31, 1996 66,153,439 $66,153 $959,558 $(2,680) $(803,349) $ 219,682 ========== ======= ======== ======= ========= =========
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. ================================================================================ In addition, the Company manufacturers Snapper(R) brand premium-priced power lawnmowers, lawn tractors, garden tillers, snowthrowers and related parts and accessories and distributes edgers. The lawnmowers include rear engine riding mowers, front engine riding mowers or lawn tractors, and self-propelled and push-type walk-behind mowers. The Company also manufactures a line of commercial lawn and turf equipment under the Snapper(R) brand. Liquidity MMG is a holding company, and accordingly, does not generate cash flows. The Entertainment Group and Snapper are restricted under covenants contained in their respective credit agreements from making dividend payments or advances to MMG. The Communications Group is dependent on MMG for significant capital infusions to fund its operations, its commitments to make capital contributions and loans to its Joint Ventures and any acquisitions. Such funding requirements are based on the anticipated funding needs of its Joint Ventures and certain acquisitions committed to by the Company. Future capital requirements of the Communications Group including future acquisitions will depend on available funding from the Company and on the ability of the Communications Group's Joint Ventures to generate positive cash flows. There can be no assurance that the Company will have the funds necessary to support the current needs of the Communications Group's current investments or any of the Communications Group's additional opportunities or that the Communications Group will be able to obtain financing from third parties. If such financing is unavailable, the Group may not be able to further develop existing ventures and the number of additional ventures in which it invests may be significantly curtailed. MMG is obligated to make principal and interest payments under its own various debt agreements and has debt repayment requirements of $17.1 million and $60.3 million in 1997 and 1998, respectively (see note 9), in addition to funding its working capital needs, which consist principally of corporate overhead and payments on self insurance claims. In the short term, MMG intends to satisfy its current obligations and commitments with available cash on hand and the proceeds from the sale of RDM Sports Group, Inc. (see note 5). At December 31, 1996 MMG had approximately $82.7 million of available cash on hand. The Company anticipates disposing of its investment in RDM Sports Group, Inc. during 1997. The carrying value of the Company's investment in RDM Sports Group, Inc. at December 31, 1996 was $31.2 million. Management believes that its available cash on hand and proceeds from the disposition of its investment in RDM Sports Group, Inc., will provide sufficient funds for the Company to meet its obligations, including the Communications Group's funding requirements, in the short term. However, no assurances can be given that the Company will be able to dispose of RDM Sports Group, Inc. in a timely fashion and on favorable terms. Any delay in the sale of RDM Sports Group, Inc. or reductions in the proceeds anticipated to be received upon this disposition may result in the Company's inability to satisfy its obligations, including the funding of the Communications Group during the year ended December 31, 1997. Delays in funding the Communications Group's capital requirements may have a material adverse impact on the results of operations of the Communications Group's Joint Ventures. The Company expects that it will sell either equity or debt securities in a public or private offering during the remainder of 1997. The Company intends to use the proceeds from the sale of these securities to finance the continued build-out of the Communications Group's systems and for general corporate purposes, including working capital needs of the Company and its subsidiaries, the repayment of certain indebtedness of the Company and its subsidiaries and potential future acquisitions. However, no assurances can be given that the Company will be able to successfully complete the sale of its securities in a timely fashion or on favorable terms. F-7 ================================================================================ Metromedia International Group, Inc. ================================================================================ In addition, management believes that its long term liquidity needs will be satisfied through a combination of (i) the Company's successful implementation and execution of its growth strategy to become a global communications, media and entertainment company, (ii) the Communications Group's Joint Ventures achieving positive operating results and cash flows through revenue and subscriber growth and control of operating expenses, and (iii) the Entertainment Group's ability to generate positive cash flows sufficient to meet its planned film production release schedule and service the Entertainment Group Credit Facility. In addition to disposing of its investment in RDM Sports Group, Inc., the Company may be required to (i) attempt to obtain financing in addition to the offering described above, through the public or private sale of debt or equity securities of the Company or one of its subsidiaries, (ii) otherwise restructure its capitalization or (iii) seek a waiver or waivers under one or more of its subsidiaries' credit facilities to permit the payment of dividends to the Company. Summary of Significant Accounting Policies Investments Equity Method Investments Investments in other companies and Joint Ventures ("Joint Ventures") which are not majority owned, or which the Company does not control but in which it exercises significant influence are accounted for using the equity method. The Company reflects its net investments in Joint Ventures under the caption "Investments in and advances to Joint Ventures". Generally, under the equity method of accounting, original investments are recorded at cost and are adjusted by the Company's share of undistributed earnings or losses of the Joint Venture. Equity in the losses of the Joint Ventures are recognized according to the percentage ownership in each Joint Venture until the Company's Joint Venture partner's contributed capital has been fully depleted. Subsequently, the Company recognizes the full amount of losses generated by the Joint Venture if it is the principal funding source for the Joint Venture. During the year ended February 28, 1995 ("fiscal 1995"), the Company changed its policy of accounting for the Joint Ventures by recording its equity in their earnings and losses based upon a three-month lag. As a result, the December 31, 1996 and 1995 consolidated statement of operations reflects twelve months of operations through September 30, 1996 and 1995, respectively, for the Joint Ventures and the February 28, 1995 consolidated statement of operations reflects nine months of operations through September 30, 1994 for the Joint Ventures. The effect of this change in accounting policy in fiscal 1995 is not material to the consolidated financial statements. During the year ended December 31, 1995 ("calendar 1995"), the Company changed its policy of consolidating two indirectly owned subsidiaries by recording the related assets and liabilities and results of operations based on a three-month lag. As a result, the December 31, 1996 and 1995 balance sheets includes the accounts of these subsidiaries at September 30, 1996 and 1995, respectively, and the calendar 1995 statement of operations reflects the results of operations of these subsidiaries for the nine months ended September 30, 1995. Had the Company applied this method from October 1, 1994, the effect on reported December 31, 1995 results would not have been material. For the year ended December 31, 1996 ("calendar 1996") the results of operations reflect twelve months of activity based upon a September 30 fiscal year end of these subsidiaries. F-8 ================================================================================ Metromedia International Group, Inc. ================================================================================ Short-Term Investments The Company classifies its debt and equity securities in one of three categories: trading, available-for-sale, or held-to-maturity. Trading securities are bought and held principally for the purpose of selling them in the near term. Held-to-maturity securities are those securities in which the Company has the ability and intent to hold the securities until maturity. All other securities not classified as trading or held-to-maturity are classified as available-for-sale. Management determines the appropriate classification of investments as trading, held-to-maturity or available-for-sale at the time of purchase and reevaluates such designation as of each balance sheet date. The Company has classified all investments as available-for-sale. Available-for-sale securities are carried at fair value, with the unrealized gains and losses, net of tax, reported in stockholders' equity. The amortized cost of debt securities in this category is adjusted for amortization of premiums and accretion of discounts to maturity. Such amortization is included in investment income. Realized gains and losses, and declines in value judged to be other-than-temporary on available-for-sale securities, are included in investment income. The cost of securities sold is based on the specific identification method. Interest and dividends on securities classified as available-for-sale are included in investment income. At December 31, 1995 short-term investments of $5.4 million, classified as available-for-sale, had an amortized cost that approximated fair value. The short-term investments were sold during calendar 1996. Revenue Recognition The Communications Group The Communications Group and its Joint Ventures' cable, paging and telephony operations recognize revenues in the period the service is provided. Installation fees are recognized as revenues upon subscriber hook-up to the extent installation costs are incurred. Installation fees in excess of installation costs are deferred and recognized over the length of the related individual contract. The Communications Group and its Joint Ventures' radio operations recognize advertising revenue when commercials are broadcast. The Entertainment Group Revenue from the theatrical distribution of films is recognized as the films are exhibited. The Entertainment Group distributes its films to the home video market in the United States and Canada. The Entertainment Group's home video revenue, less a provision for returns, is recognized when the video cassettes are shipped. Distribution of the Entertainment Group's films to the home video markets in foreign countries is generally effected through subdistributors who control various aspects of distribution. When the terms of sale to such subdistributors include the receipt of nonrefundable guaranteed amounts by the Entertainment Group, revenue is recognized when the film is available to the subdistributors for exhibition or exploitation and other conditions of sale are met. When the arrangements with such subdistributors call for distribution of the Entertainment Group's product without a minimum amount guaranteed to the Entertainment Group, such sales are recognized when the Entertainment Group's share of the income from exhibition or exploitation is earned. F-9 ================================================================================ Metromedia International Group, Inc. ================================================================================ Revenue from the licensing of the Entertainment Group's film product to networks, basic and pay cable companies and television stations or groups of stations in the United States and Canada, as well as in foreign territories, is recognized when the license period begins and when certain other conditions are met, including the availability of such product for exhibition. Snapper Sales are recognized when the products are shipped to distributors or dealers. Film Inventories and Cost of Rentals Theatrical and television program inventories consist of direct production costs, production overhead and capitalized interest, print and exploitation costs, less accumulated amortization. Film inventories are stated at the lower of unamortized cost or estimated net realizable value. Selling costs and other distribution costs are charged to expense as incurred. Film inventories and estimated total costs of participations and residuals are charged to cost of rentals under the individual film forecast method in the ratio that current period revenue recognized bears to management's estimate of total gross revenue to be realized. Such estimates are re-evaluated quarterly in connection with a comprehensive review of the Company's inventory of film product, and estimated losses, if any, are provided for in full. Such losses include provisions for estimated future distribution costs and fees, as well as participation and residual costs expected to be incurred. Inventories Lawn and garden equipment inventories and pager inventories are stated at the lower of cost or market. Lawn and garden equipment inventories are valued utilizing the last-in, first-out (LIFO) method. Pager inventories are calculated on the weighted average method. Inventories consist of the following as of December 31, 1996 and 1995 (in thousands): 1996 1995 ---- ---- Lawn and garden equipment: Raw materials $ 18,733 $ -- Finished goods 34,822 -- --------- --------- 53,555 -- Telecommunications: Pagers 849 224 --------- --------- $ 54,404 $ 224 ========= ========= F-10 ================================================================================ Metromedia International Group, Inc. ================================================================================ Property Plant and Equipment Property, plant and equipment at December 31, 1996 and 1995 consists of the following (in thousands): 1996 1995 ---- ---- Land $ 2,270 $ -- Buildings and improvements 12,409 -- Machinery and equipment 39,723 7,764 Theatre and other leasehold improvements 26,698 419 --------- -------- 81,100 8,183 Less: Accumulated depreciation and amortization (7,172) (2,386) --------- -------- $ 73,928 $ 5,797 ========= ======== Property, plant and equipment are recorded at cost and are depreciated over their expected useful lives. Generally, depreciation is provided on the straight-line method for financial reporting purposes. Theatre and other leasehold improvements are amortized using the straight-line method over the life of the improvements or the life of the lease, whichever is shorter. Intangible Assets Intangible assets are stated at historical cost, net of accumulated amortization. Intangibles such as broadcasting licenses and frequency rights are amortized over periods of 20 to 25 years. Goodwill has been recognized for the excess of the purchase price over the value of the identifiable net assets acquired. Such amount is amortized over 25 years using the straight-line method. Management continuously monitors and evaluates the realizability of recorded intangibles to determine whether their carrying values have been impaired. In evaluating the value and future benefits of intangible assets, their carrying value is compared to management's best estimate of undiscounted future cash flows over the remaining amortization period. If such assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying value of the assets exceeds the fair value of the assets. The Company believes that the carrying value of recorded intangibles is not impaired. Impairment of Long-Lived Assets The Company adopted the provisions of Statement of Financial Accounting Standards No. 121, ("SFAS 121") "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed of," on January 1, 1996. SFAS 121 requires that long-lived assets and certain identifiable intangibles be reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to future net cash flows expected to be generated by the asset. If such assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the assets exceeds the fair value of the assets. Assets to be disposed of are reported at the lower of the carrying amount or fair value less costs to sell. Adoption of SFAS 121 did not have any impact on the Company's financial position, results of operations, or liquidity. F-11 ================================================================================ Metromedia International Group, Inc. ================================================================================ Earnings Per Share of Common Stock Primary earnings per share are computed by dividing net income (loss) by the weighted average number of common and common equivalent shares outstanding during the year. Common equivalent shares include shares issuable upon the assumed exercise of stock options using the treasury stock method when dilutive. Computations of common equivalent shares are based upon average prices during each period. Fully diluted earnings per share are computed using such average shares adjusted for any additional shares which would result from using end-of-year prices in the above computations, plus the additional shares that would result from the conversion of the 6 1/2% Convertible Subordinated Debentures (see note 9). Net income (loss) is adjusted by interest (net of income taxes) on the 6 1/2% Convertible Subordinated Debentures. The computation of fully diluted earnings per share is used only when it results in an earnings per share number which is lower than primary earnings per share. The loss per share amounts for fiscal 1995 represent combined Orion and MITI's common shares converted at the exchange ratios used in the November 1 Merger (see note 2). Fair Value of Financial Instruments Statement of Financial Accounting Standards No. 107 ("SFAS 107") "Disclosures about Fair Value of Financial Instruments," requires disclosure of fair value information about financial instruments, whether or not recognized in the balance sheet, for which it is practicable to estimate that value. In cases where quoted market prices are not available, fair values are based on settlements using present value or other valuation techniques. These techniques are significantly affected by the assumptions used, including discount rates and estimates of future cash flows. In that regard, the derived fair value estimates cannot be substantiated by comparison to independent markets and, in many cases, could not be realized in immediate settlement of the instruments. SFAS 107 excludes certain financial instruments and all non-financial instruments from its disclosure requirements. Accordingly, the aggregate fair value amounts presented do not represent the underlying value to the Company. The following methods and assumptions were used in estimating the fair value disclosures for financial instruments: Cash and Cash Equivalents, Receivables, Notes Receivable and Accounts Payable The carrying amounts reported in the consolidated balance sheets for cash and cash equivalents, current receivables, notes receivable and accounts payable approximate fair values. The carrying value of receivables with maturities greater than one year have been discounted, and if such receivables were discounted based on current market rates, the fair value of these receivables would not be materially different than their carrying values. Short-term Investments For short-term investments, fair values are based on quoted market prices. If a quoted market price is not available, fair value is estimated using quoted market prices for similar securities or dealer quotes. F-12 ================================================================================ Metromedia International Group, Inc. ================================================================================ Long-term Debt For long-term and subordinated debt, fair values are based on quoted market prices, if available. If the debt is not traded, fair value is estimated based on the present value of expected cash flows. See note 9 for the fair values of long-term debt. Income Taxes The Company accounts for deferred income taxes using the asset and liability method of accounting. Under the asset and liability method, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using rates expected to be in effect when those assets and liabilities are recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. Stock Option Plans Prior to January 1, 1996, the Company accounted for its stock option plans in accordance with the provisions of Accounting Principles Board Opinion No. 25 ("APB 25"), "Accounting for Stock Issued to Employees," and related interpretations. As such, compensation expense would be recorded on the date of grant only if the current market price of the underlying stock exceeded the exercise price. On January 1, 1996, the Company adopted Statement of Financial Accounting Standards No. 123 ("SFAS 123"), "Accounting for Stock-Based Compensation," which permits entities to recognize as expense over the vesting period the fair value of all stock-based awards on the date of grant. Alternatively, SFAS 123 also allows entities to continue to apply the provisions of APB 25 and provide pro forma net income and pro forma earnings per share disclosures for employee stock option grants made in 1995 and future years as if the fair-value-based method defined in SFAS 123 had been applied. The Company has elected to continue to apply the provisions of APB 25 and provide the pro forma disclosure requirements of SFAS 123. Pension and Other Postretirement Plans Snapper has a defined benefit pension plan covering substantially all of its collective bargaining unit employees. The benefits are based on years of service multiplied by a fixed dollar amount and the employee's compensation during the five years before retirement. The cost of this program is funded currently. Snapper also sponsors a defined benefit health care plan for substantially all of its retirees and employees. Snapper measures the costs of its obligation based on its best estimate. The net periodic costs are recognized as employees render the services necessary to earn postretirement benefits. Barter Transactions In connection with its AM/FM radio broadcast business, the Company trades commercial air time for goods and services used principally for promotional, sales and other business activities. An asset and a liability are recorded at the fair market value of the goods or services received. Barter revenue is recorded and the liability is relieved when commercials are broadcast, and barter expense is recorded and the assets are relieved when the goods or services are received or used. F-13 ================================================================================ Metromedia International Group, Inc. ================================================================================ Foreign Currency Translation The statutory accounts of the Company's consolidated foreign subsidiaries and Joint Ventures are maintained in accordance with local accounting regulations and are stated in local currencies. Local statements are translated into U.S. generally accepted accounting principles and U.S. dollars in accordance with Statement of Financial Accounting Standards No. 52 ("SFAS 52"), "Accounting for Foreign Currency Translation". Under SFAS 52, foreign currency assets and liabilities are generally translated using the exchange rates in effect at the balance sheet date. Results of operations are generally translated using the average exchange rates prevailing throughout the year. The effects of exchange rate fluctuations on translating foreign currency assets and liabilities into U.S. dollars are accumulated as part of the foreign currency translation adjustment in stockholders' equity. Gains and losses from foreign currency transactions are included in net income in the period in which they occur. Under SFAS 52, the financial statements of foreign entities in highly inflationary economies are remeasured, in all cases using the U.S. dollar as the functional currency. U.S. dollar transactions are shown at their historical value. Monetary assets and liabilities denominated in local currencies are translated into U.S. dollars at the prevailing period-end exchange rate. All other assets and liabilities are translated at historical exchange rates. Results of operations have been translated using the monthly average exchange rates. Translation differences resulting from the use of these different rates are included in the accompanying consolidated statements of operations. Such differences amounted to $255,000, $54,000 and $69,000 for calendar 1996, calendar 1995, and fiscal 1995, respectively, and were immaterial to the Company's results of operations for each of the periods presented. In addition, translation differences resulting from the effect of exchange rate changes on cash and cash equivalents were immaterial and are not reflected in the Company's statements of cash flow for each of the periods presented. Accrued Expenses Accrued expenses at December 31, 1996 and 1995 consist of the following (in thousands): 1996 1995 ---- ---- Accrued salaries and wages $ 4,919 $ 9,627 Accrued taxes 25,467 11,000 Accrued interest 7,176 9,822 Self-insurance claims payable 29,833 31,549 Accrued warranty costs 4,317 - Accrued film distribution costs 7,742 6,328 Other 28,628 27,787 -------- -------- $108,082 $ 96,113 ======== ======== F-14 ================================================================================ Metromedia International Group, Inc. ================================================================================ Self-Insurance The Company is self-insured for workers' compensation, health, automobile, product and general liability costs for its lawn and garden operation and for certain former subsidiaries. The self-insurance claim liability is determined based on claims filed and an estimate of claims incurred but not yet reported. Cash and Cash Equivalents Cash equivalents consists of highly liquid instruments with maturities of three months or less at the time of purchase. Included in cash at December 31, 1996, is approximately $1.0 million of restricted cash which represents collateral pursuant to the terms of the Snapper Credit Agreement (see note 9). Use of Estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of the contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Supplemental Disclosure of Cash Flow Information Supplemental disclosure of cash flow information (in thousands): Calendar Calendar Fiscal 1996 1995 1995 ---- ---- ---- Cash paid during the year for: Interest $ 32,015 $ 12,270 $ 13,108 ======== ======== ========= Taxes $ 728 $ 996 $ 1,804 ======== ======== ========= Supplemental schedule of non-cash investing and financing activities (in thousands): Calendar Calendar Fiscal 1996 1995 1995 ---- ---- ---- Acquisition of business: Fair value of assets acquired $ 120,882 $ 290,456 $ -- Fair value of liabilities assumed 180,591 239,109 -- --------- --------- ---------- Net value $ (59,709) $ 51,347 $ -- ========= ========= ========== In connection with acquisition of Motion Picture Corporation of America in 1996, the Company issued debt of $1.2 million and restricted common stock valued at $3.2 million. See note 4 regarding the consolidation of Snapper. F-15 ================================================================================ Metromedia International Group, Inc. ================================================================================ ================================================================================ 2. The November 1 Merger ================================================================================ On November 1, 1995, (the "Merger Date") Orion, MITI, the Company and MCEG Sterling Incorporated ("Sterling"), consummated the mergers contemplated by the Amended and Restated Agreement and Plan of Merger (the "Merger Agreement") dated as of September 27, 1995. The Merger Agreement provided for, among other things, the simultaneous mergers of each of Orion and MITI with and into OPC Merger Corp. and MITI Merger Corp., the Company's recently-formed subsidiaries, and the merger of Sterling with and into the Company (the "November 1 Merger"). In connection with the November 1 Merger, the Company changed its name from The Actava Group Inc. to Metromedia International Group, Inc. Upon consummation of the November 1 Merger, all of the outstanding shares of the common stock, par value $.25 per share of Orion (the "Orion Common Stock"), the common stock, par value $.001 per share, of MITI (the "MITI Common Stock") and the common stock, par value $.001 per share, of Sterling (the "Sterling Common Stock") were exchanged for shares of the Company's common stock, par value $1.00 per share, pursuant to exchange ratios contained in the Merger Agreement. Pursuant to such ratios, holders of Orion Common Stock received .57143 shares of the Company's common stock for each share of Orion Common Stock (resulting in the issuance of 11,428,600 shares of common stock to the holders of Orion Common Stock), holders of MITI Common Stock received 5.54937 shares of the Company's common stock for each share of MITI Common Stock (resulting in the issuance of 9,523,817 shares of the Company's common stock to the holders of MITI Common Stock) and holders of Sterling Common Stock received .04309 shares of the Company's common stock for each share of Sterling Common Stock (resulting in the issuance of 483,254 shares of the Company's common stock to the holders of Sterling Common Stock). In addition, pursuant to the terms of a contribution agreement dated as of November 1, 1995 among the Company and two affiliates of Metromedia Company ("Metromedia"), MetProductions, Inc. ("MetProductions") and Met International, Inc. ("Met International"), MetProductions and Met International contributed to the Company an aggregate of $37,068,303 consisting of (i) interests in a partnership and (ii) the principal amount of indebtedness of Orion and its affiliate, and indebtedness of an affiliate of MITI, owed to MetProductions and Met International respectively, in exchange for an aggregate of 3,530,314 shares of the Company's common stock. Immediately prior to the consummation of the November 1 Merger, there were 17,490,901 shares of the Company's common stock outstanding. As a result of the consummation of the November 1 Merger and the transactions contemplated by the contribution agreement, the Company issued an aggregate of 24,965,985 shares of common stock. Following consummation of the November 1 Merger and the transactions contemplated by the contribution agreement, Metromedia Company (an affiliate of the Company) and its affiliates (the "Metromedia Holders") collectively held an aggregate of 15,252,128 shares of common stock (or 35.9% of the issued and outstanding shares of common stock). Due to the existence of the Metromedia Holders' common control of Orion and MITI prior to consummation of the November 1 Merger, their combination pursuant to the November 1 Merger was accounted for as a combination of entities under common control. Orion was deemed to be the acquirer in the common control merger. As a result, the combination of Orion and MITI was effected utilizing historical costs for the ownership interests of the Metromedia Holders in MITI. The remaining ownership interests of MITI, were accounted for in accordance with the purchase method of accounting based on the fair value of such ownership interests, as determined by the value of the shares received by the holders of such interests at the effective time of the November 1 Merger. F-16 ================================================================================ Metromedia International Group, Inc. ================================================================================ For accounting purposes only, Orion and MITI were deemed to be the joint acquirers of Actava and Sterling. The acquisition of Actava and Sterling has been accounted for as a reverse acquisition. As a result of the reverse acquisition, the historical financial statements of the Company for periods prior to the November 1 Merger are those of Orion and MITI, rather than Actava. The operations of Actava and Sterling have been included in the accompanying consolidated financial statements from November 1, 1995, the date of acquisition. During December 1995, the Company adopted a formal plan to dispose of Snapper (see notes 1 and 4). In addition, the Company's investment in RDM Sports Group, Inc. (formerly Roadmaster Industries, Inc.), was deemed to be a non-strategic asset (see note 5). At December 31, 1995, Snapper was included in the accompanying balance sheet in an amount equal to the sum of estimated cash flows from the operations of Snapper plus the anticipated proceeds from the sale of Snapper which amounted to $79.2 million. The excess of the purchase price allocated to Snapper in the November 1 Merger over the expected estimated cash flows from the operations and sale of Snapper in the amount of $293.6 million has been reflected in the accompanying consolidated statement of operations as a loss on disposal of a discontinued operation. No income tax benefits were recognized in connection with this loss on disposal because of the Company's losses from continuing operations and net operating loss carryforwards. The purchase price of Actava, Sterling and MITI minority interests, exclusive of transaction costs, amounted to $438.9 million at November 1, 1995. The excess purchase price over the net fair value of assets acquired amounted to $404 million at November 1, 1995, before the write-off of Snapper goodwill of $293.6 million. Orion, MITI and Sterling were parties to a number of material contracts and other arrangements under which Metromedia Company and certain of its affiliates had, among other things, made loans or provided financing to, or paid obligations on behalf of, each of Orion, MITI and Sterling. On November 1, 1995 such indebtedness, financing and other obligations of Orion, MITI and Sterling to Metromedia and its affiliates were refinanced, repaid or converted into equity of MMG. Certain of the amounts owed by Orion ($20.4 million), MITI ($34.1 million) and Sterling ($524,000) to Metromedia were financed by Metromedia through borrowings under a $55.0 million credit agreement between the Company and Metromedia (the "Actava-Metromedia Credit Agreement"). Orion, MITI and Sterling repaid such amounts to Metromedia, and Metromedia repaid the Company the amounts owed by Metromedia to the Company under the Actava-Metromedia Credit Agreement. In addition, certain amounts owed by Orion to Metromedia were repaid on November 1, 1995. ================================================================================ 3. Entertainment Group Acquisitions ================================================================================ On July 2, 1996, the Entertainment Group consummated the acquisition (the "Goldwyn Merger") of the Samuel Goldwyn Company ("Goldwyn") by merging the Company's newly formed subsidiary, SGC Merger Corp., into Goldwyn. Upon consummation of the Goldwyn Merger, Goldwyn was renamed Goldwyn Entertainment Company. Holders of common stock received .3335 shares of the Company's common stock (the "Common Stock") for each share of Goldwyn Common Stock in accordance with a formula set forth in the Agreement and Plan of Merger relating to the Goldwyn Merger (the "Goldwyn Merger Agreement"). Pursuant to the Goldwyn Merger, the Company issued 3,130,277 shares of common stock. The purchase price, including the value of existing Goldwyn stock options and transaction costs related to the Goldwyn Merger, was approximately $43.8 million. F-17 Also on July 2, 1996, the Entertainment Group consummated the acquisition (the "MPCA Merger", together with the Goldwyn Merger, the "July 2 Mergers") of Motion Picture Corporation of America ("MPCA") by merging the Company's recently formed subsidiary, MPCA Merger Corp., with MPCA. In connection with the MPCA Merger, the Company (i) issued 1,585,592 shares of common stock to MPCA's sole stockholders, and (ii) paid such stockholders approximately $1.2 million in additional consideration, consisting of promissory notes. The purchase price, including transaction costs, related to the acquisition of MPCA was approximately $21.9 million. The excess of the purchase price over the net fair value of liabilities assumed in the July 2 Mergers amounted to $125.4 million. Following the consummation of the July 2 Mergers, the Company contributed its interests in Goldwyn and MPCA to Orion, with Goldwyn and MPCA becoming wholly-owned subsidiaries of Orion. Orion, Goldwyn and MPCA are collectively referred to as the Entertainment Group. The July 2 Mergers have been recorded in accordance with the purchase method of accounting for business combinations. The purchase price to acquire both Goldwyn and MPCA were allocated to the net assets acquired according to management's estimate of their respective fair values and the results of those purchased businesses have been included in the accompanying consolidated condensed financial statements from July 2, 1996, the date of acquisition. The following unaudited pro forma information illustrates the effect of the July 2 Mergers on revenues, loss from continuing operations, net loss and net loss per share for the years ended December 31, 1996 and 1995, and assumes that the July 2 Mergers occurred at the beginning of each period, the November 1 Merger occurred at the beginning of 1995, Snapper was included in consolidated results of operations at the beginning of 1995 and does not account for refinancing of certain indebtedness of Goldwyn and MPCA debt as discussed in note 9 (in thousands, except per share amounts): 1996 1995 ---- ---- (Unaudited) (Unaudited) Revenues $ 419,960 $ 401,132 ========== =========== Loss from continuing operations (144,897) (185,865) ========== =========== Net loss (165,707) (511,817) ========== =========== Net loss per share $ (2.92) $ (10.76) ========== =========== F-18 ================================================================================ Metromedia International Group, Inc. ================================================================================ ================================================================================ 4. Snapper, Inc. ================================================================================ In connection with the November 1 Merger, Snapper was classified as an asset held for sale. Subsequently, the Company has announced its intention not to continue to pursue its previously adopted plan to dispose of Snapper and to actively manage Snapper in order to grow and develop Snapper so as to maximize its long term value to the Company. Snapper has been included in the consolidated financial statements as of November 1, 1996. The allocation of the November 1, 1996 carrying value of Snapper, $73.8 million, which included an intercompany receivable of $23.8 million, is as follows (in thousands): Cash $ 7,395 Accounts receivable 36,544 Inventories 51,707 Property, plant and equipment 29,118 Other assets 773 Accounts payable and accrued expenses (25,693) Debt (40,059) Other liabilities (3,200) -------- Excess of assets over liabilities 56,585 Carrying value at November 1, 1996 73,800 -------- Excess of carrying value over fair value of net assets $ 17,215 ======== The following table summarizes the operating results of Snapper for the ten-months ended October 31, 1996 and for the period November 1, 1995 to December 31, 1995 (in thousands): 1996 1995 ---- ---- Net sales $ 130,623 $ 14,385 Operating expenses 148,556 34,646 --------- -------- Operating loss (17,933) (20,261) Interest expense (6,859) (1,213) Other income (expenses) 1,210 (259) --------- -------- Loss before taxes (23,582) (21,733) Income taxes -- -- --------- -------- Net loss $ (23,582) $(21,733) ========= ======== As part of Snapper's transition to the dealer-direct business, Snapper has from time to time reacquired the inventories and less frequently has purchased the accounts receivable of distributors it has canceled. The purchase of inventories is recorded by reducing sales for the amount credited to accounts receivable from the canceled distributor and recording the repurchased inventory at the lower of cost or market. During 1996 and 1995, 18 and 7 distributors were canceled, respectively. Inventories purchased (and/or credited to the account of canceled distributors) under such arrangements amounted to (in thousands): Two-months Ten-months Two-months ended ended ended December 31, 1996 October 31, 1996 December 31, 1995 ----------------- ---------------- ----------------- Inventories $ 2,438 $ 15,550 $ 4,596 Decrease in gross profit 2,106 5,967 1,245 F-19 ================================================================================ Metromedia International Group, Inc. ================================================================================ ================================================================================ 5. RDM Sports Group, Inc. ================================================================================ The Company has identified its investment in RDM Sports Group, Inc. ("RDM") as a non-strategic asset and the Company's investment in RDM is included in the balance sheet at December 31, 1996 and 1995 as an asset held for sale. As of November 1, 1995, the Company's investment in RDM was adjusted to the anticipated proceeds from its sale under the purchase method of accounting. Management regularly monitors and evaluates the net realizable value of its assets held for sale to determine whether their carrying values have been impaired. During 1996, the Company reduced the carrying value of its investment in RDM to $31.2 million. The Company's write-down of its investment in RDM of $16.3 million is reflected as a discontinued operation in the 1996 consolidated statement of operations. The Company intends to dispose of its RDM stock during 1997. The equity in earnings and losses of RDM have been excluded from the Company's results of operations since the November 1 Merger. As of December 31, 1996, the Company owned 39% of the issued and outstanding shares of RDM Common Stock based on approximately 49,507,000 shares of RDM Common Stock outstanding at November 8, 1996. Summarized financial information for RDM is shown below (in thousands): As of, and for the As of, and for the nine months ended year ended September 28, December 31, 1996 1995 ---- ---- (Unaudited) Net sales $ 304,235 $ 730,875 Gross profit 12,369 86,607 Interest expense 19,920 35,470 Gain on sale of subsidiaries 98,475 -- Net income (loss) 412 (51,004) Current assets 209,272 406,586 Non-current assets 82,657 170,521 Current liabilities 126,144 232,502 Non-current liabilities 110,730 289,081 Total shareholders' equity 55,055 55,524 ================================================================================ 6. Film Accounts Receivable and Deferred Revenues ================================================================================ Film accounts receivable consists primarily of trade receivables due from film distribution, including theatrical, home video, basic cable and pay television, network, television syndication, and other licensing sources which have payment terms generally covered under contractual arrangements. Film accounts receivable is stated net of an allowance for doubtful accounts of $11.6 million at both December 31, 1996 and 1995. The Entertainment Group has entered into contracts for licensing of theatrical and television product to the pay cable, home video and free television markets, for which the revenue and the related accounts receivable will be recorded in future periods when the films are available for broadcast or exploitation. These contracts, net of advance payments received and recorded in deferred revenues as described below, aggregated approximately $175.0 million at December 31, 1996. Included in this amount is $61.5 million of license fees for which the revenue and the related accounts receivable will be recorded only when the Entertainment Group produces or acquires new products. F-20 ================================================================================ Metromedia International Group, Inc. ================================================================================ Deferred revenues consist principally of advance payments received on pay cable, home video and other television contracts for which the films are not yet available for broadcast or exploitation. ================================================================================ 7. Film Inventories ================================================================================ The following is an analysis of film inventories at December 31, 1996 and 1995 (in thousands): 1996 1995 ---- ---- Current: Theatrical and television product released less amortization $ 60,377 $ 59,430 Completed not released 5,779 -- -------- -------- 66,156 59,430 -------- -------- Non Current: Theatrical and television product released less amortization 133,014 137,233 Completed not released 2,476 -- In process and other 50,653 -- -------- -------- 186,143 137,233 -------- -------- $252,299 $196,663 ======== ======== The Entertainment Group has in prior years recorded substantial writeoffs to its released product. As a result, approximately one-half of the gross cost of film inventories are stated at estimated net realizable value and will not result in the recording of gross profit upon the recognition of related revenues in future periods. The Entertainment Group has amortized 94% of such gross cost of its film inventories. Approximately 98% of such gross film inventory costs will have been amortized by December 31, 1999. As of December 31, 1996, approximately 62% of the unamortized balance of such film inventories will be amortized within the next three-year period based upon the Company's revenue estimates at that date. For the year ended December 31, 1996 interest costs of $1.2 million were capitalized to film inventories. ================================================================================ 8. Investments in and Advances to Joint Ventures ================================================================================ The Communications Group has recorded its investments in Joint Ventures at cost, net of its equity in earnings or losses. Advances to the Joint Ventures under the line of credit agreements are reflected based on amounts recoverable under the credit agreement, plus accrued interest. Advances are made to Joint Ventures in the form of cash, for working capital purposes and for payment of expenses or capital expenditures, or in the form of equipment purchased on behalf of the Joint Ventures. Interest rates charged to the Joint Ventures under the credit agreement range from prime rate to prime rate plus 6%. The credit agreements generally provide for the payment of principal and interest from 90% of the Joint Ventures' available cash flow, as defined, prior to any substantial distributions of dividends to the Joint Venture partners. The Communications Group has entered into credit agreements with its Joint Ventures to provide up to $69.6 million in funding of which $18.9 million remains unfunded at December 31, 1996. Under its credit agreements the Communications Group's funding commitments are contingent on its approval of the Joint Ventures' business plans. F-21 ================================================================================ Metromedia International Group, Inc. ================================================================================ At December 31, 1996 and 1995 the Communications Group's investments in the Joint Ventures, at cost, net of adjustments for its equity in earnings or losses, were as follows (in thousands): Investments in and advances to Joint Ventures
Year Venture Date Operations 1996 1995 Ownership % Formed Commenced ---- ---- ----------- ------ --------- Name Wireless Cable TV Kosmos TV, Moscow, Russia $ 759 $ 4,317 50% 1991 1992 Baltcom TV, Riga, Latvia 8,513 6,983 50% 1991 1992 Ayety TV, Tbilisi, Georgia 4,691 3,630 49% 1991 1993 Kamalak, Tashkent, Uzbekistan(1) 6,031 3,731 50% 1992 1993 Sun TV, Kishinev, Moldova 3,590 1,613 50% 1993 1994 Alma-TV, Almaty, Kazakhstan(1) 2,840 1,318 50% 1994 1995 -------- --------- 26,424 21,592 -------- --------- Paging Baltcom Paging, Tallinn, Estonia 3,154 2,585 39% 1992 1993 Baltcom Plus, Riga, Latvia 1,711 1,412 50% 1994 1995 Tbilisi Paging, Tbilisi, Georgia 829 619 45% 1993 1994 Raduga Paging, Nizhny Novgorod, Russia 450 364 45% 1993 1994 St. Petersburg Paging, St. Petersburg, Russia 963 527 40% 1994 1995 -------- --------- 7,107 5,507 -------- --------- Radio Broadcasting SAC/Radio 7, Moscow, Russia -- 1,174 51% (2) 1994 1994 Eldoradio, St. Petersburg, Russia 435 561 50% 1993 1995 Radio Socci, Socci, Russia 361 269 51% 1995 1995 -------- --------- 796 2,004 -------- --------- Telephony Telecom Georgia, Tbilisi, Georgia 2,704 2,078 30% 1994 1994 Trunk mobile radio ventures 2,049 -- -------- --------- 4,753 2,078 -------- --------- Pre-Operational St. Petersburg Cable, St. Petersburg, Russia 554 -- 45% 1996 Pre-Operational Minsk Cable, Minsk, Belarus 1,980 918 50% 1993 Pre-Operational Kazpage, Kazakhstan 350 -- 51% 1996 Pre-Operational Magticom, Tbilisi, Georgia 2,450 -- 34% 1996 Pre-Operational Batumi Paging, Batumi, Georgia 256 -- 35% 1996 Pre-Operatoinal Balcom GSM 7,874 -- 24% 1996 Pre-Operational PRC Telephony ventures and equipment 9,712 2,378 Other 3,191 2,457 ------ ------- 26,367 5,753 ------ ------- Total $65,447 $36,934 ======= =======
(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. ================================================================================ The ability of the Communications Group and its Joint Ventures to establish profitable operations is subject to, among other things, special political, economic and social risks inherent in doing business in the republics of the former Soviet Union, Eastern Europe and the PRC. These include matters arising out of government policies, economic conditions, imposition of taxes or other similar charges by governmental bodies, foreign exchange fluctuations and controls, civil disturbances, deprivation or unenforceability of contractual rights, and taking of property without fair compensation. MITI has obtained political risk insurance policies from the Overseas Private Investment Corporation ("OPIC") for two of its Joint Ventures. The policies cover loss of investment and losses due to business interruption caused by political violence or expropriation. Recently, the United States House of Representatives extended the insuring authority of OPIC for one year. If such authority is not further renewed, OPIC may be unable to write any new insurance policies or underwrite new investments. Summarized combined balance sheet financial information as of September 30, 1996 and 1995 and combined statement of operations financial information for the years ended September 30, 1996 and 1995 and for the nine months ended September 30, 1994 of Joint Ventures accounted for under the equity method that have commenced operations as of the dates indicated are as follows (in thousands): Combined Balance Sheets 1996 1995 ---- ---- Assets Current assets $ 16,073 $ 6,937 Investments in wireless systems and equipment 38,447 31,349 Other assets 3,100 2,940 --------- -------- Total Assets $ 57,620 $ 41,226 ========= ======== Liabilities and Joint Ventures' Equity (Deficit) Current liabilities $ 18,544 $ 10,954 Amount payable under MITI credit facility 41,055 33,699 Other long-term liabilities 6,043 -- --------- -------- 65,642 44,653 Joint Ventures' Equity (Deficit) (8,022) (3,427) --------- -------- Total Liabilities and Joint Ventures' Equity (Deficit) $ 57,620 $ 41,226 ========= ======== F-23 ================================================================================ Metromedia International Group, Inc. ================================================================================ Combined Statement of Operations 1996 1995 1994 ---- ---- ---- Revenue $ 43,768 $ 19,344 $ 3,280 Expenses: Cost of service 15,171 9,993 2,026 Selling, general and administrative 23,387 11,746 2,411 Depreciation and amortization 7,989 3,917 1,684 Other 1,674 -- 203 -------- -------- ------- Total expenses 48,221 25,656 6,324 -------- -------- ------- Operating loss (4,453) (6,312) (3,044) Interest expense (3,655) (1,960) (632) Other income (expense) (391) (1,920) 47 Foreign currency translation (356) (203) 15 -------- -------- ------- Net loss $ (8,855) $(10,395) $(3,614) ======== ======== ======= Financial information for Joint Ventures which are not yet operational is not included in the above summary. The Communication Group's investment in and advances to those Joint Ventures and for those entities whose venture agreements are not yet finalized at December 31, 1996 amounted to approximately $26.4 million. F-24 ================================================================================ Metromedia International Group, Inc. ================================================================================ The following table represents summary financial information for all operating entities being grouped as indicated as of and for the year ended December 31, 1996 and totals for the years ended December 31, 1995 and February 28, 1995 (in thousands):
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-25 ================================================================================ Metromedia International Group, Inc. ================================================================================ The following table represents information about the Communication Group's operations in different geographic locations: Republics of Former Soviet Union United and Other States Eastern Europe PRC Foreign Total ------ -------------- --- ------- ----- Calendar 1996 - -------- Revenues $ 1,582 $12,413 $ -- $ 52 $ 14,047 Assets 118,670 61,319 10,105 4,911 195,005 ======== ======= ======= ======== ======== Calendar 1995 - -------- Revenues 589 4,569 -- -- 5,158 Assets 119,280 39,269 2,384 156 161,089 ======== ======= ======= ======== ======== Fiscal 1995 - ------ Revenues 417 3,128 -- -- 3,545 Assets 12,518 27,764 -- -- 40,282 ======== ======= ======= ======== ======== In December 1995, the Communications Group and Protocall Ventures, Ltd. ("Protocall") executed a letter of intent together with a loan agreement. The letter of intent called for the Communications Group to loan up to $1.5 million to Protocall and negotiate for the purchase by the Communications Group from Protocall of 51% of Protocall for $2.6 million. This letter was amended on April 12, 1996 to allow for a total borrowing of $1.9 million against the purchase price and to increase the Communications Group's ownership to 56% of Protocall. Upon closing of the purchase agreement, the principal and accrued interest under the loan were offset against the purchase price otherwise payable to Protocall. On May 17, 1996 the acquisition of Protocall by the Communications Group was completed with final payment of $600,000 to Protocall and all prior amounts loaned to Protocol were offset against the purchase price of $2.6 million. The transaction was accounted for under the purchase method of accounting. Accordingly, the difference between the purchase price and the underlying equity in the net assets of Protocall of approximately $1.5 million has been allocated to goodwill and is being amortized over 25 years. In October 1996, The Communications Group entered into a Joint Venture agreement to design, construct, install and operate Magticom, a mobile radio network in Tbilisi, Georgia. The equity contribution to the Joint Venture is $5.0 million of which 49% was contributed by the Communications Group. In December 1996, the Communications Group, through its 50% owned Moldovan Joint Venture, Sun-TV, acquired the assets of Eurocable Moldova, Ltd., a wired cable television company with approximately 30,000 subscribers, for approximately $1.5 million. In January 1997, the Communication Group's 99% owned Joint Venture, Romsat Cable TV and Radio, S.A., acquired the cable-television assets of Standard Ideal Consulting, S.A., a wired cable television company with approximately 37,000 subscribers, for approximately $2.8 million. F-26 ================================================================================ Metromedia International Group, Inc. ================================================================================ On March 18, 1996 Metromedia Asia Limited ("MAC," n/k/a Metromedia Asia Corporation), entered into a Joint Venture agreement with Golden Cellular Communications, Ltd, ("GCC") a company located in the PRC. The purpose of the Joint Venture is to provide wireless local loop telephony equipment, network planning, technical support and training to domestic telephone operators throughout the PRC. Total required equity contributions to the venture is $8.0 million, 60% of which is to be contributed by MAC and 40% by GCC. The equipment contributed by MAC as an in-kind capital contribution must be verified by a Chinese registered accountant in order to obtain a business license. Although the capital verification process has not yet been successfully completed, MAC is continuing its efforts towards completion. Management believes that the capital verification will be completed successfully. In addition, GCC's potential customers require an allocation of an appropriate frequency spectrum to utilize the equipment contributed to the Venture. In February 1997, MAC acquired Asian American Telecommunications Corporation ("AAT") pursuant to a Business Combination Agreement (the "BCA") in which MAC and AAT agreed to combine their businesses and operations. Pursuant to the BCA, each AAT shareholder and warrant holder exchanged (the "Exchange") (i) one AAT common share for one share of MAC common stock, par value $.01 per share ("MAC Common Stock"), (ii) one warrant to acquire one AAT common share at an exercise price of $4.00 per share for one warrant to acquire one share of MAC Common Stock at an exercise price of $4.00 per share and (iii) one warrant to acquire one AAT common share at an exercise price of $6.00 per share for one warrant to acquire one share of MAC Common Stock at an exercise price of $6.00 per share. AAT is engaged in the development and construction of communications services in the PRC. AAT, through a joint venture, has a contract with one of the PRC's two major providers of telephony services to provide telecommunications services in the Sichuan Province of the PRC. This transaction will be accounted for under the purchase method of accounting with MAC as the acquiring entity. Since the consummation of the acquisition the Communications Group owns 57% of MAC. As a condition to the closing of the BCA, the Communications Group purchased from MAC, for an aggregate purchase price of $10.0 million, 3,000,000 shares of MAC's Class A Common Stock, par value $.01 per share (the "MAC Class A Common Stock") and 1,250,000 warrants to purchase an additional 1,250,000 shares of MAC Class A Common Stock, at an exercise price of $6.00 per share (the "MAC Purchase"). The securities received by the Communications Group in the MAC Purchase are not registered under the Securities Act, but have certain demand and piggyback registration rights as provided in the MAC Purchase Agreement. F-27 ================================================================================ Metromedia International Group, Inc. ================================================================================ ================================================================================ 9. Long-term Debt ================================================================================ Long-term debt at December 31, 1996 and 1995 consisted of the following (in thousands): 1996 1995 ---- ---- MMG (excluding Communications Group, Entertainment Group and Snapper) MMG Credit Facility $ -- $ 28,754 6 1/2% Convertible Debentures due 2002, net of unamortized discount of $15,261 and $17,994 59,739 57,006 9 1/2% Debentures due 1998, net of unamortized discount of $86 and $140 59,398 59,344 9 7/8% Senior Debentures due 1997, net of unamortized premium of $38 and $217 15,038 18,217 10% Debentures due 1999 5,467 6,075 MPCA Acquisition Notes Payable due 1997 1,179 -- 6 1/4% Secured Note Payable due 1998 700 1,020 -------- -------- 141,521 170,416 -------- -------- Entertainment Group Notes payable to banks under Credit, Security and Guaranty Agreements 247,500 123,700 Other guarantees and contracts payable, net of unamortized discounts of $2,699 and $2,402 16,138 9,939 -------- -------- 263,638 133,639 -------- -------- Communications Group Hungarian Foreign Trade Bank 246 588 -------- -------- 246 588 -------- -------- Snapper Snapper Revolver 46,419 -- Industrial Development Bonds 1,050 -- -------- -------- 47,469 -- -------- -------- Capital lease obligations, interest rates of 9% to 13% 6,185 -- -------- -------- Less: current portion 55,638 40,597 -------- -------- Long-term debt, net of current portion $403,421 $264,046 ======== ======== Aggregate annual repayments of long-term debt over the next five years and thereafter are as follows (in thousands): 1997 $ 56,138 1998 93,293 1999 83,464 2000 32,042 2001 130,530 Thereafter 81,600 F-28 ================================================================================ Metromedia International Group, Inc. ================================================================================ MMG Debt (excluding Communications Group, Entertainment Group and Snapper) In 1987 the Company issued $75.0 million of 6 1/2% Convertible Subordinated Debentures due in 2002 in the Euro-dollar market. The Debentures are convertible into common stock at a conversion price of $41 5/8 per share. At the Company's option, the Debentures may be redeemed at 100% plus accrued interest until maturity. The 9 1/2% Subordinated Debentures are due in 1998. These debentures do not require annual principal payments. The 9 7/8% Senior Subordinated Debentures are redeemable at the option of the Company, in whole or in part, at 100% of the principal amount plus accrued interest. Mandatory sinking fund payments of $3.0 million (which the Company may increase to $6.0 million annually) began in 1982 and are intended to retire, at par plus accrued interest, 75% of the issue prior to maturity. The Senior Subordinated Debetures were paid in March 1997. At the option of the Company, the 10% Subordinated Debentures are redeemable, in whole or in part, at the principal amount plus accrued interest. Mandatory sinking fund payments of 10% of the outstanding principal amount commenced in 1989, however, the Company receives credit for debentures redeemed or otherwise acquired in excess of sinking fund payments. During 1996 the Company repaid its outstanding balance of $28.8 million under its revolving Credit Facility. The carrying value of the Company's long-term and subordinated debt, including the current portion at December 31, 1996, approximates fair value. Estimated fair value is based on a discounted cash flow analysis using current incremental borrowing rates for similar types of agreements and quoted market prices for issues which are traded. Entertainment Group Credit Facility On July 2, 1996, the Entertainment Group entered into a credit agreement with Chase Bank as agent for a syndicate of lenders, pursuant to which the lenders provided to the Entertainment Group and its subsidiaries a $300 million credit facility (the "Entertainment Group Credit Facility"). The $300 million facility consists of a secured term loan of $200 million (the "Term Loan") and a revolving credit facility of $100 million, including a $10 million letter of credit subfacility, (the "Revolving Credit Facility"). Proceeds from the Term Loan and $24.0 million of the Revolving Credit Facility were used to refinance the existing indebtedness of Orion (the "Old Orion Credit Facility"), Goldwyn and MPCA. In connection with the refinancing of the Old Orion Credit Facility, the Entertainment Group expensed the deferred financing costs associated with the Old Orion Credit Facility and recorded an extraordinary loss of approximately $4.5 million. F-29 ================================================================================ Metromedia International Group, Inc. ================================================================================ Borrowings under the Entertainment Group's Credit Facility which do not exceed the "borrowing base" as defined in the agreement will bear interest, at the Entertainment Group's option, at a rate of LIBOR plus 2.5% or Chase's alternative base rate plus 1.5%, and borrowings in excess of the borrowing base, which have the benefit of the guarantee referred to below, will bear interest, at the Entertainment Group's option, at a rate of LIBOR plus 1% or Chase's alternative base rate. The Term Loan has a final maturity date of June 30, 2001 and amortizes in 20 equal quarterly installments of $7.5 million commencing on September 30, 1996, with the remaining principal amount due at the final maturity date. If the outstanding balance under the Term Loan exceeds the borrowing base, the Company will be required to pay down such excess amount. The Term Loan and the Revolving Credit Facility are secured by a first priority lien on all of the stock of Orion and its subsidiaries and on substantially all of the Entertainment Group's assets, including its accounts receivable and film and television libraries. Amounts outstanding under the Revolving Credit Facility in excess of the applicable borrowing base are also guaranteed jointly and severally by Metromedia Company, and John W. Kluge, a general partner. To the extent the borrowing base exceeds the amount outstanding under the Term Loan, such excess will be used to support the Revolving Credit Facility so as to reduce the exposure of the guarantors under such facility. The Entertainment Group Credit Facility contains customary convenants including limitations on the issuance of additional indebtedness and guarantees, on the creation of new liens, development costs and budgets and other information regarding motion picture production and made-for television movies, the aggregate amount of unrecouped print and advertising costs the Entertainment Group may incur, on the amount of the Entertainment Group's leases, capital and overhead expenses (including specific limitations on the Entertainment Group's theatrical exhibition subsidiary's capital expenditures), prohibitions of the declaration of dividends or distributions by the Entertainment Group (except as defined in the agreement), limitations on the merger or consolidation of the Entertainment Group or the sale by the Entertainment Group of any substantial portion of its assets or stock and restrictions on the Entertainment Group's line of business, other than activities relating to the production, distribution and exhibition of entertainment product. The Entertainment Group's Credit Facility also contains financial covenants, including requiring maintenance by the Entertainment Group of certain cash flow and operational ratios. The Revolving Credit Facility contains certain events of default, including nonpayment of principal or interest on the facility, the occurrence of a "change of control" (as defined in the agreement) or an assertion by the guarantors of such facility that the guarantee of such facility is unenforceable. The Term Loan portion of the Entertainment Group's Credit Facility also contains a number of customary events of default, including non-payment of principal and interest and the occurrence of a "change of management" (as defined in the agreement), violation of covenants, falsity of representations and warranties in any material respect, certain cross-default and cross-acceleration provisions, and bankruptcy or insolvency of Orion or its material subsidiaries. At the November 1 Merger date (see note 2), proceeds from the Old Orion Credit Facility as well as amounts advanced from MMG under a subordinated promissory note, were used to repay and terminate all outstanding Plan debt obligations ($210.7 million) and to pay certain transaction costs. To record the repayment and termination of the Plan debt, the Entertainment Group removed certain unamortized discounts associated with such obligations from its accounts and recognized an extraordinary loss of $32.4 million on the extinguishment of debt. It is assumed that the carrying value of the Entertainment Group's bank debt approximates its face value because it is a floating rate instrument. F-30 ================================================================================ Metromedia International Group, Inc. ================================================================================ Communications Group Debt A loan from the Hungarian Foreign Trade Bank, which bears interest at 34.5%, is due on September 14, 1997. The loan is a Hungarian Forint based loan and is secured by a letter of credit in the amount of $1.2 million. On November 1, 1995, MMG issued 2,537,309 shares of common stock in repayment of $26.6 million of MITI notes payable. Included in interest expense for calendar 1996, calendar 1995 and fiscal 1995 are $107,000, $3.8 million and $430,000, respectively, of interest on amounts due to Metromedia Company, an affiliate of MMG. Snapper Debt On November 26, 1996, Snapper entered into a credit agreement (the "Snapper Credit Agreement") with AmSouth Bank of Alabama ("AmSouth"), pursuant to which AmSouth has agreed to make available to Snapper a revolving line of credit up to $55.0 million, upon the terms and subject to conditions contained in the Snapper Credit Agreement (the "Snapper Revolver") for a period ending on January 1, 1999 (the "Snapper Revolver Termination Date"). The Snapper Revolver is guaranteed by the Company. Interest under the Snapper Revolver is payable at Snapper's option at a rate equal to either (i) prime plus .5% (from November 26, 1996 through May 25, 1997) and prime plus 1.5% (from May 26, 1997 to the Snapper Revolver Termination Date) and (ii) LIBOR (as defined in the Snapper Credit Agreement) plus 2.5% (from November 26, 1996 through May 25, 1997) or LIBOR plus 3.5% (from May 26, 1997 to the Snapper Revolver Termination Date). The Snapper Revolver contains customary covenants, including delivery of certain monthly, quarterly and annual financial information, delivery of budgets and other information related to Snapper, limitations on Snapper's ability to (i) sell, transfer, lease (including sale-leaseback) or otherwise dispose of all or any material portion of its assets or merge with any person; (ii) acquire an equity interest in another business; (iii) enter into any contracts, leases, sales or other transactions with any division or an affiliate of Snapper, without the prior written consent of AmSouth; (iv) declare or pay any dividends or make any distributions upon any of its stock or directly or indirectly apply any of its assets to the redemption, retirement, purchase or other acquisition of its stock; (v) make any payments to the Company on a subordinated promissory note issued by Snapper to the Company at any time (a) an Event of Default (as defined in the Snapper Credit Agreement) exists or would result because of such payment, (b) there would be less than $10 million available to Snapper under the terms of the Snapper Credit Agreement, (c) a single payment would exceed $3 million, (d) prior to January 1, 1998, and (e) such payment would occur more frequently than quarterly after January 1, 1998; (vi) make loans, issue additional indebtedness or make any guarantees. In addition, Snapper is required to maintain at all times as of the last day of each month a specified net worth. The Snapper Credit Agreement is secured by a first priority security interest in all of Snapper's assets and properties and is also entitled to the benefit of a replenishable $1.0 million cash collateral account, which was initially funded by Snapper. Under the Snapper Credit Agreement, AmSouth may draw upon amounts in the cash collateral account to satisfy any payment defaults by Snapper and Messrs. Kluge and Subotnick, general partners of Metromedia, are obligated to replenish such account any time amounts are so withdrawn up to the entire amount of the Snapper Revolver. F-31 ================================================================================ Metromedia International Group, Inc. ================================================================================ Under the Snapper Credit Agreement, the following events, among others, each constitute an "Event of Default": (i) breach of any representation or warranty, certification or certain covenants made by Snapper or any due observance or performance to be observed or performed by Snapper; (ii) failure to pay within 5 days after payment is due; and (iii) a "change of control" shall occur. For purposes of the Snapper Credit Agreement, "change of control" means (i) a change of ownership of Snapper that results in the Company not owning at least 80% of all the outstanding stock of Snapper, (ii) a change of ownership of the Company that results in (a) Messrs. Kluge and Subotnick not having beneficial ownership or common voting power of at least 15% of the common voting power of the Company, (b) any person having more common voting power than Messrs. Kluge and Subotnick, or (c) any person other than Messrs. Kluge and Subotnick for any reason obtaining the right to appoint a majority of the board of directors of the Company. At December 31, 1996 Snapper was not in compliance with certain of these covenants. The Company and AmSouth have amended the Snapper Credit Agreement to provide for (i) an annual administrative fee to be paid on December 31, 1997, (ii) an increase in Snapper's borrowing rates as of December 31, 1997 (from prime rate to prime rate plus 1.50% and from LIBOR plus 2.50% to LIBOR plus 4.00%), and (iii) an increase in Snapper's commitment fee as of December 31, 1997 from .50% per annum to .75% per annum. As part of the amendment to the Snapper Credit Agreement AmSouth waived: (i) the covenant defaults as of December 31, 1996, (ii) the $250,000 semi-annual administrative fee requirement which was set to commence on May 26, 1997 and (iii) the mandatory borrowing rate and commitment fee increase that was to occur on May 26, 1997. Furthermore, the amendment replaces certain existing financial covenants with covenants on minimum quarterly cash flow and equity requirements, as defined. In addition, the Company and AmSouth have agreed to the major terms and conditions of a $10.0 million credit facility. The closing of the credit facility shall remain subject to the delivery of satisfactory loan documentation. The $10.0 million working capital facility will: (i) have a pari passu collateral interest (including rights under the Make-Whole and Pledge Agreement) with the Credit Facility, (ii) accrue interest on borrowings at AmSouth's prime rate, floating (same borrowing rate as the Credit Facility), (iii) become due and payable on October 1, 1997. As additional consideration for AmSouth making this new facility available, Snapper shall provide AmSouth with either: (i) the joint and several guarantees of Messrs. Kluge and Subotnick on the new facility only, or (ii) a $10.0 million interest-bearing deposit made by MMG at AmSouth (this deposit will not be specifically pledged to secure the Snapper facility or to secure MMG's obligations thereunder, but AmSouth shall have the right of offset against such deposit as granted by law and spelled out within the Credit Agreement). It is assumed that the carrying value of Snapper's bank debt approximates its face value because it is a floating rate instrument. In addition, Snapper has industrial development bonds with certain municipalities. The industrial development bonds mature in 1999 and 2001, and their interest rates range from 62% to 75% of the prime rate. ================================================================================ 10. Stockholders' Equity ================================================================================ Preferred Stock There are 70,000,000 shares of Preferred Stock authorized, none of which were outstanding or designated as to a particular series at December 31, 1996. Common Stock On July 2, 1996, the Company completed a public offering of 18.4 million shares of common stock, generating net proceeds of approximately $190.6 million. On August 29, 1996, the Company increased the number of authorized shares of common stock from 110,000,000 to 400,000,000. At December 31, 1996 and 1995 and February 28, 1995 there were 66,153,439, 42,613,738 and 20,934,898 shares issued and outstanding, respectively. At December 31, 1996, the Company has reserved for future issuance shares of Common Stock in connection with the plans and debentures listed below: Stock option plans 10,067,603 6 1/2% Convertible Debentures 1,801,802 Restricted stock plan 132,800 ---------- 12,002,205 ========== F-32 ================================================================================ Metromedia International Group, Inc. ================================================================================ Stock Option Plans On August 29, 1996, the stockholders of MMG approved the Metromedia International Group, Inc. 1996 Incentive Stock Option Plan (the "MMG Plan"). The aggregate number of shares of common stock that may be the subject of awards under the MMG Plan is 8,000,000. The maximum number of shares which may be the subject of awards to any one grantee under the MMG Plan may not exceed 250,000 in the aggregate. The MMG Plan provides for the issuance of incentive stock options and nonqualified stock options. Incentive stock options may not be issued at a per share price less than the market value at the date of grant. Nonqualified stock options may be issued at prices and on terms determined in the case of each stock option grant. Stock options may be granted for terms of up to but not exceeding ten years and vest and become fully exercisable after four years from the date of grant. At December 31, 1996 there were 5,210,279 additional shares available for grant under the MMG Plan. Following the November 1 Merger, options granted pursuant to each of the MITI stock option plan and the Actava stock option plans and, following the Goldwyn Merger, the Goldwyn stock option plans were converted into stock options exercisable for common stock of MMG in accordance with their respective exchange ratios. The per share weighted-average fair value of stock options granted during 1996 was $7.36 on the date of grant using the Black Scholes option-pricing model with the following weighted average assumptions: expected volatility of 49%, expected dividend yield of zero percent, risk-free interest rate of 5.2% and an expected life of 7 years. The Company applies APB 25 in recording the value of stock options granted pursuant to its plans. No compensation cost has been recognized for stock options granted under the MMG Plan and compensation expense of $153,000 has been recorded for stock options under the MITI stock option plan in the financial statements. Had the Company determined compensation cost based on the fair value at the grant date for its stock options under SFAS 123, the Company's net loss would have increased to the pro forma amounts indicated below (in thousands, except per share amount): 1996 Net loss As reported ($115,243) Pro forma ($118,966) Primary loss per common share As reported ($2.12) Pro forma ($2.19) Pro forma net income reflects only options granted under the MMG Plan and MITI stock option plan in 1996. MITI and Actava stock options granted prior to the November 1 Merger were recorded at fair value. In addition, Goldwyn stock options granted prior to the Goldwyn Merger, were recorded at fair value and included in the Goldwyn purchase price. F-33 ================================================================================ Metromedia International Group, Inc. ================================================================================ Stock option activity during the periods indicated is as follows: Weighted Number Average of Shares Option Price --------- ------------ Balance at December 31, 1994 941,000 $ 2.38 Transfer of Actava options in merger 737,000 $ 8.17 Options granted 367,000 $ 5.41 Options exercised (93,000) $ 8.63 Options canceled (89,000) $ 5.41 --------- Balance at December 31, 1995 1,863,000 $ 4.81 Transfer of Goldwyn options in acquisition 202,000 $ 23.33 Options granted 2,945,000 $ 12.63 Options exercised (167,000) $ 7.46 Options canceled (264,000) $ 13.03 --------- Balance at December 31, 1996 4,579,000 $ 10.09 ========= At December 31, 1996 the range of exercise prices and the weighted-average remaining contractual lives of outstanding options was $1.08 - $97.45 and 8.4 years, respectively. In addition to the MMG Plan, at December 31, 1996, there were 278,000 shares that may be the subject of awards under other existing stock option plans. At December 31, 1996 and 1995, the number of stock options exercisable was 2,031,000 and 1,214,000, respectively, and the weighted-average exercise price of these options was $7.92 and $3.97, respectively During 1994, an officer of the Communications Group was granted an option, not pursuant to any plan, to purchase 657,908 shares of common stock (the "MITI Options") at a purchase price of $1.08 per share. The MITI Options expire on September 30, 2004, or earlier if the officer's employment is terminated. Included in the fiscal 1995 statement of operations is $3.6 million of compensation expense in connection with these options. Prior to the November 1 Merger, an officer of Actava was granted an option, not pursuant to any plan, to purchase 300,000 shares of common stock (the "Actava Options") at a purchase price of $6.375 per share. The Actava Options expire on April 18, 2001. As part of the MPCA Merger, the Company issued 256,504 shares of restricted common stock to certain employees. The common stock vests on a pro-rata basis over a three year period ending in July 1999. The total market value of the shares at the time of issuance is treated as unearned compensation and is charged to expense over the vesting period. Unearned compensation charged to expense for the period ended December 31, 1996 was $529,000. F-34 ================================================================================ Metromedia International Group, Inc. ================================================================================ On December 13, 1995, the Board of Directors of the Company terminated the Actava 1991 Non-Employee Director Stock Option Plan. The Company had previously reserved 150,000 shares for issuance upon the exercise of stock options granted under this plan and had granted 20,000 options thereunder. No shares have been granted under the Company's restricted stock plan during 1996 and 102,800 shares of common stock remain available under this plan. ================================================================================ 11. Income Taxes ================================================================================ The provision for income taxes for calendar 1996, calendar 1995 and fiscal 1995 all of which is current, consists of the following (in thousands): Calendar Calendar Fiscal 1996 1995 1995 ---- ---- ---- Federal $ -- $ -- $ -- State and local 100 167 100 Foreign 1,314 600 1,200 -------- -------- ------- Current 1,414 767 1,300 Deferred -- -- -- -------- -------- ------- $ 1,414 $ 767 $ 1,300 ======== ======== ======= The provision for income taxes for calendar 1996, calendar 1995 and fiscal 1995 applies to continuing operations before discontinued operations and extraordinary items. The federal income tax portion of the provision for income taxes includes the benefit of state income taxes provided. The Company recognizes investment tax credits on the flow-through method. The Company had pre-tax losses from foreign operations of $4.4 million, $1.9 million and $9.5 million in calendar 1996, calendar 1995 and fiscal 1995, respectively. Pre-tax losses from domestic operations were $88.6 million, $84.4 million and $58.6 million in calendar 1996, calendar 1995 and fiscal 1995, respectively. State and local income tax expense in calendar 1996, calendar 1995 and fiscal 1995 includes an estimate for franchise and other state tax levies required in jurisdictions which do not permit the utilization of the Company's net operating loss carryforwards to mitigate such taxes. Foreign tax expense in calendar 1996, calendar 1995 and fiscal 1995 reflects estimates of withholding and remittance taxes. F-35 ================================================================================ Metromedia International Group, Inc. ================================================================================ The temporary differences and carryforwards which give rise to deferred tax assets and (liabilities) at December 31, 1996 and 1995 are as follows (in thousands): 1996 1995 --------- --------- Net operating loss carryforward $ 237,713 $ 241,877 Deferred income 29,183 22,196 Investment credit carryforward 25,000 28,000 Allowance for doubtful accounts 7,471 4,395 Capital loss carryforward 6,292 3,850 Film costs (29,412) (1,832) Shares payable 21,228 15,670 Reserves for self-insurance 10,415 10,970 Investment in equity investee 12,325 22,146 Purchase of safe harbor lease investment (7,903) (9,115) Minimum tax credit (AMT) carryforward 8,805 8,805 Other reserves 11,790 6,331 Other (2,628) 7,654 --------- --------- Subtotal before valuation allowance 330,279 360,947 Valuation allowance (330,279) (360,947) --------- --------- Deferred taxes $ -- $ -- ========= ========= The net change in the total valuation allowance for calendar 1996, calendar 1995 and fiscal 1995 was an increase (decrease) of ($30.7) million, $119.9 million and $51.3 million, respectively. The Company's provision (benefit) for income taxes for calendar 1996, calendar 1995 and fiscal 1995, differs from the provision (benefit) that would have resulted from applying the federal statutory rates during those periods to income (loss) before the provision (benefit) for income taxes. The reasons for these differences are explained in the following table (in thousands): Calendar Calendar Fiscal 1996 1995 1995 ---- ---- ---- Benefit based upon federal statutory rate of 35% $(32,556) $(30,190) $(23,839) State taxes, net of federal benefit 65 109 65 Foreign taxes in excess of federal credit 1,314 600 1,200 Amortization of goodwill 2,510 17 -- Non-deductible direct expenses of chapter 11 filing 76 448 214 Foreign operations 1,548 656 -- Current year operating loss not benefited 17,632 26,725 22,832 Equity in losses of Joint Ventures 10,690 2,376 790 Other, net 135 26 38 -------- -------- -------- Provision for income taxes $ 1,414 $ 767 $ 1,300 ======== ======== ======== F-36 ================================================================================ Metromedia International Group, Inc. ================================================================================ At December 31, 1996 the Company had available net operating loss carryforwards, capital loss carryforwards, unused minimum tax credits and unused investment tax credits of approximately $615.0 million, $18.0 million, $9.0 million and $25.0 million, respectively, which can reduce future federal income taxes. These carryforwards and credits began to expire in 1996. The minimum tax credit may be carried forward indefinitely to offset regular tax in certain circumstances. The use by the Company of the Pre-November 1, 1995 net operating loss carryforwards reported by Orion, Actava, MITI and Sterling ("the Pre-November 1 Losses") (and the subsidiaries included in their respective affiliated groups of corporations which filed consolidated Federal income tax returns with Orion, Actava, MITI or Sterling as the parent corporations) are subject to certain limitations as a result of the November 1 Merger, respectively. Under Section 382 of the Internal Revenue Code, annual limitations generally apply to the use of the Pre-November 1 Losses by the Company. The annual limitations on the use of the Pre-November 1 Losses of Orion, Actava, MITI or Sterling by the Company approximate $11.9 million, $18.3 million, $10.0 million, $510,000 per year, respectively. To the extent Pre-November 1 Losses equal to the annual limitation with respect to Orion, Actava, MITI or Sterling are not used in any year, the unused amount is generally available to be carried forward and used to increase the applicable limitation in the succeeding year. The use of Pre-November 1 Losses of Orion, MITI and Sterling is also separately limited by the income and gains recognized by the corporations that were members of the Orion, MITI and Sterling affiliated groups, respectively. Under proposed Treasury regulations, such Pre-November 1 Losses of any such former members of any such group, are usable on an aggregate basis to the extent of the income and gains of such former members of such group. As a result of the November 1 Merger, the Company succeeded to approximately $92.2 million of Pre-November 1 Losses of the Actava Group. SFAS 109 requires assets acquired and liabilities assumed to be recorded at their "gross" fair value. Differences between the assigned values and tax bases of assets acquired and liabilities assumed in purchase business combinations are temporary differences under the provisions of SFAS 109. However, since all of the Actava intangibles have been eliminated, when the Pre-November 1 Losses are utilized they will reduce income tax expense. F-37 ================================================================================ Metromedia International Group, Inc. ================================================================================ ================================================================================ 12. Employee Benefit Plans ================================================================================ Orion, MITI and Snapper have defined contribution plans which provide for discretionary annual contributions covering substantially all of their employees. Participating employees can defer receipt of up to 15% of their compensation, subject to certain limitations. Orion matches 50% of amounts contributed up to $1,000 per participant per plan year and may make discretionary contributions on an annual basis. MITI has the discretion to match amounts contributed by plan participants up to 3% of their compensation. Snapper's employer match is determined each year, and was 50% of the first 6% of compensation contributed by each participant for the period November 1, 1996 to December 31, 1996. The contribution expense for calendar 1996, calendar 1995 and fiscal 1995 was $375,000, $124,000 and $107,000, respectively. In addition, Snapper has a profit sharing plan covering substantially all non-bargaining unit employees. Contributions are made at the discretion of management. No profit sharing amounts were approved by management in 1996. Prior to the November 1 Merger, Actava had a noncontributory defined benefit plan which was "qualified" under Federal tax law and covered substantially all of Actava's employees. In addition, Actava had a "nonqualified" supplemental retirement plan which provided for the payment of benefits to certain employees in excess of those payable by the qualified plans. Following the November 1 Merger (see note 2), the Company froze the Actava noncontributory defined benefit plan and the Actava nonqualified supplemental retirement plan effective as of December 31, 1995. Employees no longer accumulate benefits under these plans. In connection with the November 1 Merger, the projected benefit obligation and fair value of plan assets were remeasured considering the Company's freezing of the plan. The excess of the projected benefit obligations over the fair value of plan assets in the amount of $4.9 million was recorded in the allocation of purchase price. The recognition of the net pension liability in the allocation of the purchase price eliminated any previously existing unrecognized gain or loss, prior service cost, and transition asset or obligation related to the acquired enterprise's pension plan. Snapper sponsors a defined benefit pension plan which covers substantially all bargaining unit employees. Benefits are based upon the employee's years of service multiplied by fixed dollar amounts. Snapper's funding policy is to contribute annually such amounts as are necessary to provide assets sufficient to meet the benefits to be paid to the plan's members and keep the plan actuarially sound. F-38 ================================================================================ Metromedia International Group, Inc. ================================================================================ In addition, Snapper provides a group medical plan and life insurance coverage for certain employees subsequent to retirement. The plans have been funded on a pay-as-you-go (cash) basis. The plans are contributory, with retiree contributions adjusted annually, and contain other cost-sharing features such as deductibles, coinsurance, and life-time maximums. The plan accounting anticipates future cost-sharing changes that are consistent with Snapper's expressed intent to increase the retiree contribution rate annually for the expected medical trend rate for that year. The coordination of benefits with Medicare uses a supplemental, or exclusion of benefits, approach. Snapper funds the excess of the cost of benefits under the plans over the participants' contributions as the costs are incurred. The net periodic pension cost and net periodic post-retirement benefit cost (income) for the year ended December 31, 1996 amounts to $128,000 and ($104,000), respectively. Snapper's defined benefit plan's projected benefit obligation and fair value of plan assets at December 31 were $5.4 million and $6.7 million, respectively. Accrued post-retirement benefit cost at December 31, 1996 was $3.1 million. Disclosures regarding the funded status of the plan have not been included herein because they are not material to the Company's consolidated financial statements at December 31, 1996. F-39 ================================================================================ Metromedia International Group, Inc. ================================================================================ ================================================================================ 13. Business Segment Data ================================================================================ The business activities of the Company constitute three business segments (see note 1 Description of the Business) and are set forth in the following table (in thousands): BUSINESS SEGMENT DATA Calendar Calendar Fiscal 1996 1995 1995 ---- ---- ---- Entertainment Group: Net revenues $ 165,164 $ 133,812 $ 191,244 Direct operating costs (164,016) (157,000) (210,365) Depreciation and amortization (5,555) (694) (767) --------- --------- --------- Loss from operations (4,407) (23,882) (19,888) ========= ========= ========= Assets at year end 490,288 283,093 351,588 Capital expenditures 3,648 1,151 1,198 ========= ========= ========= Communications Group: Net revenues 14,047 5,158 3,545 Direct operating costs (39,021) (26,803) (19,067) Depreciation and amortization (6,403) (2,101) (1,149) --------- --------- --------- Loss from operations (31,377) (23,746) (16,671) ========= ========= ========= Equity in losses of Joint Ventures (11,079) (7,981) (2,257) ========= ========= ========= Assets at year end 195,005 161,089 40,282 Capital expenditures 3,829 2,324 3,610 ========= ========= ========= Snapper (1): Net revenues 22,544 -- -- Direct operating costs (30,653) -- -- Depreciation and amortization (1,256) -- -- --------- --------- --------- Loss from operations (9,365) -- -- ========= ========= ========= Assets at year end 140,327 -- -- Capital expenditures 1,252 -- -- ========= ========= ========= Headquarters and Eliminations: Net revenues -- -- -- Direct operating costs (9,355) (1,109) -- Depreciation and amortization (18) -- -- --------- --------- --------- Income from operations (9,373) (1,109) -- ========= ========= ========= Assets at year end including discounted operations and eliminations 119,120 155,456 -- ========= ========= ========= Consolidated - Continuing Operations: Net revenues 201,755 138,970 194,789 Direct operating costs (243,045) (184,912) (229,432) Depreciation and amortization (13,232) (2,795) (1,916) --------- --------- --------- Loss from operations (54,522) (48,737) (36,559) ========= ========= ========= Equity in losses of joint ventures (11,079) (7,981) (2,257) ========= ========= ========= Assets at year end 944,740 599,638 391,870 Capital expenditures $ 8,729 $ 3,475 $ 4,808 ========= ========= ========= (1) Represents operations from November 1, 1996 to December 31, 1996. F-40 ================================================================================ Metromedia International Group, Inc. ================================================================================ The sources of the Company's revenues from continuing operations by market for each of the last three fiscal years are set forth in "Management's Discussion and Analysis of Financial Condition and Results of Operations". The Company derives significant revenues from the foreign distribution of its theatrical motion pictures and television programming. The following table sets forth the Entertainment Group's export sales from continuing operations by major geographic area for each of the last three fiscal years (in thousands): Calendar Calendar Fiscal 1996 1995 1995 ---- ---- ---- Canada $ 1,995 $ 4,150 $ 3,862 Europe 32,699 32,126 36,532 Mexico and South America 3,151 2,454 4,586 Asia and Australia 8,669 8,841 13,820 -------- -------- -------- $ 46,515 $ 47,571 $ 58,800 ======== ======== ======== Revenues and assets of the Communications Group's foreign operations are disclosed in note 8. Showtime Networks, Inc. ("Showtime") and Lifetime Television ("Lifetime") have been significant customers of the Company. During calendar 1996, calendar 1995 and fiscal 1995, the Company recorded approximately $800,000, $15.4 million and $45.5 million, respectively, of revenues under its pay cable agreement with Showtime, and during calendar 1996, calendar 1995 and fiscal 1995, the Company recorded approximately $1.9 million, $15.0 million and $12.5 million of revenues, respectively, under its basic cable agreement with Lifetime. ================================================================================ 14. Commitments and Contingent Liabilities ================================================================================ Commitments The Company is obligated under various operating and capital leases. Total rent expense amounted to $5.7 million, $2.6 million and $2.3 million in calendar 1996, calendar 1995, and fiscal 1995, respectively. Plant, property and equipment included capital leases of $7.2 million and related accumulated amortization of $1.4 million at December 31, 1996. Minimum rental commitments under noncancellable leases are set forth in the following table (in thousands): Year Capital Leases Operating Leases ---- -------------- ---------------- 1997 $ 1,049 $ 8,731 1998 1,049 7,314 1999 1,515 5,598 2000 833 4,866 2001 538 4,757 Thereafter 8,761 24,187 -------- -------- Total 13,745 $ 55,453 ======== Less: amount representing interest (7,560) Present value of future minimum lease payments $ 6,185 ======== F-41 ================================================================================ Metromedia International Group, Inc. ================================================================================ The Company and certain of its subsidiaries have employment contracts with various officers, with remaining terms of up to five years, at amounts approximating their current levels of compensation. The Company's remaining aggregate commitment at December 31, 1996 under such contracts is approximately $30.3 million. In addition, the Company and certain of its subsidiaries have postemployment contracts with various officers. The Company's remaining aggregate commitment at December 31, 1996 under such contracts is approximately $1.1 million. The Company pays a management fee to Metromedia for certain general and administrative services provided by Metromedia personnel. Such management fee amounted to $1.5 million in calendar 1996 and $250,000 for the period November 1, 1995 to December 31, 1995. The management fee commitment for the year ended December 31, 1997 is $3.3 million. Snapper has entered into various long-term manufacturing and purchase agreements with certain vendors for the purchase of manufactured products and raw materials. As of December 31, 1996, noncancelable commitments under these agreements amounted to approximately $25.0 million. Snapper has an agreement with a financial institution which makes available floor plan financing to distributors and dealers of Snapper products. This agreement provides financing for dealer inventories and accelerates Snapper's cash flow. Under the terms of the agreement, a default in payment by a dealer is nonrecourse to both the distributor and to Snapper. However, the distributor is obligated to repurchase any equipment recovered from the dealer and Snapper is obligated to repurchase the recovered equipment if the distributor defaults. At December 31, 1996, there was approximately, $35.3 million outstanding under this floor plan financing arrangement. Contingencies The licenses pursuant to which the Communications Group's businesses operate are issued for limited periods. Certain of these licenses expire over the next several years. Two of the licenses held by the Communications Group have recently expired, although the Communications Group has been permitted to continue operations while the reissuance is pending. The Communications Group has applied for renewals and expects new licenses to be issued. Six other licenses held or used by the Communications Group will expire in 1997. While there can be no assurance on this matter, based on past experience, the Communications Group expects that all of these licenses will be renewed. At December 31, 1996 the Company had $17.8 million of outstanding letters of credit which principally collaterlizes certain liabilities under the Company's self-insurance program. F-42 ================================================================================ Metromedia International Group, Inc. ================================================================================ The Company may also be materially and adversely affected by laws restricting foreign investment in the field of communications. Certain countries have extensive restrictions on foreign investment in the communications field and the Communications Group is attempting to structure its prospective projects in order to comply with such laws. However, there can be no assurance that such legal and regulatory restrictions will not increase in the future or, as currently promulgated, will not be interpreted in a manner giving rise to tighter restrictions, and thus may have a material adverse effect on the Company's prospective projects in the country. The Russian Federation has periodically proposed legislation that would limit the ownership percentage that foreign companies can have in communications businesses. While such proposed legislation has not been made into law, it is possible that such legislation could be enacted in Russia and/or that other countries in Eastern Europe and the republics of the former Soviet Union may enact similar legislation which could have a material adverse effect on the business, operations, financial condition or prospects of the Company. Such legislation could be similar to United States federal law which limits the foreign ownership in entities owning broadcasting licenses. Similarly, PRC law and regulation restrict and prohibit foreign companies or joint ventures in which they participate from providing telephony service to customers in the PRC and generally limit the role that foreign companies or their joint ventures may play in the telecommunications industry. As a result, a Communications Group affiliate that has invested in the PRC must structure its transactions as a provider of telephony equipment and technical support services as opposed to a direct provider of such services. In addition, there is no way of predicting whether additional foreign ownership limitations will be enacted in any of the Communications Group's markets, or whether any such law, if enacted, will force the Communications Group to reduce or restructure its ownership interest in any of the ventures in which the Communications Group currently has an ownership interest. If foreign ownership limitations are enacted in any of the Communications Group's markets and the Communications Group is required to reduce or restructure its ownership interests in any ventures, it is unclear how such reduction or restructuring would be implemented, or what impact such reduction or restructuring would have on the Communications Group. The Republic of Latvia passed legislation in September, 1995 which purports to limit to 20% the interest which a foreign person is permitted to own in entities engaged in certain communications businesses such as radio, cable television and other systems of broadcasting. This legislation will require the Communications Group to reduce to 20% its existing ownership interest in Joint Ventures which operate a wireless cable television system and an FM radio station in Riga, Latvia. Management believes that the ultimate outcome of this matter will not have a material adverse impact on the Company's financial position and results of operations. Acquisition Commitments During December 1995, the Communications Group and the shareholders of AS Trio LSL, executed a letter of intent together with a loan agreement. The letter of intent states that the Communications Group will loan up to $1.0 million to the shareholders and negotiate for the purchase of AS Trio LSL. Upon closing of the purchase agreement, the principal and accrued interest under the loan will be applied to the purchase price. F-43 ================================================================================ Metromedia International Group, Inc. ================================================================================ In connection with the Communications Group's activities directed at entering into joint venture agreements in the Pacific Rim, MAC has entered into certain agreements with Communications Technology International, Inc., ("CTI"), owner of 7% of the equity of MAC. Under these agreements, MAC has agreed to loan up to $2.5 million to CTI which would be used to fund certain of CTI's operations in the Pacific Rim, and permit CTI to purchase up to an additional 7% of the equity of MAC provided that CTI is successful in obtaining rights to operate certain services, as defined, and MAC is provided with the right to participate in the operation of such services. MAC has also agreed to loan the funds required to purchase the equity interests in MAC to CTI. No amounts have been loaned under this provision as of December 31, 1996. Litigation Fuqua Industries, Inc. Shareholder Litigation Between February 25, 1991 and March 4, 1991, three lawsuits were filed against the Company (formerly named Fuqua Industries, Inc.) in the Delaware Chancery Court. On May 1, 1991, these three lawsuits were consolidated by the Delaware Chancery Court in re Fuqua Industries, Inc. Shareholders Litigation, Civil Action No. 11974. The named defendants are certain current and former members of the Company's Board of Directors and certain former members of the Board of Directors of Intermark, Inc. ("Intermark"). Intermark is a predecessor to Triton Group Ltd., which at one time owned approximately 25% of the outstanding shares of the Company's Common Stock. The Company was named as a nominal defendant in this lawsuit. The action was brought derivatively in the right of and on behalf of the Company and purportedly was filed as a class action lawsuit on behalf of all holders of the Company's Common Stock other than the defendants. The complaint alleges, among other things, a long-standing pattern and practice by the defendants of misusing and abusing their power as directors and insiders of the Company by manipulating the affairs of the Company to the detriment of the Company's past and present stockholders. The complaint seeks (i) monetary damages from the director defendants, including a joint and several judgment for $15.7 million for alleged improper profits obtained by Mr. J.B. Fuqua in connection with the sale of his shares in the Company to Intermark; (ii) injunctive relief against the Company, Intermark and its former directors, including a prohibition against approving or entering into any business combination with Intermark without specified approval; and (iii) costs of suit and attorneys' fees. On December 28, 1995, the plaintiffs filed a consolidated second amended derivative and class action complaint, purporting to assert additional facts in support of their claim regarding an alleged plan, but deleting their prior request for injunctive relief. On January 31, 1996, all defendants moved to dismiss the second amended complaint and filed a brief in support of that motion. A hearing regarding the motion to dismiss was held on November 6, 1996; the decision relating to the motion is pending. Michael Shores v. Samuel Goldwyn Company On May 20, 1996 a purported class action lawsuit against Goldwyn and its directors was filed in the Superior Court of the State of California for the County of Los Angeles in Michael Shores v. Samuel Goldwyn Company, et. al., case no. BC 150360. In the complaint, the plaintiff alleged that Goldwyn's Board of Directors breached its fiduciary duties to the stockholders of Goldwyn by agreeing to sell Goldwyn to the Company at a premium, yet providing Mr. Samuel Goldwyn, Jr., the Samuel Goldwyn Family Trust and Mr. Meyer Gottlieb with additional consideration, and sought to enjoin consummation of the Goldwyn Merger. The Company believes that the suit is without merit and intends to vigorously defend such action. The Company and its subsidiaries are contingently liable with respect to various matters, including litigation in the ordinary course of business and otherwise. Some of the pleadings in the various litigation matters contain prayers for material awards. Based upon management's review of the underlying facts and circumstances and consultation with counsel, management believes such matters will not result in significant additional liabilities which would have a material adverse effect upon the consolidated financial position or results of operations of the Company. F-44 ================================================================================ Metromedia International Group, Inc. ================================================================================ Environmental Protection Snapper's manufacturing plant is subject to federal, state and local environmental laws and regulations. Compliance with such laws and regulations has not, and is not expected to, materially affect Snapper's competitive position. Snapper's capital expenditures for environmental control facilities, its incremental operating costs in connection therewith and Snapper's environmental compliance costs were not material in 1996 and are not expected to be material in future years. The Company has agreed to indemnify the purchaser of a former subsidiary of the Company for certain obligations, liabilities and costs incurred by such subsidiary arising out of environmental conditions existing on or prior to the date on which the subsidiary was sold by the Company. The Company sold the subsidiary in 1987. Since that time, the Company has been involved in various environmental matters involving property owned and operated by the subsidiary, including clean-up efforts at landfill sites and the remediation of groundwater contamination. The costs incurred by the Company with respect to these matters have not been material during any year through and including the fiscal year ended December 31, 1996. As of December 31, 1996, the Company had a remaining reserve of approximately $1.3 million to cover its obligations of its former subsidiary. During 1995, the Company was notified by certain potentially responsible parties at a superfund site in Michigan that the former subsidiary may be a potentially responsible party at such site. The former subsidiary's liability, if any, has not been determined but the Company believes that such liability will not be material. The Company, through a wholly-owned subsidiary, owns approximately 17 acres of real property located in Opelika, Alabama (the "Opelika Property"). The Opelika Property was formerly owned by Diversified Products Corporation, a former subsidiary of the Company ("DP"), and was transferred to a wholly-owned subsidiary of the Company in connection with the sale of the Company's former sporting goods business to RDM Sports Group, Inc. DP previously used the Opelika Property as a storage area for stockpiling cement, sand, and mill scale materials needed for or resulting from the manufacture of exercise weights. In June 1994, DP discontinued the manufacture of exercise weights and no longer needed to use the Opelika Property as a storage area. In connection with the sale to RDM, RDM and the Company agreed that the Company, through a wholly-owned subsidiary, would acquire the Opelika Property, together with any related permits, licenses, and other authorizations under federal, state and local laws governing pollution or protection of the environment. In connection with the closing of the sale, the Company and RDM entered into an Environmental Indemnity Agreement (the "Indemnity Agreement") under which the Company agreed to indemnify RDM for costs and liabilities resulting from the presence on or migration of regulated materials from the Opelika Property. The Company's obligations under the Indemnity Agreement with respect to the Opelika Property are not limited. The Indemnity Agreement does not cover environmental liabilities relating to any property now or previously owned by DP except for the Opelika Property. The Company believes that the reserves of approximately $1.8 million previously established by the Company for the Opelika Property will be adequate to cover the cost of the remediation plan that has been developed. F-45 ================================================================================ Metromedia International Group, Inc. ================================================================================ ================================================================================ 15. Selected Quarterly Financial Data (unaudited) ================================================================================ Selected financial information for the quarterly periods in calendar 1996 and 1995 is presented below (in thousands, except per-share amounts): First Quarter of Second Quarter of - -------------------------------------------------------------------------------- 1996 1995 1996 1995 - -------------------------------------------------------------------------------- Revenues $ 30,808 $ 37,678 $ 37,988 $ 40,755 Operating loss (10,124) (11,459)(a) (10,154) (7,628) Interest expense, net 7,034 8,119 6,520 7,353 Equity interest in losses of Joint Ventures (1,783) (588) (1,985) (1,633) Net loss (19,141) (20,366) (18,850) (16,714) Primary loss per common share: Net loss $ (0.45) $ (0.97) $ (0.44) $ (0.80)
========================================================================================= 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. (d) In connection with the refinancing of the Orion Credit Facility, the Company expensed the deferred financing costs of $4.5 million. (e) Reflects the consolidation of Snapper as of November 1, 1996. (f) Includes writedowns to estimated realizable value of $3.0 million for unreleased theatrical product and $4.8 million for writedowns of previously released product. (g) Represents the excess of the allocated purchase price attributed to Snapper in the November 1 Merger, over the estimated cash flows from the operations and the anticipated sale of Snapper. (h) Orion removed certain unamortized discounts associated with such obligations from the accounts and recognized an extraordinary loss on the extinguishment of debt. The quarterly financial information for calendar 1995 presented above differs from amounts previously reported in Orion's quarterly financial statements due to the restatement of historical financial statements to account for the common control merger with MITI (see note 2). In addition, Orion's previously filed fiscal 1996 quarters have been restated and presented on a calendar year basis in calendar 1995. ================================================================================ F-46 ================================================================================ Metromedia International Group, Inc. ================================================================================ SCHEDULE I - CONDENSED FINANCIAL INFORMATION OF REGISTRANT METROMEDIA INTERNATIONAL GROUP, INC., Statements of Operations Year ended December 31, 1996 and the period ended December 31, 1995 (in thousands, except per share amounts) 1996 1995 --------- --------- Revenues Cost and Expenses: $ -- $ -- Selling, general and administrative 9,355 1,109 Depreciation and amortization 18 -- --------- --------- Operating loss (9,373) (1,109) Interest expense, net 13,313 2,208 Equity in losses of subsidiaries (71,747) (83,707) --------- --------- Loss from continuing operations before discontinued operations (94,433) (87,024) Discontinued operations: Loss on disposal of assets held for sale (16,305) (293,570) Extraordinary item: Early extinguishment of debt (4,505) (32,382) --------- --------- Net loss $(115,243) $(412,976) ========= ========= Primary loss per common share: Continuing operations $ (1.74) $ (3.54) ========= ========= Discontinued operations $ (0.30) $ (11.97) ========= ========= Extraordinary item $ (0.08) $ (1.32) ========= ========= Net loss $ (2.12) $ (16.83) ========= ========= The accompanying notes are an integral part of the condensed financial information. See notes to Condensed Financial Information on page S-4. S-1 ================================================================================ Metromedia International Group, Inc. ================================================================================ SCHEDULE I - CONDENSED FINANCIAL INFORMATION OF REGISTRANT - continued METROMEDIA INTERNATIONAL GROUP, INC. Balance Sheets December 31, 1996 and 1995 (in thousands) 1996 1995 --------- --------- Current Assets: Cash and cash equivalents $ 82,663 $ 16,482 Short-term investments -- 5,366 Other assets 2,765 3,010 --------- --------- Total current assets 85,428 24,858 Investment in RDM Sports Group, Inc. 31,150 47,455 Investment in Snapper, Inc. -- 79,200 Investment in subsidiaries 114,442 80,189 Intercompany accounts 188,065 86,102 Other assets 2,542 4,525 --------- --------- Total assets $ 421,627 $ 322,329 ========= ========= Current Liabilities: Accounts payable $ 2,453 $ 943 Accrued expenses 57,581 66,750 Current portion of long term debt 17,103 32,682 --------- --------- Total current liabilities 77,137 100,375 Long term debt 124,418 137,734 Other long term liabilities 390 382 --------- --------- Total liabilities 201,945 238,491 Stockholders' equity Common stock 66,153 42,614 Paid-in surplus 959,558 728,747 Other (2,680) 583 Accumulated deficit (803,349) (688,106) --------- --------- Total stockholders' equity 219,682 83,838 --------- --------- Total liabilities and stockholder equity $ 421,627 $ 322,329 ========= ========= The accompanying notes are an integral part of the condensed financial information. See Notes to Condensed Financial Information on page S-4 S-2 ================================================================================ Metromedia International Group, Inc. ================================================================================ SCHEDULE I - CONDENSED FINANCIAL INFORMATION OF REGISTRANT - continued METROMEDIA INTERNATIONAL GROUP, INC. Statements of Cash Flows Year ended December 31, 1996 and the period ended December 31, 1995 (in thousands)
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 S-4 S-3 ================================================================================ 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 SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS METROMEDIA INTERNATIONAL GROUP, INC. 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 EX-10.45 2 CREDIT AGREEMENT =============================================================================== CREDIT AGREEMENT Dated November 26, 1996 Between SNAPPER, INC. and AMSOUTH BANK OF ALABAMA Relating to a $55,000,000 Credit Facility =============================================================================== TABLE OF CONTENTS PAGE ARTICLE 1 RULES OF CONSTRUCTION AND DEFINITIONS SECTION 1.1 GENERAL RULES OF CONSTRUCTION.............................. 1 SECTION 1.2 Definitions................................................ 2 ARTICLE 2 CREDIT TO BE EXTENDED UNDER THIS AGREEMENT SECTION 2.1 Loan....................................................... 13 SECTION 2.2 Advances................................................... 13 SECTION 2.3 Payments................................................... 14 SECTION 2.4 Prepayment................................................. 14 SECTION 2.5 Reduction or Cancellation of Maximum Credit Amount. ...... 14 SECTION 2.6 Fees....................................................... 15 SECTION 2.7 Extension of Termination Date.............................. 15 SECTION 2.8 Place and Time of Payments................................. 15 SECTION 2.9 Security................................................... 16 SECTION 2.10 GUARANTY AGREEMENT......................................... 16 SECTION 2.12 Subordination Agreement.................................... 16 SECTION 2.13 Lock Box Agreement......................................... 17 ARTICLE 3 INTEREST SECTION 3.1 Applicable Interest Rates.................................. 18 SECTION 3.2 Procedure for Exercising Interest Rate Options............. 18 SECTION 3.3 FLOATING RATE.............................................. 19 SECTION 3.4 LIBOR-Based Rate........................................... 19 SECTION 3.5 Termination of LIBOR-Based Rate; Increase in LIBOR-Based Rate; Reduction of Return...................... 19 SECTION 3.6 Compensation............................................... 21 ARTICLE 4 REPRESENTATIONS AND WARRANTIES SECTION 4.1 FINANCIAL STATEMENTS....................................... 21 SECTION 4.2 NON-EXISTENCE OF DEFAULTS.................................. 21 SECTION 4.3 LITIGATION................................................. 22 SECTION 4.4 MATERIAL ADVERSE CHANGES................................... 22 i SECTION 4.5 TITLE TO PROPERTY.......................................... 22 SECTION 4.6 CORPORATE STATUS........................................... 22 SECTION 4.7 Corporate Power and Authority.............................. 22 SECTION 4.8 PLACE OF BUSINESS.......................................... 22 SECTION 4.9 PLACE WHERE RECORDS MAINTAINED............................. 22 SECTION 4.10 Validity, Binding Nature and Enforceability of the Credit Documents................... 23 SECTION 4.11 TAXES...................................................... 23 SECTION 4.12 Compliance with Laws....................................... 23 SECTION 4.13 Consents................................................... 23 SECTION 4.14 Purpose.................................................... 23 SECTION 4.15 Condition of the Business.................................. 23 SECTION 4.16 Labor Contracts............................................ 23 SECTION 4.17 ERISA...................................................... 23 SECTION 4.18 Patents and Trademarks..................................... 23 SECTION 4.19 Location of Property....................................... 24 SECTION 4.20 Real Property.............................................. 24 SECTION 4.21 Capitalization............................................. 24 SECTION 4.22 Subsidiaries............................................... 24 SECTION 4.23 Federal Reserve Board Regulations.......................... 24 SECTION 4.24 Investment Company Act..................................... 24 ARTICLE 5 CONDITIONS OF LENDING SECTION 5.1 Representations and Warranties............................. 24 SECTION 5.2 No Default................................................. 25 SECTION 5.3 Automatic Representations and Warranties................... 25 SECTION 5.4 Required Items............................................. 25 SECTION 5.5 SUPPORTING DOCUMENTS....................................... 25 ARTICLE 6 COVENANTS SECTION 6.1 PAYMENT AND PERFORMANCE.................................... 27 SECTION 6.2 INSURANCE.................................................. 28 SECTION 6.3 COLLECTION OF RECEIVABLES; SALE OF INVENTORY............... 28 SECTION 6.4 NOTICE OF LITIGATION AND PROCEEDINGS....................... 28 SECTION 6.5 Payment of Indebtedness to Third Persons................... 29 SECTION 6.6 NOTICE OF CHANGE OF BUSINESS LOCATION...................... 29 SECTION 6.7 PENSION PLANS.............................................. 29 SECTION 6.8 PAYMENT OF TAXES........................................... 29 SECTION 6.9 Further Assurances......................................... 29 SECTION 6.10 Advancements............................................... 30 SECTION 6.11 Maintenance of Status...................................... 30 ii SECTION 6.12 Financial Statements; Reporting Requirements; Certification as to Events of Defaults..... 30 SECTION 6.13 NOTICE OF EXISTENCE OF DEFAULT............................ 32 SECTION 6.14 Compliance with Laws...................................... 32 SECTION 6.15 MAINTENANCE OF PROPERTY................................... 32 SECTION 6.16 Property Records and Statements........................... 32 SECTION 6.17 INSPECTION OF PROPERTY.................................... 32 SECTION 6.18 CHANGE OF NAME, ETC....................................... 33 SECTION 6.19 SALE OR TRANSFER OF ASSETS................................ 33 SECTION 6.20 ACQUISITION OF STOCK OF THIRD PERSON...................... 33 SECTION 6.21 FALSE CERTIFICATES OR DOCUMENTS........................... 33 SECTION 6.22 TRANSACTIONS WITH AFFILIATES.............................. 33 SECTION 6.23 DIVIDENDS................................................. 33 SECTION 6.24 PAYMENTS ON MIG NOTE...................................... 33 SECTION 6.26 Use of Credit Proceeds.................................... 34 SECTION 6.27 INDEBTEDNESS.............................................. 34 SECTION 6.28 GUARANTIES................................................ 34 SECTION 6.29 INVESTMENTS, ETC.......................................... 34 SECTION 6.30 Sale of Receivables....................................... 34 SECTION 6.31 SOLVENCY.................................................. 34 SECTION 6.32 LEASE OBLIGATIONS......................................... 35 SECTION 6.33 Financial Covenants....................................... 35 SECTION 6.34 ERISA COMPLIANCE.......................................... 36 SECTION 6.35 FISCAL YEAR............................................... 36 ARTICLE 7 EVENTS OF DEFAULT SECTION 7.1 Events of Default.......................................... 37 SECTION 7.2 Lender's Remedies on Default............................... 39 ARTICLE 8 MISCELLANEOUS SECTION 8.1 Notices.................................................... 40 SECTION 8.2 Expenses................................................... 42 SECTION 8.3 Independent Obligations.................................... 42 SECTION 8.4 Successors and Assigns..................................... 42 SECTION 8.5 Governing Law.............................................. 42 SECTION 8.6 Date of Agreement.......................................... 43 SECTION 8.7 Separability Clause........................................ 43 SECTION 8.8 Counterparts............................................... 43 SECTION 8.9 No Oral Agreements......................................... 43 SECTION 8.10 Waiver and Election........................................ 43 SECTION 8.11 No Obligations of Lender; Indemnification.................. 43 SECTION 8.12 Set-off.................................................... 44 SECTION 8.13 Participation.............................................. 44 SECTION 8.14 Submission to Jurisdiction................................. 45 SECTION 8.15 Usury Laws................................................. 46 SECTION 8.16 Arbitration; Dispute Resolution; Preservation of Foreclosure Remedies....................... 46 iii CREDIT AGREEMENT THIS CREDIT AGREEMENT ("this Agreement") dated November 26, 1996 is between SNAPPER, INC., a Georgia corporation (the "Borrower"), and AMSOUTH BANK OF ALABAMA, an Alabama banking corporation (the "Lender"). RECITALS Capitalized terms used in these Recitals have the meanings defined for them above or in Section 1.2. The Borrower has requested that the Lender extend Credit to the Borrower under this Agreement and the other Credit Documents as described herein. To induce the Lender to extend Credit to the Borrower, the Borrower has agreed to execute and deliver this Agreement to the Lender. AGREEMENT NOW, THEREFORE, in consideration of the foregoing Recitals, and to induce the Lender to extend credit to the Borrower under this Agreement and the other Credit Documents, the Borrower agrees with the Lender as follows: ARTICLE 1 RULES OF CONSTRUCTION AND DEFINITIONS SECTION 1.1 GENERAL RULES OF CONSTRUCTION. For the purposes of this Agreement, except as otherwise expressly provided or unless the context otherwise requires: (a) Words of masculine, feminine or neuter gender include the correlative words of other genders. Singular terms include the plural as well as the singular, and vice versa. (b) All references herein to designated "Articles," "Sections" and other subdivisions or to lettered Schedules are to the designated Articles, Sections and subdivisions hereof and the Schedules annexed hereto unless expressly otherwise designated in context. All Article, Section, other subdivision and Schedule captions herein are used for reference only and do not limit or describe the scope or intent of, or in any way affect, this Agreement. (c) The terms "include," "including," and similar terms shall be construed as if followed by the phrase "without being limited to." (d) The terms "herein," "hereof" and "hereunder" and other words of similar import refer to this Agreement as a whole and not to any particular Article, Section, other subdivision or Schedule. (e) All Recitals set forth in, and all Schedules to, this Agreement are hereby incorporated in this Agreement by reference. (f) No inference in favor of or against any party shall be drawn from the fact that such party or such party's counsel has drafted any portion hereof. (g) All references in this Agreement to a separate instrument are to such separate instrument as the same may be amended or supplemented from time to time pursuant to the applicable provisions thereof. (h) If the Borrower now or hereafter has any Subsidiaries, all computations required in connection with the covenants contained in Article 6 shall be made for the Borrower and its Subsidiaries on a combined or consolidated basis, after elimination of intercompany items, and all financial statements, reports and certificates required hereunder shall be prepared on the same basis. SECTION 1.2 DEFINITIONS. As used in this Agreement, capitalized terms that are not otherwise defined herein have the meanings defined for them in the Security Agreement and the following terms are defined as follows: (a) ACTUAL/360 DAY BASIS means a method of computing interest and other charges on the basis of an assumed year of 360 days for the actual number of days elapsed, meaning that the interest accrued for each day will be computed by multiplying the interest rate applicable on that day by the unpaid principal balance on that day and dividing the result by 360. (b) ADVANCE is defined in Section 2.1. (c) AFFILIATE of any specified person means any other person directly or indirectly controlling or controlled by or under direct or indirect common control with such specified person. For purposes of this definition, "control" when used with respect to any specified person means the power to direct the management and policies of such person, directly or indirectly, whether through the ownership of voting securities, by contract or otherwise; and the terms "controlling" and "controlled" have meanings correlative to the foregoing. (d) AGREEMENT means, on any date, this Credit Agreement, as originally in effect on the Closing Date and as thereafter from time to time amended, supplemented, restated or otherwise modified and in effect on such date. (e) AUTHORIZED REPRESENTATIVE means the officer or officers of the Borrower that are duly authorized to act for the Borrower in the specified capacity under the Governing Documents of the Borrower or applicable law. 2 (f) BORROWING BASE means, at any time, the sum of: (a) eighty percent (80.0%) of the Net Outstanding Amount of Eligible Accounts at such time consisting of Accounts arising from the sale of Inventory to (1) Home Depot; (2) a dealer which has financed the purchase of such Inventory by means of a floor planning arrangement; (3) a dealer pursuant to Extended Terms, on any date when the due date with respect to such Account is fewer than ninety-one (91) days after such date or on which such Account is past due but not more than sixty (60) days past due; (4) a dealer pursuant to Thirty Day Terms; or (5) a dealer or distributor located outside the United States whose Inventory has been shipped on the security of a letter of credit acceptable to the Lender; (b) the lesser of (A) the applicable Distributor A/R Sublimit in effect from time to time and (B) an amount equal to sixty percent (60.0%) of (1) the Net Outstanding Amount of Eligible Accounts at such time consisting of Accounts arising from the sale of Inventory to a distributor times (2) a distributor cost conversion factor of 76.3%, or such other factor as the Borrower and the Lender may mutually agree to from time to time; (c) the lesser of (A) $10,000,000 and (B) fifty-five percent (55.0%) of (1) the Net Outstanding Amount of Eligible Accounts at such time consisting of Accounts arising from the sale of Inventory to a dealer pursuant to Extended Terms, on any date when the due date with respect to such Account is more than ninety (90) days after such date (provided, that with respect to Accounts arising from sales to dealers of Inventory consisting of snow products, which Inventory has not been sold by the dealer or financed by the dealer by means of a floor planning arrangement, the Borrower shall be permitted to extend the due date with respect to such Account from March 10 of any year to December 10 of such year) times (2) a dealer cost conversion factor of 65.8%, or such other factor as the Borrower and the Lender may mutually agree to from time to time; and (d) an amount equal to the lesser of (1) $45,000,000, and (2) the sum of (A) sixty percent (60.0%) of Eligible Inventory at such time consisting of finished goods that are ready for sale in the ordinary course of business, identified by serial numbers and located at the Borrower's factory in McDonough, Georgia or at the Borrower's other distribution centers and commissioned distributor warehouses, (B) the lesser of (i) $5,000,000 and (ii) fifty percent (50.0%) of Eligible Inventory at such time consisting of engines, and 3 (C) an amount equal to the lesser of (i) $5,000,000 and (ii) thirty-five (35.0%) of Eligible Inventory at such time consisting of parts and accessories other than engines; and (e) an amount equal to seventy-five percent (75%) of the Eligible Adjusted Equipment Value. (g) BUSINESS means the manufacture, distribution and/or sale of lawn, garden, snow removal or outdoor power equipment and other products by the Borrower. (h) BUSINESS DAY means (a) any day on which commercial banks located in Birmingham, Alabama are generally open for business and (b) if such day relates to the giving of notices or quotes in connection with a LIBOR Quote or to a borrowing of, a payment or prepayment of principal of or interest on, or a LIBOR-Based Rate Period for, a LIBOR-Based Rate Segment or a notice by the Borrower with respect to any such borrowing, payment, prepayment or LIBOR-Based Rate Period, any day on which dealings in Dollar deposits are carried out in the London interbank market. (i) CLOSING DATE means November 26, 1996. (j) CODE means the Internal Revenue Code of 1986, as amended from time to time. (k) COMMITMENT AMOUNT means $55,000,000 (as the same may be reduced at any time or from time to time pursuant to Section 2.5). (l) CONTROLLED GROUP means all members of a controlled group of corporations and all trade or business (whether or not incorporated) under common control which, together with the Borrower, are treated as a single employer under Section 414(c) of the Code. (m) CREDIT means, individually and collectively, all loans, forbearances, renewals, extensions, advances, disbursements and other extensions of credit now or hereafter made by the Lender to or for the account of the Borrower under this Agreement and the other Credit Documents, including the Loan. (n) CREDIT DOCUMENTS means this Agreement and the documents described in SCHEDULE A and all other documents now or hereafter executed or delivered in connection with the transactions contemplated thereby. (o) DEBT of any person means (1) all indebtedness, whether or not represented by bonds, debentures, notes or other securities, for the repayment of borrowed money, (2) all deferred indebtedness for the payment of the purchase price of property or assets purchased, (3) all capitalized lease obligations, (4) all indebtedness secured by any Lien on any property of such person, whether or not indebtedness secured thereby has been assumed, (5) all obligations with respect to any conditional sale contract or title retention agreement, (6) all indebtedness and 4 obligations arising under acceptance facilities or in connection with surety or similar bonds, and the outstanding amount of all letters of credit issued for the account of such person, and (7) all obligations with respect to interest rate swap agreements. (p) DEFAULT RATE means a rate of interest equal to two percentage points (200 basis points) in excess of the Floating Rate in effect from time to time, or the maximum rate permitted by law, whichever is less. (q) DISTRIBUTOR A/R SUBLIMIT means the maximum amount of distributor accounts receivable set forth below for the periods set forth below to be included in the Borrowing Base: DATE SUBLIMIT ---- -------- 12/96 - 2/97 10,000,000 3/97 9,000,000 4/97 8,000,000 5/97 7,000,000 6/97 6,000,000 7/97 5,000,000 8/97 4,000,000 9/97 3,000,000 10/97 2,000,000 11/97 1,000,000 12/97 and thereafter 0 (r) DOLLAR and the symbol $ means dollars constituting legal tender for the payment of public and private debts in the United States of America. (s) ELIGIBLE ACCOUNT means only Accounts that are not more than 60 days past due (provided, that with respect to Accounts arising from sales to dealers of Inventory consisting of snow products, which Inventory has not been sold by the dealer or financed by the dealer by means of a floor planning arrangement, the Borrower shall be permitted to extend the due date with respect to such Account from March 10 of any year to December 10 of such year), according to the terms shown on the invoice (or the date of the invoice where terms are not specifically stated). Without limiting the generality of the foregoing, the Lender may exclude any Account from Eligible Accounts if: 5 (1) the subject goods have been shipped or delivered to an Account Debtor on a bill-and-hold, guaranteed sale, consignment, approval or sale-or-return basis or subject to any other repurchase or return agreement; or (2) any material part of the subject goods has been returned, rejected, lost or damaged; or (3) the Account Debtor is located outside the United States, and the subject goods have not been shipped on the security of a banker's acceptance or letter of credit acceptable to the Lender and pledged to the Lender, or the Account is not payable in United States dollars; or (4) the Account Debtor is also the Borrower's supplier or creditor; or (5) more than 50% in amount of the other Accounts of the Account Debtor are more than 90 days past due; or (6) the Account arises out of transactions with an employee, officer, agent, director, stockholder, partner, member of the Borrower or the Guarantor and its subsidiaries; or (7) any of the representations or warranties set forth in Section 3.2 of the Security Agreement are not true and correct in all material respects with respect to such Account. (t) ELIGIBLE ADJUSTED EQUIPMENT VALUE means the value of the Borrower's Equipment assumed by the Lender in the amounts and for the periods set forth on SCHEDULE B, which amount shall be included as part of the Borrowing Base. (u) ELIGIBLE INVENTORY means Inventory, less any amount reserved on the Borrower's books for surplus or obsolescence, consisting of factory whole goods, engines or other parts and accessories held for sale by the Borrower that meet all of the following specifications: DOCUMENTS. If it is represented or covered by documents of title, the Borrower is the owner of the documents free of all Liens except the Permitted Encumbrances. LOCATION. It is stored at such locations in the United States of which the Borrower has given the Lender notice and where the Lender has perfected its security interest, and is in the possession or control of the Borrower or its consignee. If it is located on leased premises, the Lender has received a landlord's waiver of rights with respect to such Inventory. If it is held by a bailee, warehouseman or similar party, the Lender shall have received from such bailee, warehouseman or similar party such acknowledgements of the Lender's Lien, warehouse receipts or other agreements, each in form and substance acceptable to the Lender, as the Lender 6 may require in its reasonable discretion. If it is held by a consignee: (a) the Lender shall have received a copy of a consignment agreement in form and substance reasonably satisfactory to the Lender, (b) the Borrower shall have filed all necessary or appropriate UCC consignment financing statements in form and substance reasonably satisfactory to the Lender as reasonably requested by the Lender, (c) the Borrower shall have sent to the consignee's prior filed secured parties a consignment notification letter in form and substance reasonably satisfactory to the Lender, (d) the prior filed secured parties of the consignee shall have subordinated their security interest in the consigned inventory and all proceeds thereof in favor of the Borrower, the Lender and Chase Manhattan Bank, in form and substance reasonably satisfactory to the Lender, (e) consignee and consignee's landlord shall have executed a waiver of landlord's Lien in form and substance reasonably satisfactory to the Lender and subordinating such Lien in favor of the Borrower, the Lender and Chase Manhattan Bank, (f) the Borrower has agreed upon the request of the Lender to file UCC financing statements against the Borrower in the jurisdiction where such consigned inventory is located, and (g) prior filed secured creditors of the Borrower shall have subordinated their security interest in the consigned inventory in favor of the Lender. MISCELLANEOUS. It is unused, and it has not, in the Lender's good faith judgment, been materially reduced in market value by reason of age, obsolescence, surplus or other factors. OWNERSHIP. It is owned by the Borrower free of all Liens except the Permitted Encumbrances, and the Lender has a perfected first security interest therein. OTHER FINANCING. No financing statement is on file covering such item or the products or proceeds thereof except for the Lender's financing statement and the financing statement of Chase Manhattan Bank. WIP. It is not work-in-process. (v) ENVIRONMENTAL LAWS means the Resource Conversation and Recovery Act, as amended, the Toxic Substance Control Act, as amended, the Comprehensive Environmental Response, Compensation and Liability Act, as amended, the Superfund Amendments and Reauthorization Act of 1986, as amended, the Solid Waste Disposal Act, as amended, the Clean Air Act, as amended, the Clean Water Act, as amended, and any comparable federal or state statutes, now existing or later enacted, or any regulation promulgated under any of such federal or state statutes relating to the protection of the environment. (w) ERISA means the Employee Retirement Income Security Act of 1974, as amended. (x) EVENTS OF DEFAULT is defined in Section 7.1. An Event of Default "exists" if an Event of Default has occurred and is continuing. 7 (y) EXTENDED TERMS has the meaning set forth in EXHIBIT F. (z) FEDERAL FUNDS EFFECTIVE RATE means, for any day, an interest rate per annum equal to the weighted average of the rates on overnight Federal funds transactions with members of the Federal Reserve System arranged by Federal funds brokers on such day, as published for such day (or, if such day is not a Business Day, for the immediately preceding Business Day) by the Federal Reserve Bank of Atlanta, or, if such rate is not so published for any day that is a Business Day, the average of the quotations at approximately 10:00 a.m. (Birmingham, Alabama time) on such day on such transactions received by the Lender from three Federal funds brokers of recognized standing selected by the Lender in its sole discretion. (aa) FLOATING RATE means a rate per annum equal to (A) from the Closing Date to and including May 25, 1997, the higher of (1) the Prime Rate in effect from time to time or (2) the Federal Funds Effective Rate in effect from time to time, plus .5% (50 basis points) and (B) from May 26, 1997 until the Termination Date, the higher of (1) the Prime Rate in effect from time to time, plus one percent (100 basis points) or (2) the Federal Funds Effective Rate in effect from time to time, plus 1.5% (150 basis points). (bb) GAAP means generally accepted accounting principles, consistently applied. (cc) GOVERNING DOCUMENTS means all organizational and governing documents applicable to the Borrower, including the Borrower's certificate or articles of incorporation and bylaws, and all applicable resolutions or other directions of the directors, shareholders, officers or other relevant persons comprising, owning, managing or operating the Borrower. (dd) GOVERNMENTAL AUTHORITY means any national, state, county, municipal or other government, domestic or foreign, and any agency, authority, department, commission, bureau, board, court or other instrumentality thereof. (ee) GOVERNMENTAL REQUIREMENTS means all laws, rules, regulations, ordinances, judgments, decrees, codes, orders, injunctions, notices and demand letters of any Governmental Authority. (ff) GUARANTOR means Metromedia International Group, Inc., a Delaware corporation. (gg) HAZARDOUS SUBSTANCES means any and all hazardous or toxic substances, materials or wastes as defined or listed under the Environmental Laws. (hh) LIBOR-BASED RATE means a rate per annum equal to (A) from the Closing Date to and including May 25, 1996 the LIBOR Quote plus 250 basis points and (B) from May 26, 1996 until the Termination Date, the LIBOR Quote plus 350 basis points. 8 (ii) LIBOR-BASED RATE PERIOD means the period of time, selected by the Borrower under Section 3.1, with respect to which the LIBOR-Based Rate is (or is proposed to be) applicable to a Segment. (jj) LIBOR-BASED RATE SEGMENT means a Segment to which the LIBOR-Based Rate is (or is proposed to be) applicable. (kk) LIBOR QUOTE means, with respect to any time at which the LIBOR-Based Rate is to be determined, the rate of interest determined by the Lender at such time by reference to the Knight-Ridder MoneyCenter reporting service or other comparable financial information reporting service at the time employed by the Lender, as the Lender's best estimate of the cost of funds available to the Lender from the purchase on the London interbank market of funds in the form of time deposits in Dollars in the approximate amount of the Segment that is to bear interest at the LIBOR-Based Rate, having a maturity comparable to the LIBOR-Based Rate Period during which the LIBOR-Based Rate is to be in effect, it being expressly understood that (1) the Lender may not actually purchase any such time deposits and obtain such funds and (2) the LIBOR Quote will be an estimate, and for a variety of reasons, including changing market conditions, the actual cost of funds to the Lender (if the Lender elects to purchase funds in the form of time deposits on such date) might vary from the LIBOR Quote. (ll) LIBOR RESERVE REQUIREMENT means the percentage (expressed as a decimal) prescribed by the Board of Governors of the Federal Reserve System (or any successor Governmental Authority), on the date on which the LIBOR-Based Rate is determined, for determining the reserve requirements of the Lender (including any marginal, emergency, supplemental, special or other reserves) with respect to liabilities relating to time deposits purchased in the London interbank market having a maturity equal to the period during which the LIBOR-Based Rate will be in effect and in an amount equal to the LIBOR-Based Rate Segment involved, without any benefit or credit for any proration, exemptions or offsets under any now or hereafter applicable regulations. (mm) LIEN means any mortgage, pledge, assignment, charge, encumbrance, lien, security title, security interest or other preferential arrangement. (nn) LOAN is defined in Section 2.1. (oo) MARGIN STOCK is defined in Regulation U of the Federal Reserve Board, as amended. (pp) MAXIMUM CREDIT AMOUNT means the lesser of (1) the Borrowing Base Amount; or (2) the Commitment Amount. (qq) MIG NOTE means the $23,800,000 Subordinated Promissory Note dated November 26, 1996, issued by the Borrower to the Guarantor. 9 (rr) NET OUTSTANDING AMOUNT OF ELIGIBLE ACCOUNTS means the net outstanding amount of all then Eligible Accounts after eliminating from the aggregate face amount thereof all payments, adjustments, discounts, credits and allowances applicable thereto and all amounts due thereon considered uncollectible by reason of return, rejection, repossession or loss of, or damage to, the merchandise covered thereby, disputes, financial difficulty of the Account Debtor or otherwise. (ss) NOTE is defined in Section 2.1. (tt) OBLIGATIONS means (1) the payment of all amounts now or hereafter becoming due and payable under the Credit Documents, including the principal amount of the Credit, all interest (including interest that, but for the filing of a petition in bankruptcy, would accrue on any such principal) and all other fees, charges and costs (including attorneys' fees and disbursements) payable in connection therewith; (2) the observance and performance by the Borrower of all of the provisions of the Credit Documents; (3) the payment of all sums advanced or paid by the Lender in exercising any of its rights, powers or remedies under the Credit Documents, and all interest (including post-bankruptcy petition interest, as aforesaid) on such sums provided for herein or therein; (4) the payment and performance of all other indebtedness, obligations and liabilities of the Borrower to the Lender (including obligations of performance) of every kind whatsoever, arising directly between the Borrower and the Lender or acquired outright, as a participation or as collateral security from another person by the Lender, direct or indirect, absolute or contingent, due or to become due, now existing or hereafter incurred, contracted or arising, joint or several, liquidated or unliquidated, regardless of how they arise or by what agreement or instrument they may be evidenced or whether they are evidenced by agreement or instrument, and whether incurred as maker, endorser, surety, guarantor, general partner, drawer, tort-feasor, account party with respect to a letter of credit, indemnitor or otherwise; and (5) all renewals, extensions, modifications and amendments of any of the foregoing, whether or not any renewal, extension, modification or amendment agreement is executed in connection therewith. (uu) OBLIGORS means the Borrower, the Guarantor, the Sponsors, and any other maker, endorser, surety, guarantor or other person now or hereafter liable for the payment or performance, in whole or in part, of any of the Obligations. (vv) PBGC means the Pension Benefit Guaranty Corporation or any entity succeeding to any or all of its functions under ERISA. (ww) PENSION PLAN means an "employee pension benefit plan" (as such term is defined in ERISA) from time to time maintained by the Borrower or a member of the Controlled Group. (xx) PERMITTED CONTEST means any appropriate proceeding conducted in good faith by the Borrower to contest any tax, assessment, charge, Lien or similar claim, during the pendency of which proceeding the enforcement of such tax, assessment, charge, Lien or claim is stayed; provided that the Borrower has set aside on its books or, if required by the Lender, deposited as 10 cash collateral with the Lender, adequate cash reserves to assure the payment of any such tax, assessment, charge, Lien or claim. (yy) PERMITTED ENCUMBRANCES means (a) Liens for taxes, assessments or other governmental charges or levies not yet delinquent or that are subject to Permitted Contests; (b) Liens of mechanics, materialmen, landlord, warehousemen, carriers and similar Liens arising in the future in the ordinary course of business for sums not yet delinquent or that are subject to Permitted Contests; (c) Liens incurred in the ordinary course of business in connection with workers' compensation, unemployment insurance, social security, and similar items for sums not yet delinquent or that are subject to Permitted Contests; (d) lessor's Liens arising from operating and capitalized leases entered into in the ordinary course of business; (e) Liens arising from legal proceedings, so long as such proceedings are subject to a Permitted Contest, and so long as execution is stayed on all judgments resulting from any such proceedings; (f) easements, rights of way, restrictions and other similar encumbrances incurred in the ordinary course of business and encumbrances consisting of zoning restrictions, easements, licenses, restrictions on the use of property or minor imperfections in title thereto that, in the aggregate, are not material in amount and that do not materially detract from the value of the property subject thereto or interfere with the ordinary conduct of the Business; (g) Liens securing Debt incurred for the payment of all or any part of the purchase price of any real property and fixed assets, and any renewal, extensions or refinancings thereof; (h) Liens upon the real property of the Borrower located at 535 Macon Road, McDonough, Georgia that are expressly permitted by the Deed to Secure Debt and Security Agreement in favor of the Lender relating to such real property; (i) Liens and security interest existing on the Closing Date and set forth on SCHEDULE C hereto (which include the Liens of Chase Manhattan Bank); and (j) Liens in favor of the Lender. (zz) PERMITTED INVESTMENTS means (1) direct obligations of, or obligations unconditionally guaranteed by, the United States of America or any agency thereof maturing in less than one year from the date of purchase; (2) commercial paper issued by any person organized and doing business under the laws of the United States of America or any state thereof rated P-1 or better by Moody's Investors Services, Inc. or A-1 or better by Standard & Poor's Corporation and maturing in less than one year from the date of purchase; and (3) certificates of deposit maturing within one year of the date of acquisition thereof issued by the Lender or any other financial institution acceptable to the Lender. (aaa) PERSON (whether or not capitalized) includes natural persons, sole proprietorships, corporations, trusts, unincorporated organizations, associations, companies, institutions, entities, joint ventures, partnerships, limited liability companies and Governmental Authorities. (bbb) PLAN means, at any time, an employee pension benefit plan which is covered by Title IV of ERISA or subject to the minimum funding standards under Section 412 of the Code and is either (a) maintained by the Borrower or any member of a Controlled Group for employees of the Borrower or any member of such Controlled Group or (b) maintained pursuant to a collective bargaining agreement or any other arrangement under which more than one employer makes contributions and to which the Borrower or any member of a Controlled Group is then making 11 or accruing an obligation to make contributions or has within the preceding five plan years made contributions. (ccc) PRIME RATE means that rate of interest designated by the Lender from time to time as its "prime rate," it being expressly understood and agreed that the "prime rate" is merely an index rate used by the Lender to establish lending rates and is not necessarily the Lender's most favorable lending rate, and that changes in the "prime rate" are discretionary with the Lender. (ddd) PRINCIPAL OFFICE means the principal office of the Lender located at AmSouth-Sonat Tower, 1900 Fifth Avenue North, Birmingham, Alabama 35203. (eee) PROPERTY means all property, real and personal, that is now or hereafter conveyed or assigned to the Lender, or in which the Lender is now or hereafter granted a Lien, as security for any of the Obligations. (fff) QUARTERLY PAYMENT DATE is defined in Section 2.3. (ggg) REQUEST FOR ADVANCES OR INTEREST RATE ELECTION is defined in Section 2.2. (hhh) SECURITY AGREEMENT means the General Security Agreement described on SCHEDULE A. (iii) SECURITY DOCUMENTS means all Credit Documents that now or hereafter grant or purport to grant to Lender any guaranty, collateral or other security for any of the Obligations. (jjj) SEGMENT means a portion of the Advances (or all thereof) with respect to which a particular interest rate is (or is proposed to be) applicable. The aggregate amount of all Advances that bear interest at the Floating Rate shall be deemed to constitute a single Segment. The aggregate amount of all Advances that bear interest at the same LIBOR-Based Rate and for the same LIBOR-Based Rate Period shall be deemed to constitute a single LIBOR-Based Rate Segment. (kkk) SOLVENT means, with respect to any person on a particular date, that as of such date (1) the fair value of the property of such person is greater than the total amount of liabilities (including contingent liabilities) of such person, (2) the present fair salable value of the assets of such person is not less than the amount that will be required to pay the probable liability of such person on its debts as they become absolute and matured, (3) such person is not engaged in business or a transaction, and is not about to engage in business or a transaction, for which such person's property would constitute an unreasonably small capital, and (4) such person does not intend to, or believe or reasonably should have believed that it will, incur debts beyond its ability to repay as they become due. (lll) SPONSORS means John W. Kluge and Stuart Subotnick. 12 (mmm) SUBORDINATED DEBT means Debt of the Borrower (including the Debt evidenced by the MIG Note) that is subordinated to the Obligations on terms approved by the Lender. (nnn) SUBSIDIARY means (1) any corporation more than 50% of whose shares of stock having general voting power under ordinary circumstances to elect a majority of the board of directors, managers or trustees of such corporation (irrespective of whether or not at the time stock of any other class or classes has or might have voting power by reason of the happening of any contingency), are owned or controlled directly or indirectly by the Borrower, or (2) any partnership or limited liability company, 50% or more of the partnership or membership interests in which are owned or controlled, directly or indirectly, by the Borrower, and includes entities currently or hereafter falling within the categories described above. (ooo) TERMINATION DATE means the maturity date of the Loan (which is initially January 1, 1999), as such date may be extended from time to time pursuant to Section 2.7 or accelerated pursuant to Section 7.2. (ppp) THIRTY DAY TERMS has the meaning as set forth in EXHIBIT G. ARTICLE 2 CREDIT TO BE EXTENDED UNDER THIS AGREEMENT SECTION 2.1 LOAN. From the Closing Date to (but not including) the Termination Date, the Lender agrees, upon the terms and subject to the conditions of this Agreement, to make a revolving line of credit available to the Borrower, pursuant to which the Borrower may from time to time borrow from the Lender and repay and reborrow, such sums as may be needed by the Borrower for the purposes expressed in this Agreement up to a maximum aggregate principal amount at any one time outstanding not exceeding the Maximum Credit Amount (the "Loan"). All advances made by the Lender to the Borrower under this Agreement ("Advances") shall be evidenced by a Note (the "Note") dated the Closing Date, payable to the order of the Lender, duly executed by the Borrower and in the maximum principal amount of $55,000,000. The Advances shall bear interest as provided in Article 3. In no event shall the balance of the Loan be reduced below $100. SECTION 2.2 ADVANCES. The Advances made by the Lender pursuant to each request for Advances shall be in an aggregate amount not less than $1,000,000 or a greater integral multiple of $100,000. Each request for Advances must be in writing (which may be by facsimile transmission) and must be received by the Lender not later than 10:00 a.m., Birmingham, Alabama time, on the day on which the Advances are to be made, except that, if the Advances are to bear interest at the LIBOR-Based Rate, the request must be received by the Lender not later than 10:00 a.m., Birmingham, Alabama time, two Business Days prior to the day on which 13 the Advances are to be made. Each request for Advances shall be in the form attached hereto as SCHEDULE D ("Request for Advances or Interest Rate Election") and shall specify the aggregate amount of the Advances requested, the day as of which the Advances are to be made and shall provide the interest rate information called for in Section 3.2. All the Advances requested in a single Request for Advances or Interest Rate Election shall be subject to the same interest rate terms. Not later than 2:00 p.m. Birmingham, Alabama time on the date specified for the Advances, the Lender shall make available the amount of the Advances to be made by it on such date to the Borrower by depositing the proceeds thereof into an account with the Lender or with an Affiliate of the Lender in the name of the Borrower. The Lender's obligation to make Advances shall terminate, if not sooner terminated pursuant to the provisions of this Agreement, on the Termination Date. The Lender shall have no obligation to make Advances if an Event of Default exists. Each Request for Advances or Interest Rate Election, whether submitted under this Section 2.2 in connection with requested Advances or under Section 3.2 in connection with an interest rate election, shall be signed by an Authorized Representative of the Borrower designated as authorized to sign and submit Request for Advances or Interest Rate Election forms in the documents submitted to the Lender pursuant to Section 5.5. The Borrower may, from time to time, by written notice to the Lender, terminate the authority of any Authorized Representative to submit Request for Advances or Interest Rate Election forms, such termination of authority to become effective upon actual receipt by the Lender of such notice of termination. The Borrower may from time to time authorize other Authorized Representatives to sign and submit Request for Advances or Interest Rate Election forms by delivering to the Lender a certificate of the Secretary of the Borrower certifying the incumbency and specimen signature of each such Authorized Representative. The Lender shall be entitled to rely conclusively upon the authority of any Authorized Representative so designated by the Borrower. SECTION 2.3 PAYMENTS. All interest accrued at the Floating Rate shall be payable in arrears on the first day of each successive January, April, July and October (each a "Quarterly Payment Date"), commencing on January 1, 1997; and all interest accrued on each LIBOR-Based Rate Segment shall be payable on the last day of the applicable LIBOR-Based Rate Period. The principal amount of the Advances, together with accrued interest thereon, shall be due and payable on the Termination Date. SECTION 2.4 PREPAYMENT. (a) The Borrower may at any time prepay all or any part of the Advances, without premium or penalty; provided, however, that (1) unless the Borrower pays the amounts, if any, due under Section 3.6, no LIBOR-Based Rate Segment may be prepaid during a LIBOR-Based Rate Period if the Lender purchases any such time deposits and obtains such funds comprising the LIBOR-Based Rate Segment being prepaid, and (2) any partial prepayment shall be in the amount of not less than $1,000,000 or a greater integral multiple of $100,000. The Borrower shall pay, on the date of prepayment, all interest accrued to the date of prepayment on any amount prepaid in connection with the prepayment in full of the Obligations and the concurrent termination of this Agreement. The Borrower shall pay all interest accrued to the date of prepayment on the amount prepaid. 14 (b) If at any time the principal amount of the Advances is greater than the Maximum Credit Amount, the Borrower shall immediately make a prepayment (notwithstanding the provisions of clause (a)(1) of this section, but subject to the provisions of Section 3.6) on the Advances equal to the difference between said aggregate principal amount of the Advances and the Maximum Credit Amount. SECTION 2.5 REDUCTION OR CANCELLATION OF MAXIMUM CREDIT AMOUNT. The Borrower shall have the right at any time to reduce the unused portion of the Maximum Credit Amount on each Quarterly Payment Date, provided that: (a) the Borrower shall give the Lender at least 10 days' prior notice in writing of each such reduction, (b) the amount of such reduction shall not be less than $500,000, and (c) no reduction in the Maximum Credit Amount may be reinstated. The Borrower shall also have the right at any time to terminate this Agreement by prepayment in full of the Obligations (subject to the provisions of Section 2.4) with at least 15 days' prior notice in writing of such termination. SECTION 2.6 FEES. (a) The Borrower shall pay to the Lender on the Closing Date a commitment fee equal to $550,000. This fee shall be fully earned and non-refundable as of the Closing Date. (b) The Borrower shall pay to the Lender an availability fee (the "Availability Fee") that begins to accrue on the Closing Date and shall be computed at the Applicable Rate per annum times the daily average difference between (1) the Commitment Amount and (2) the sum of the aggregate outstanding principal amount of the Advances made by the Lender. The Availability Fee shall be payable in arrears on each Quarterly Payment Date and on the Termination Date, commencing on January 1, 1997. The Availability Fee shall be computed on an Actual/360 Basis. The term "Applicable Rate" shall mean from the Closing Date to and including May 25, 1997, one-half of one percent (.5%) and from May 26, 1997 until the Termination Date, three quarters of one percent (.75%). (c) The Borrower shall pay to the Lender on May 26, 1997, November 26, 1997, May 26, 1998 and the Termination Date (each an "Administrative Fee Payment Date") a nonrefundable administrative fee in the amount of $250,000, payable in arrears on each Administrative Fee Payment Date. SECTION 2.7 EXTENSION OF TERMINATION DATE. The Borrower and the Lender may from time to time extend the then-current Termination Date to any subsequent termination date upon which the Borrower and the Lender may agree by executing a written extension agreement. Upon the execution of such an extension agreement by the Borrower and the Lender, the maturity date of the Loan shall be extended to the agreed-upon termination date, and the agreed-upon termination date shall become the new "Termination Date" for purposes of this Agreement. 15 SECTION 2.8 PLACE AND TIME OF PAYMENTS. (a) All payments by the Borrower to the Lender under this Agreement and the other Credit Documents shall be made in lawful currency of the United States and in immediately available funds to the Lender at its Principal Office in Birmingham, Alabama at the hand delivery address set forth in Section 8.1 or at such other address within the continental United States as shall be specified by the Lender by notice to the Borrower. Any payment received by the Lender after 2:00 p.m. (Birmingham, Alabama time) on a Business Day (or at any time on a day that is not a Business Day) shall be deemed made by the Borrower and received by the Lender on the following Business Day. (b) All amounts payable by the Borrower to the Lender under this Agreement or any of the other Credit Documents for which a payment date is expressly set forth herein or therein shall be payable on the specified due date without notice or demand by the Lender. All amounts payable by the Borrower to the Lender under this Agreement or the other Credit Documents for which no payment date is expressly set forth herein or therein shall be payable ten days after written demand by the Lender to the Borrower. The Lender may, at its option, send written notice or demand to the Borrower of amounts payable on a specified due date pursuant to this Agreement or the other Credit Documents, but the failure to send such notice shall not affect or excuse the Borrower's obligation to make payment of the amounts due on the specified due date. (c) Payments that are due on a day that is not a Business Day shall be payable on the next succeeding Business Day, and any interest payable thereon shall be payable for such extended time at the specified rate. (d) Except as otherwise required by law, payments received by the Lender shall be applied first to expenses, fees and charges, then to interest and finally to principal. SECTION 2.9 SECURITY. The security for the Obligations shall include the collateral and other security granted to the Lender under the Security Documents described in SCHEDULE A. The Security Documents shall be valid and binding as security for, the aggregate amount of the Obligations outstanding from time to time, whether or not the full amount of the Credit is actually advanced by the Lender to the Borrower. SECTION 2.10 GUARANTY AGREEMENT. Concurrently with the execution of this Agreement, the Guarantor is executing and delivering to the Lender a Guaranty Agreement pursuant to which such Guarantor is unconditionally guaranteeing the payment to the Lender, when and as due and payable, of the Obligations. SECTION 2.11 MAKE-WHOLE ACCOUNT. Concurrently with the execution of this Agreement, the Borrower is depositing with the Lender the sum of $1,000,000 in a restricted account (the "Snapper Make-Whole Account"). Funds in the Snapper Make-Whole Account may be withdrawn by the Lender from time to time to pay any and all amounts that are due the Lender from time to time pursuant to the terms of this Agreement and other credit documents, if the 16 Borrower has not made such payment within the time provided herein in the other credit documents (after giving effect to any notice or cure periods). The Snapper Make-Whole Agreement shall be pledged to the Lender pursuant to the terms of the Security Agreement. Any withdrawals from the Snapper Make-Whole Account shall not cure a default under this Agreement unless the default was due solely to a failure on the part of the Borrower to make a scheduled payment of principal or interest pursuant to the terms of this Agreement or the Lenders so agrees in writing. SECTION 2.12 SUBORDINATION AGREEMENT. Concurrently with the execution of this Agreement, the Borrower and the Guarantor are executing and delivering to the Lender a Subordination Agreement pursuant to which the MIG Note is expressly subordinated to the Obligations pursuant to the terms therein described. SECTION 2.13 LOCK BOX AGREEMENT. (a) RECEIPT AND CREDIT FOR COLLECTIONS. Concurrently with the execution of this Agreement, the Borrower shall enter into a Lock Box Agreement with the Lender and NationsBank (the "Bank") pursuant to which the Bank will be granted access to the post office box to which all Account Debtors shall be instructed to forward payments with respect to all Property. All checks, drafts, cash, notes, money orders, acceptances and other remittances in part or full payment with respect to the Property ("Collections") received through the Lock Box shall be retained by the Bank and processed in accordance with the Lock Box Agreement. All Collections received directly by the Borrower shall immediately be sent or delivered by the Borrower to the post office box that is part of the lock box arrangement. The Bank shall, without further inquiry and without regard to any instructions from the Borrower, send all collections by electronic funds transfer to the Lender at such account or accounts as the Lender shall direct in the Lock Box Agreement, or otherwise in writing from time to time. Any fees or expenses charged to the Lender by the Bank or any other bank for transfer of funds from the Borrower's account shall be charged as accrued, as a debit to the Obligations. (b) VERIFICATION OF RECEIVABLES. If an Event of Default exists, the Lender may confirm and verify all Accounts in any reasonable manner. In such circumstance, the Borrower shall assist the Lender in confirmation and verification of the Accounts. If no Event of Default exists, the Lender and the Borrower shall in good faith coordinate the verification of all Accounts. The Lender may at any time after an Event of Default exists, notify or require the Borrower to notify, all of the Borrower's Account Debtors or any of them to make payment directly to the Lender to the extent not already provided by the Lock Box. The Lender may enforce collection of, settle, compromise, extend or renew the indebtedness of any or all of the Borrower's Account Debtors after an Event of Default exists. (c) AUTHORITY TO PERFORM FOR BORROWER - LOCK BOX. The Borrower hereby appoints the Lender as the Borrower's attorney-in-fact in connection solely with enforcement of the 17 Lender's rights under the Lock Box Agreement, (i) to endorse the name of the Borrower on any notes, acceptances, checks, drafts, money orders or other instruments for the payment of money or any security interest that may come into the Lender's possession; (ii) after an Event of Default exists, to sign the Borrower's name on any invoice or bill of lading relating to any of the Accounts, on drafts against Account Debtors, and notices to Account Debtors; and (iii) after an Event of Default exists, to receive, open and dispose of all mail addressed to the Borrower and received at the lock box established pursuant to subparagraph (a) hereof. This power, because it is coupled with an interest, is irrevocable during the term of this Agreement. The Lender is hereby authorized and empowered to accept the return of goods represented by any of the Accounts, without notice to or the consent of the Borrower and without discharging or in any way affecting the Borrower's liability hereunder. Except in case of its gross negligence or intentional misconduct, neither the Lender nor its appointee shall be liable for any acts of commission or omission, nor for any error of judgment or mistake of fact or law. ARTICLE 3 INTEREST SECTION 3.1 APPLICABLE INTEREST RATES. The Borrower shall have the option to elect to have any Segment bear interest at the Floating Rate or the LIBOR-Based Rate. For any period of time and for any Segment with respect to which the Borrower does not elect the LIBOR-Based Rate, such Segment shall bear interest at the Floating Rate. The Borrower's right to elect the LIBOR-Based Rate shall be subject to the following requirements: (a) each LIBOR-Based Rate Segment shall be in the amount of $1,000,000 or more and in an integral multiple of $100,000 thereafter, (b) each LIBOR-Based Rate Segment shall have a maturity selected by the Borrower of one, two or three months, (c) no more than three Segments may be outstanding at any time, and (d) no LIBOR-Based Rate Segment may have a maturity date later than the Termination Date. SECTION 3.2 PROCEDURE FOR EXERCISING INTEREST RATE OPTIONS. The Borrower may elect to have a particular interest rate apply to a Segment by notifying the Lender in writing (which may be by facsimile transmission) not later than 10:00 a.m., Birmingham, Alabama time, on the day on which a requested interest rate is to become applicable, except that, if the Segment is to bear interest at the LIBOR-Based Rate, the notice must be received by the Lender not later than 10:00 a.m. Birmingham, Alabama time, two Business Days before the day on which the requested interest rate is to become applicable. Any notice of interest rate election hereunder shall be irrevocable and shall be on a Request for Advances or Interest Rate Election form and shall set forth the following: (a) the amount of the Segment to which the requested interest rate will apply, (b) the date on which the selected interest rate will become applicable, (c) whether the interest rate selected is the Floating Rate or the LIBOR-Based Rate and (d) if the interest rate selected is the LIBOR-Based Rate, the maturity selected for the LIBOR-Based Rate Period. On the day that the Lender receives a notice hereunder requesting that the LIBOR-Based Rate be applicable, the Lender shall use its best efforts to notify the Borrower by telephone or by facsimile 18 transmission of the Lender's estimate of the applicable LIBOR-Based Rate as early on that day or the next Business Day as may be practical in the circumstances. The Lender shall not be required to provide an estimate of the LIBOR-Based Rate on any day on which dealings in deposits in Dollars are not transacted in the London interbank market. If the Borrower does not immediately accept the LIBOR-Based Rate quoted by the Lender, the Lender may, in view of changing market conditions, revise the quoted LIBOR-Based Rate at any time. No LIBOR-Based Rate shall be effective until mutually agreed upon by the Borrower and the Lender. If the Lender and the Borrower attempt to agree on the LIBOR-Based Rate but fail so to agree, or if there is any uncertainty as to whether or not the Lender and the Borrower have agreed upon the LIBOR-Based Rate, interest shall accrue on the Segment for which the LIBOR-Based Rate has been selected at the then applicable Floating Rate. SECTION 3.3 FLOATING RATE. Each Segment subject to the Floating Rate shall bear interest from the date the Floating Rate becomes applicable thereto until payment in full, or until the LIBOR-Based Rate is selected by the Borrower and becomes applicable thereto, on the unpaid principal balance of such Segment on an Actual/360 Basis. Any change in the Floating Rate caused by a change in the Prime Rate or in the Federal Funds Effective Rate shall take effect on the effective date of such change in the Prime Rate designated by the Lender or in the Federal Funds Effective Rate, without notice to the Borrower and without any further action by the Lender. If an Event of Default exists, each Segment subject to the Floating Rate shall bear interest from the date of such Event of Default until payment in full at a per annum rate (computed on an Actual/360 Basis) equal to the Default Rate. Notwithstanding the foregoing, for the purpose of enabling the Lender to send periodic billing statements in advance of each interest payment date reflecting the amount of interest payable on such interest payment date, at the option of the Lender, the Prime Rate or the Federal Funds Effective Rate, as applicable, in effect 15 days prior to each interest payment date shall be deemed to be the Prime Rate or the Federal Funds Effective Rate, as applicable, as continuing in effect until the date prior to such interest payment date for purposes of computing the amount of interest payable on such interest payment date. If the Lender elects to use the Prime Rate or the Federal Funds Effective Rate, as applicable, 15 days prior to the interest payment date for billing purposes, and if the Prime Rate or the Federal Funds Effective Rate, as applicable, changes during such 15-day period, the difference between the amount of interest that in fact accrues during such period and the amount of interest actually paid will be added to or subtracted from, as the case may be, the interest otherwise payable in preparing the periodic billing statement for the next succeeding interest payment date. In determining the amount of interest payable at the Termination Date or upon full prepayment of the Obligations, all changes in the Prime Rate or the Federal Funds Effective Rate, as applicable, occurring on or prior to the day before the Termination Date or the date of such full prepayment shall be taken into account. SECTION 3.4 LIBOR-BASED RATE. Each LIBOR-Based Rate Segment shall bear interest from the date the LIBOR-Based Rate becomes applicable thereto until the end of the applicable LIBOR-Based Rate Period on the unpaid principal balance of such LIBOR-Based Rate Segment at the LIBOR-Based Rate on an Actual/360 Basis. If an Event of Default exists, each LIBOR-Based Rate Segment shall bear interest from the date of such Event of Default until payment in 19 full at a per annum rate (computed on an Actual/360 Basis) equal to two percent (2%) in excess of the LIBOR-Based Rate that would otherwise have been applicable. SECTION 3.5 TERMINATION OF LIBOR-BASED RATE; INCREASE IN LIBOR-BASED RATE; REDUCTION OF RETURN. (a) If at any time the Lender shall reasonably determine (which determination, if reasonable, shall be final, conclusive and binding upon all parties) that: (1) by reason of any changes arising after Closing Date affecting the London interbank market or affecting the position of the Lender in such market, adequate and fair means do not exist for ascertaining the LIBOR-Based Rate by reference to the LIBOR Quote with respect to a LIBOR-Based Rate Segment; or (2) the continuation by the Lender of LIBOR-Based Rate Segments at the LIBOR-Based Rate or the funding thereof in the London interbank market would be unlawful by reason of any law, governmental rule, regulation, guidelines or order; or (3) the continuation by the Lender of LIBOR-Based Rate Segments at the LIBOR-Based Rate or the funding thereof in the London interbank market would be impracticable as a result of a contingency occurring after the Closing Date that materially and adversely affects the London interbank market; then, and in any such event, the Lender shall on such date give notice (by telephone and confirmed in writing) to the Borrower of such determination. The obligation of the Lender to make or maintain LIBOR-Based Rate Segments so affected or to permit interest to be computed thereon at the LIBOR-Based Rate, as the case may be, shall be terminated, and interest shall thereafter be computed on the affected Segment or Segments at the then applicable Floating Rate. (b) It is the intention of the parties hereto that the LIBOR-Based Rate shall accurately reflect the cost to the Lender of maintaining any LIBOR-Based Rate Segment during the applicable LIBOR-Based Rate Period assuming the Bank purchases any such time deposits and obtains such funds comprising any LIBOR-Based Rate Segment. Accordingly, if by reason of any change after the date hereof in any applicable Governmental Requirement (or any interpretation thereof and including the introduction of any new Governmental Requirement), including any change in the LIBOR Reserve Requirement, the cost to the Lender of maintaining any LIBOR-Based Rate Segment or funding the same by means of a London interbank market time deposit, as the case may be, shall increase, the LIBOR-Based Rate applicable to such LIBOR-Based Rate Segment shall be adjusted as necessary to reflect such change in cost to the Lender, effective as of the date on which such change in any applicable Governmental Requirement becomes effective. Any amounts due under this Section 3.5(b) as a result of a change in the LIBOR Reserve Requirement shall only be payable by the Borrower to the extent the Lender incurs actual costs associated with any such change. 20 (c) If the Lender shall have determined that the adoption after the Closing Date of any Governmental Requirement regarding capital adequacy, or any change in any of the foregoing or in the interpretation or administration of any of the foregoing by any Governmental Authority, central bank or comparable agency charged with the interpretation or administration thereof, or compliance by the Lender (or any lending office of the Lender) or the Lender's holding company with any request or directive regarding capital adequacy (whether or not having the force of law) of any such Governmental Authority, central bank or comparable agency, has or would have the effect of reducing the rate of return on the Lender's capital or on the capital of the Lender's holding company, as a consequence of the Lender's obligations under this Agreement or the Advances made by the Lender pursuant hereto to a level below that which the Lender or the Lender's holding company could have achieved but for such adoption, change or compliance (taking into consideration the Lender's guidelines with respect to capital adequacy) by an amount deemed by the Lender to be material, then from time to time the Borrower shall pay to the Lender such additional amount or amounts as will compensate the Lender or the Lender's holding company for any such reduction suffered. SECTION 3.6 COMPENSATION. The Borrower shall compensate the Lender for all reasonable losses, expenses and liabilities (including any interest paid by the Lender to lenders on funds borrowed by the Lender to make or carry any LIBOR-Based Rate Segment and any loss sustained by the Lender in connection with the re-employment of such funds), that the Lender may sustain: (a) if for any reason (other than a default by the Lender) following agreement between the Borrower and the Lender as to the LIBOR-Based Rate applicable to the LIBOR-Based Rate Segment the Borrower fails to accept such LIBOR-Based Rate Segment, (b) as a consequence of any unauthorized action taken or default by the Borrower in the repayment of any LIBOR-Based Rate Segment when required by the terms of this Agreement or (c) as a consequence of the prepayment of any LIBOR-Based Rate Segment pursuant to Section 2.4(b). A certificate as to the amount of any additional amounts payable pursuant to this section or Section 3.5(c) (setting forth in reasonable detail the basis for requesting such amounts) submitted by the Lender to the Borrower shall be conclusive, in the absence of manifest error. The Borrower shall pay to the Lender the amount shown as due on any such certificate delivered by the Lender within 30 days after the Borrower's receipt of the same. ARTICLE 4 REPRESENTATIONS AND WARRANTIES The Borrower represents and warrants to the Lender as follows: SECTION 4.1 FINANCIAL STATEMENTS. The Borrower's audited consolidated financial statements as at December 31, 1995 and the Borrower's unaudited consolidated financial statement as at September 30, 1996, copies of which have been previously submitted to the Lender, have been prepared in conformity with GAAP and present fairly in all material respects the financial condition of the Borrower as at such dates and the results of its operations for the periods then 21 ended, subject (in the case of the September 30, 1996, financial statements) to year-end audit adjustments and omission of footnotes. SECTION 4.2 NON-EXISTENCE OF DEFAULTS. As of the Closing Date, it is not in default with respect to any material amount of its existing Debt. The making and performance of this Agreement and the Credit Documents, will not immediately, or with the passage of time, the giving of notice, or both: (a) violate the provisions of the organizational documents or any other corporate document of the Borrower; (b) violate any laws; (c) result in a material default under any contract, agreement, or instrument to which the Borrower is a party or by which the Borrower or its properties are bound; or (d) result in the creation or imposition of any Lien upon any of the Property of the Borrower except in favor of the Lender or Chase Manhattan Bank. SECTION 4.3 LITIGATION. Set forth on SCHEDULE 4.3 is a list of all material actions, suits, investigations or proceedings pending or, in the knowledge of the Borrower, threatened against the Borrower as of the Closing Date in which there is a reasonable probability of an adverse decision that would materially and adversely affect the Borrower, the Business, the Property, or the conditions, financial or otherwise, of the Borrower. SECTION 4.4 MATERIAL ADVERSE CHANGES. As of the Closing Date, the Borrower does not know of any material adverse change in the Business, or in the Borrower's assets, liabilities, properties, or condition, financial or otherwise, including changes in the Borrower's financial condition from September 30, 1996, through the Closing Date. SECTION 4.5 TITLE TO PROPERTY. The Borrower has good and marketable title to all of the Property, free and clear of any and all Liens, other than the Permitted Encumbrances. SECTION 4.6 CORPORATE STATUS. The Borrower is a duly organized Georgia corporation, in good standing, with perpetual corporate existence. The Borrower has the corporate power and authority to own its properties and to transact the Business in which it is engaged and presently proposes to engage. The Borrower has not done business under any other name, trade name or otherwise, within the five years immediately preceding the Closing Date except as set forth in SCHEDULE 4.6. SECTION 4.7 CORPORATE POWER AND AUTHORITY. The Borrower has the corporate power to borrow and to execute, deliver and carry out the terms and provisions of the Credit Documents and is duly qualified or registered to do business in every jurisdiction where the character of its properties or the nature of its activities makes such qualification or registration necessary, except to the extent it would not have a material adverse effect on the Borrower to so qualify or register. The Borrower has taken or caused to be taken all necessary corporate action to authorize the execution, delivery and performance of the Credit Documents and the borrowing thereunder (including the obtaining of any consent of shareholders required by law or by the Borrower's Articles of Incorporation or Bylaws). 22 SECTION 4.8 PLACE OF BUSINESS. As of the Closing Date, the primary place of business and chief executive office of the Borrower is at 535 Macon Road, McDonough, GA 30253. The Property is maintained as of the Closing Date solely at the locations listed in SCHEDULE 4.8, and all assets used in the Business are in such locations. SECTION 4.9 PLACE WHERE RECORDS MAINTAINED. As of the Closing Date the Borrower's records concerning the Property are kept at the chief executive office of the Borrower referenced above, or will be kept at such other place that the Borrower informs the Lender of in advance of relocation. SECTION 4.10 VALIDITY, BINDING NATURE AND ENFORCEABILITY OF THE CREDIT DOCUMENTS. The Credit Documents executed by the Borrower are the valid and binding obligations of the Borrower and are enforceable against the Borrower in accordance with their terms, except as limited by bankruptcy, insolvency, or other laws of general application relating to the enforcement of creditors' rights. SECTION 4.11 TAXES. As of the Closing Date, the Borrower has (a) filed all federal and all material state and local tax returns and other reports that it is required by law to file prior to the Closing Date, (b) paid or cause to be paid all taxes, assessments and other governmental charges that are due and payable prior to the Closing Date, the failure of which to pay would have a material adverse effect on the Business, except those subject to a Permitted Contest, and (c) made adequate provision for the payment of such taxes, assessments or other charges accruing but not yet payable. The Borrower has no knowledge of any deficiency or additional assessment in a material amount in connection with any taxes, assessments or charges. SECTION 4.12 COMPLIANCE WITH LAWS. As of the Closing Date, the Borrower has complied in all material respects with all applicable laws, including any Environmental Laws and any zoning laws, the failure of which to comply with would have a material adverse effect on the Borrower. SECTION 4.13 CONSENTS. As of the Closing Date, the Borrower has duly obtained all material consents, permits, licenses, approvals or authorization of, or effected the filing, registration or qualification with, any Governmental Authority that is required to be obtained or effected by the Borrower in connection with the Business or the execution and delivery of this Agreement and the other Credit Documents the failure of which to obtain or effect would have a material adverse effect on the Borrower. SECTION 4.14 PURPOSE. The proceeds of the Loan shall be used by the Borrower solely for capital expenditures and the working capital needs of the Borrower. SECTION 4.15 CONDITION OF THE BUSINESS. All material assets used in the conduct of the Business are in good operating condition and repair and are fully usable in the ordinary course thereof, reasonable wear and tear excepted. 23 SECTION 4.16 LABOR CONTRACTS. As of the Closing Date, the Borrower is not a party to or bound by any collective bargaining agreements, nor are there any petitions to certify a collective bargaining organization or notices of intention to organize pursuant to the National Labor Relations Act, other than as described in SCHEDULE 4.16. SECTION 4.17 ERISA. As of the Closing Date, except as set forth on SCHEDULE 4.17, the Borrower has no employee benefit plans covered by Title IV of ERISA and no qualified or nonqualified retirement plans or deferred compensation plans. SECTION 4.18 PATENTS AND TRADEMARKS. As of the Closing Date, the Borrower owns no registered patents, trademarks or service marks, and has no pending registration applications with respect to patents, trademarks or service marks, in either case relating to the Business, other than those listed in the attached SCHEDULE 4.18. SECTION 4.19 LOCATION OF PROPERTY. SCHEDULE 4.8 describes the locations where any of the Property is located or stored as of the date hereof. SECTION 4.20 REAL PROPERTY. As of the Closing Date, the Borrower does not own or lease any real property, except as set forth on SCHEDULE 4.20 attached hereto. SECTION 4.21 CAPITALIZATION. The Borrower has authorized and outstanding 1,000 shares of its capital stock, which are held beneficially and of record as follows: SHAREHOLDER NUMBER OF SHARES ----------- ---------------- Guarantor 1,000 There are no outstanding subscriptions, options, rights, warrants, calls, commitments or agreements of any kind to issue, acquire or transfer any shares of capital stock of the Borrower or any securities convertible into any shares of such capital stock. SECTION 4.22 SUBSIDIARIES. The Borrower has no Subsidiaries. SECTION 4.23 FEDERAL RESERVE BOARD REGULATIONS. The Borrower does not intend to use any part of the proceeds of the Credit, and has not incurred any indebtedness to be reduced, retired or purchased by it out of such proceeds, for the purpose of purchasing or carrying any Margin Stock, and it does not own and has no intention of acquiring any such Margin Stock. SECTION 4.24 INVESTMENT COMPANY ACT. The Borrower is not an "investment company," or a company "controlled" by an "investment company," as such terms are defined in the Investment Company Act of 1940, as amended. 24 ARTICLE 5 CONDITIONS OF LENDING The obligation of the Lender to lend hereunder is subject to the following conditions precedent: SECTION 5.1 REPRESENTATIONS AND WARRANTIES. On and as of the Closing Date and any later date on which Credit is to be extended hereunder, and on the date the Borrower presents to the Lender each Request for Advance or Interest Rate Election form requesting an Advance, the representations and warranties set forth in Article 4 must be true and correct in all material respects with the same effect as though they had been made on and as of such date, except to the extent that they expressly relate to an earlier date. SECTION 5.2 NO DEFAULT. On and as of the Closing Date hereof and any later date on which Credit is to be extended hereunder and on the date the Borrower presents to the Lender each Request for Advance or Interest Rate Election form requesting an Advance, no Event of Default, nor any event that upon notice or lapse of time or both would constitute an Event of Default, may exist. The presentation by the Borrower of each Request for Advance or Interest Rate Election form requesting an Advance shall constitute representation and warranty by the Borrower to the Lender that no Event of Default exists. SECTION 5.3 AUTOMATIC REPRESENTATIONS AND WARRANTIES. The making of any request for an Advance shall constitute an automatic representation and warranty by the Borrower that the representations and warranties contained in Article 4 are true and correct in all material respects on and as of the date of such Advance. SECTION 5.4 REQUIRED ITEMS. On and as of the Closing Date and on and as of the date of each Advance and on the date the Borrower presents to the Lender each Request for Advance or Interest Rate Election form, the Lender must have received all financial statements (if any), reports and other items required as of that date under Article 2 and Article 6 of this Agreement. SECTION 5.5 SUPPORTING DOCUMENTS. (a) The Lender shall have received on or before the Closing Date: (i) a copy of resolutions of the Board of Directors of the Borrower, certified as in full force and effect on the Closing Date by the Secretary of the Borrower, authorizing the execution, delivery and performance of the Credit Documents by the Borrower and authorizing designated officers of the Borrower to execute and deliver the Credit Documents and execute and deliver to the Lender Request for Advances or Interest Rate Election forms; 25 (ii) a certificate of the Secretary of the Borrower, dated the Closing Date, certifying (A) that attached thereto are true, correct and accurate copies of Certificate of Incorporation and By-laws of the Borrower and (B) the incumbency and specimen signatures of the designated officers referred to clause (i) above; (iii) Opinions of Counsel to the Borrower, the Guarantor and the Sponsors in form and content acceptable to the Lender and its counsel as to the execution and delivery by the Borrower, the Guarantor and the Sponsors of the Credit Documents and other matters related thereto; (iv) a Pledge Agreement duly executed by the Guarantor granting to the Lender a first priority perfected security interest in all the outstanding capital stock of the Borrower, together with all stock powers, stock certificates, and financing statements related thereto; (v) other duly executed Security Documents granting to the Lender a first priority perfected security interest and Lien on all other assets, real or personal, then or thereafter owned by the Borrower; (vi) the Subordination Agreement duly executed by the Borrower and the Guarantor together with a copy of the MIG Note; (vii) the Make-Whole and Pledge Agreement duly executed by the Sponsors dated the Closing Date in favor of the Lender; (viii) the Intercreditor and Subordination Agreement duly executed by the Lender and The Chase Manhattan Bank dated the Closing Date; (ix) the deposit of $1,000,000 made by the Borrower into the Snapper Make-Whole Account; (x) the Lock Box Agreement duly executed by the Bank, the Lender and the Borrower; (xi) a copy of resolutions of the Board of Directors of the Guarantor, certified as in full force and effect on the Closing Date by the Secretary of Guarantor, authorizing the execution, delivery and performance by the Guarantor of the Credit Documents to which it is a party and authorizing designated officers of the Guarantor to execute and deliver such Credit Documents on behalf of the Guarantor; (xii) a certificate of the Secretary of the Guarantor, dated the Closing Date, certifying (A) that attached thereto are true, correct and accurate copies of the Certificate of Incorporation and By-laws of the Guarantor and (B) the incumbency and specimen signatures of the designated officers referred to in clause (xii) above; 26 (xiii) the Guaranty Agreement duly executed by the Guarantor in favor of the Lender; (xiv) certificates of good standing with respect to the Borrower and the Guarantor from the appropriate Governmental Authorities in the jurisdictions under the laws of which each of them is incorporated or formed; and (xv) such additional supporting documents as the Lender or its counsel may reasonably request. (b) The Lender shall have received on or before the Closing Date the following additional documents: (i) a Phase I environmental audit with respect to the real property described on SCHEDULE 4.20 (the "Real Property") showing that there exist no material environmental problems with the Real Property; (ii) evidence satisfactory to the Lender that there has been no material pending or threatened litigation, bankruptcy or insolvency, injunction, order or claim pending with respect to the Borrower or any of them and that no material adverse change has occurred in the financial condition, business or prospects of the Borrower or any of them since the date of the financial statements referred to in Section 4.1; (iii) a title insurance commitment in an amount reasonably acceptable to the Lender with respect to the Real Property, issued by a title insurance company approved by the Lender and insuring the Lien of the Lender, under the deed to secure debt executed and delivered by the Borrower, and showing no exceptions other than Permitted Encumbrances; (iv) the subordinations and consents from the landlords where the Borrower has any Inventory located or consigned whereby each such party acknowledges the Lender's first-priority security interest in the Borrower's Inventory and other tangible personal property; (v) such additional supporting documents as the Agents, the Lenders or their counsel may reasonably request. (c) On or before the delivery to the Lender of any Security Document, the Borrower shall have delivered to the Lender, at the Borrower's expense, such title insurance commitments, environmental reports, surveys, UCC searches, financing statements, filing information, opinions of counsel and other information as shall be requested by the Lender in order to satisfy the Lender and its counsel as to the validity, legality, effectiveness, perfection, priority and enforceability of such Security Document. Within 60 days prior to November 26, 1997, the Borrower shall, at its expense, provide the Lender with an equipment appraisal, reasonably acceptable to the Lender. 27 (d) All documents delivered to the Lender under this Section 5.5 shall be in form and substance reasonably satisfactory to the Lender and its counsel. ARTICLE 6 COVENANTS The Borrower covenants and agrees that: SECTION 6.1 PAYMENT AND PERFORMANCE. The Borrower shall pay and perform all Obligations in full when and as due under the terms of the Credit Documents. SECTION 6.2 INSURANCE. (a) TYPE OF INSURANCE. The Borrower shall at all times cause the Business and the Property to be insured by reputable insurers of reasonable financial soundness and having an A. M. Best rating of A or better, with such policies, against such risks (including products liability) and in such amounts as are appropriate for reasonably prudent businesses in the Borrower's industry and of the Borrower's size and financial strength. (b) REQUIREMENTS AS TO INSURANCE POLICIES. The policies of insurance which the Borrower is required to carry pursuant to the provisions of Section 6.2(a) shall comply with the requirements listed below: (i) Each such policy shall provide that it may not be cancelled or allowed to lapse at the end of a policy period without at least 30 days' prior written notice to the Lender; (ii) Each liability and hazard insurance policy shall name the Lender as an additional insured; and (iii) Each insurance policy required under Section 6.2(a) shall contain a standard lender's loss payable clause in favor of the Lender. Such insurance policies shall also contain lender's loss payable endorsements satisfactory to the Lender providing, among other things, that any loss shall be payable in accordance with the terms of such policy notwithstanding any act of the Borrower which might otherwise result in forfeiture of such insurance. (c) COLLECTION OF CLAIMS. The Borrower agrees that it shall promptly advise the Lender of any insured casualty in excess of $100,000 and, if such loss represents the destruction of any Property that causes the Borrowing Base to be exceeded, the Borrower agrees that the Lender may direct all insurance proceeds therefrom to be paid directly to the Lender, and hereby appoints the Lender its attorney-in-fact for such purpose. 28 (d) BLANKET POLICIES. Any insurance required by this Section 6.2 may be supplied by means of a blanket or umbrella insurance policy. (e) DELIVERY OF POLICIES OR CERTIFICATE OF INSURANCE. The Borrower shall deliver to the Lender certificates of insurance issued by insurers to evidence that the insurance maintained by the Borrower complies with the requirements of this Section 6.2. SECTION 6.3 COLLECTION OF RECEIVABLES; SALE OF INVENTORY. The Borrower shall collect its Accounts and sell its Inventory only in the ordinary course of business, unless written permission to the contrary is obtained from the Lender. SECTION 6.4 NOTICE OF LITIGATION AND PROCEEDINGS. The Borrower shall give prompt notice to the Lender of (a) any litigation or proceeding (including fines and penalties of any public authority) in which it is a party in which there is a reasonable probability of an adverse decision that would require it to pay more than $500,000, or deliver assets the value of which exceeds $500,000, whether or not the claim is considered to be covered by insurance; (b) any class action litigation against it, regardless of size; and (c) the institution of any other suit or proceeding that could reasonably be likely to materially and adversely affect its operations, financial condition, property or the Business. SECTION 6.5 PAYMENT OF INDEBTEDNESS TO THIRD PERSONS. The Borrower shall pay, when due, all Debt due third persons, except when the amount thereof is subject to a Permitted Contest. SECTION 6.6 NOTICE OF CHANGE OF BUSINESS LOCATION. The Borrower shall notify the Lender: (a) 30 days in advance of any change in or discontinuation of the location of the Property, the Borrower's principal place of business, (b) 30 days in advance of the establishment of any new places of business relating to the Business, and (c) 2 days in advance of any change in or addition to the locations where the Borrower's Inventory or records are kept; provided, however, that Inventory shall be excluded from the Borrowing Base if it is moved to a new location and the Lender is not satisfied it has a valid perfected security interest in such Inventory. SECTION 6.7 PENSION PLANS. The Borrower shall (a) fund all of its defined benefit or defined contribution pension plans, if any, in accordance with, and in amounts not less than that required by, the minimum funding standards of Section 302 of ERISA, as amended, (b) make available for inspection and copying by the Lender, all audit reports and Forms 5500, filed with the United States Department of Labor or the Internal Revenue Service with respect to all such plans promptly after filing, and any other related information as may be reasonably requested from time to time by the Lender, and (c) promptly advise the Lender of the occurrence of any reportable event or non-exempt prohibited transaction (as defined in ERISA) with respect to any such plan. SECTION 6.8 PAYMENT OF TAXES. The Borrower shall pay or cause to be paid when and as due, all taxes, assessments and charges or levies imposed upon it or on any of its property or 29 that it is required to withhold and pay over to the taxing authority or that it must pay on its income, the failure of which to pay would have a material adverse effect on the Borrower, except where subject to a Permitted Contest. The Borrower shall, however, pay or cause to be paid all such taxes, assessments, charges or levies immediately whenever foreclosure of any Lien that attaches on the Property or the Real Property appears imminent. SECTION 6.9 FURTHER ASSURANCES. The Borrower agrees to, execute such other and further documents, including confirmatory deeds, deeds to secure debt, promissory notes, security agreements, financing statements, continuation statements, certificates of title, and the like as may from time to time in the reasonable opinion of the Lender be necessary to perfect, confirm, establish, reestablish, continue, or complete the security interests, collateral assignments and liens in the Property, and the purposes and intentions of this Agreement. SECTION 6.10 ADVANCEMENTS. If the Borrower fails to (i) perform any of the affirmative covenants contained in Section 6.1, (ii) protect or preserve the Property or (iii) protect or preserve the status and priority of the Liens and security interest of the Lender in the Property, the Lender may make advances to perform those obligations. All sums so advanced shall immediately upon advancement be subject to the terms and provisions of this Agreement and all of the Credit Documents. Any provisions in this Agreement to the contrary notwithstanding, the authorizations contained in this Section 6.10 shall impose no duty or obligation on the Lender to perform any action or make any advancement on behalf of the Borrower and are for the sole benefit and protection of the Lender. SECTION 6.11 MAINTENANCE OF STATUS. The Borrower shall take all necessary steps to (i) preserve its existence as a corporation, (ii) preserve the Borrower's franchises and permits the loss of which would have a material adverse effect on the Business, and (iii) comply with all present and future material agreements to which the Borrower's is subject. The Borrower shall not change the nature of the Business during the term of this Agreement. SECTION 6.12 FINANCIAL STATEMENTS; REPORTING REQUIREMENTS; CERTIFICATION AS TO EVENTS OF DEFAULTS. During the term of this Agreement, the Borrower shall furnish copies of the following to the Lender: (a) within thirty (30) days of each month, the Borrower's monthly financial package, consisting of projections of the Borrowing Base for the next succeeding twelve month period, financial operating results summary, together with operating summaries for the Borrower for the month and year to date then ended, subject to year-end audit adjustments, and certified by the Chief Financial Officer of the Borrower to have been prepared in accordance with GAAP and to accurately reflect in all material respects the financial condition of the Borrower; (b) within 90 days of each fiscal year, annual financial statements for the Borrower as of the end of such fiscal year, consisting of a consolidated balance sheet, consolidated statement 30 of operations, consolidated statements of cash flows and consolidated statement of stockholder's equity, in comparative form. The statements and balance sheet shall be consolidated with the financial statements of the Guarantor and the Guarantor's financial statements shall be audited by an independent firm of certified public accountants selected by the Guarantor and reasonably acceptable to the Lender (the Guarantor's present accounting firm, KPMG Peat Marwick is acceptable and any so-called "Big Six" accounting firm selected by the Guarantor shall be acceptable to the Lender), and certified by that firm of certified public accountants to have been prepared in accordance with GAAP. The certified public accountants shall render an unqualified opinion as to such statements and balance sheets; provided, however, if the opinion is qualified, the accountants shall provide a precise and full explanation of the reasons for any such qualification together with all papers upon which any such qualification is based. the Lender shall have the absolute and irrevocable right, from time to time, to discuss the affairs of the Borrower directly with the independent certified public accountant after prior notice to the Borrower and the reasonable opportunity of the Borrower to be present at any such discussions and a representative of the Guarantor shall have the right to be present during any such discussions; (c) within 45 days after the close of each fiscal quarter beginning with the fiscal quarter ending December 31, 1996, a certificate of the President, Chief Financial Officer, or Director of Taxes of the Borrower stating that he has reviewed the provisions of the Credit Documents and that a review of the activities of the Borrower during such quarter has been made by or under his supervision with a view to determining whether the Borrower has observed and performed all of the Borrower's obligations under the Credit Documents, and that, to the best of his knowledge, information and belief, the Borrower has observed and performed each and every undertaking contained in the Credit Documents and is not at the time in default in the observance or performance of any of the terms and conditions thereof or, if the Borrower shall be so in default, specifying all of such defaults and events of which he may have knowledge; (d) by January 3lst of each fiscal year, an operating plan for such fiscal year prepared for each month, including projected income statements, balance sheets, cash flow budgets, and capital expenditure budgets for each month supported by a narrative describing the assumptions upon which the plan is based; (e) within 15 days after the end of each month, financial statements similar to those referred to in Section 6.12(b) for such month and for the period beginning on the first day of the fiscal year and beginning on the last day of such month, unaudited but certified by the Chief Financial Officer of the Borrower; (f) on Monday of each week, a completed Borrowing Base Certificate in the form attached hereto as SCHEDULE E, certified by an Authorized Representative of the Borrower, together with (i) a detailed aged trial balance, in form and substance acceptable to the Lender, of all then-existing Accounts specifying the names, addresses, face value and dates of invoices for each Account Debtor obligated on an Account so listed, separated as 31 to Eligible Accounts and Accounts which are not Eligible Accounts, and, upon demand, the original copy of all documents (including proof of shipment and delivery, sales journals, contracts, bills of lading, warehouse receipts, purchase orders, invoices, customer statements, repayment histories, completion certificates or other proof of the satisfactory performance of the services that gave rise to an Account, and present status reports) evidencing or relating to the Accounts so scheduled and such other matters and information relating to the then-existing Accounts as the Lender shall reasonably request and (ii) schedules of inventory; original orders; invoices; shipping documents; floorplan billing settlements and receivables; market and inventory listing containing model, serial number, location and parts inventory by location, the current status and value of the Inventory and weekly sales reports in form and detail reasonably satisfactory to the Lender. The statements shall be in the form and shall contain the information as is prescribed by the Lender. Other reporting shall be available upon request by the Lender, including inventory reporting showing the cost (determined on a "first-in, first-out" basis) and market value thereof; (g) promptly upon receipt thereof, copies of all final reports and final management letters (or excerpts of such reports or letters which include information about the Borrower) submitted to the Guarantor by independent accountants in connection with any annual or interim audit of the books of the Guarantor made by such accountants which relate solely to the Borrower; (h) copies of any and all reports, filings and other documentation delivered to the Securities and Exchange Commission, if any; and (i) any other statements, reports and other information as the Lender may reasonably request concerning the financial condition of the Borrower. SECTION 6.13 NOTICE OF EXISTENCE OF DEFAULT. The Borrower shall promptly notify the Lender of: (i) the existence of any known condition or event, which is or which will be with notice or the passage of time or both an Event of Default of (ii) the actual or threatened termination, suspension, lapse or relinquishment of any material license, authorization, permit or other right granted the Borrower or for the Borrower's benefit and used in the Business by any Governmental Authority material to the Business. SECTION 6.14 COMPLIANCE WITH LAWS. The Borrower shall comply in all material respects with all applicable laws, rules, regulations and orders the noncompliance with which would have a material adverse effect on the Borrower. SECTION 6.15 MAINTENANCE OF PROPERTY. The Borrower shall maintain the Property and every part thereof in good condition and repair. The Borrower shall not permit the value of the Property to be materially impaired. The Borrower shall defend the Property against all claims and legal proceedings by persons other than the Lender and Chase Manhattan Bank. The Borrower shall not transfer the Property from the premises where now located (other than 32 Inventory sold in the ordinary course of business, other Property transferred in the ordinary course of business or in accordance with Section 6.19 of this Agreement), or permit the Property to become a fixture or accession (unless so affixed on the Closing Date) to any goods which are not items of Property, without the prior written approval of the Lender. The Borrower shall not permit the Property to be used in violation of any applicable law, regulations, or policy of insurance. As to Property consisting of Instruments and Chattel Paper, the Borrower shall preserve rights in it against prior parties. SECTION 6.16 PROPERTY RECORDS AND STATEMENTS. The Borrower shall keep such accurate and complete books and records pertaining to the Property in such detail and form as the Lender reasonably requires. SECTION 6.17 INSPECTION OF PROPERTY. The Lender may examine the Property at any time, and from time to time. The Lender shall have full access to, and the right to audit, inspect and make abstracts and copies from the Borrower's books and records pertaining to the information included in the Borrowing Base Certificate or the Property, wherever located, at any time during reasonable business hours, and from time to time. The Borrower shall assist the Lender in so doing. SECTION 6.18 CHANGE OF NAME, ETC. The Borrower shall not change its name, or begin to trade under any assumed names or trade names in connection with the Business without thirty (30) days' prior written notice to the Lender, other than the trade name "Blackhawk" and "Lady Garden" of which the Lender is hereby given notice may be applied to certain products of the Borrower. SECTION 6.19 SALE OR TRANSFER OF ASSETS. Except as consented to in writing by the Lender, the Borrower shall not sell, transfer, lease (including sale-leaseback) or otherwise dispose of all or any material portion of its assets or merge with any person (whether or not the Borrower shall be the survivor of such merger); provided that the Borrower may sell or otherwise dispose of Property having an aggregate book value of not more than $500,000 in any fiscal year or an aggregate fair market value of not more than $250,000 in any fiscal year. This provision shall not apply to any sale if the proceeds of such sale pay the Obligations in full. SECTION 6.20 ACQUISITION OF STOCK OF THIRD PERSON. The Borrower shall not enter into any agreement, commitment letter or letter of intent to acquire any equity interest or stock in another business. SECTION 6.21 FALSE CERTIFICATES OR DOCUMENTS. The Borrower shall not furnish the Lender with any certificate or other document delivered pursuant to this Agreement that contains any untrue statement of material fact or that omits to state a material fact necessary to make it not misleading in light of the circumstances under which it was furnished. SECTION 6.22 TRANSACTIONS WITH AFFILIATES. Without the prior written consent of the Lender, which shall not be unreasonably withheld, the Borrower shall not enter into any contracts, 33 leases, sales or other transactions with any division or Affiliates on terms less favorable than could be obtained generally by the Borrower from a nonaffiliate or in the aggregate, would have a material adverse effect on the Property or on the Business. SECTION 6.23 DIVIDENDS. The Borrower shall not declare or pay any dividends or make any distributions upon any of its stock (including dividends and distributions payable only in shares of its stock) or directly or indirectly apply any of its assets to the redemption, retirement, purchase or other acquisition of its stock. SECTION 6.24 PAYMENTS ON MIG NOTE. The Borrower shall not make any payments to the Guarantor on the MIG Note, at any time (a) that an Event of Default exists or would result because of such payment, (b) that there would be less than $10,000,000 available to the Borrower under the terms of this Agreement immediately after giving effect to such payment, (c) in a single payment exceeding $3,000,000, (d) prior to January 1, 1998 and (e) more frequently than quarterly after January 1, 1998. SECTION 6.25 LOAN. The Borrower shall not make any loan to any Person, except for loans in anticipation of reasonable and normally reimbursable business expenses, trade credit extended in the ordinary course of Business and loans to employees in an aggregate principal amount not to exceed $300,000 at any one time outstanding. SECTION 6.26 USE OF CREDIT PROCEEDS. Not, directly or indirectly use any part of the proceeds of the Credit (a) for any purpose other than capital expenditures and general working capital needs or (b) without limiting the generality of the foregoing, for the purpose of purchasing or carrying any Margin Stock, or of reducing, retiring or purchasing any indebtedness incurred for such purpose; or take any other action that would involve a violation of Section 7 of the Securities Exchange Act of 1934, as amended, or any regulation issued thereunder, including Regulation U or Regulation X of the Federal Reserve Board, in connection with the transactions contemplated hereby; provided, however, that nothing set forth in this Section 6.26 or elsewhere in this Agreement shall be construed as imposing any duty on the Lender to supervise the use or application of the Credit proceeds or any liability on the Lender to any person if the Credit proceeds are not used for the purposes set forth in this Agreement. SECTION 6.27 INDEBTEDNESS. The Borrower shall not incur, create, assume or permit to exist any Debt, other than the Obligations, Subordinated Debt, Debt existing on the Closing Date and reflected on the Borrower's financial statements, other Debt to the Lender, capitalized lease obligations in excess of $3,000,000 and purchase money obligations allowed under Permitted Encumbrances. SECTION 6.28 GUARANTIES. The Borrower shall not guarantee, endorse, become surety for or otherwise in any way become or be responsible for the indebtedness or obligations of any other person, whether by agreement to purchase the indebtedness, liabilities or obligations of any other person, or agreement for the furnishing of funds to any other person (directly or indirectly, through the purchase of goods, supplies or services or by way of stock purchase, capital 34 contribution, working capital maintenance agreement, advance or loan) or for the purpose of paying or discharging the indebtedness or obligations of any other person, or otherwise, except for the endorsement of negotiable instruments in the ordinary course of business for collection. SECTION 6.29 INVESTMENTS, ETC. The Borrower shall not purchase or hold beneficially any stock, other securities or evidences of indebtedness of or make any investment or acquire any interest whatsoever in, any other person; provided, however, that it may invest in Permitted Investments. SECTION 6.30 SALE OF RECEIVABLES. The Borrower shall not sell, assign or discount, or grant or permit any Lien (other than Permitted Encumbrances) on any of its accounts receivable or any promissory note held by it, with or without recourse, other than the discount of such notes in the ordinary course of business for collection. SECTION 6.31 SOLVENCY. The Borrower shall continue to be Solvent. SECTION 6.32 LEASE OBLIGATIONS. Except for existing leases (and all renewals, extensions and replacements thereof), the Borrower shall not incur, create, permit to exist or assume any commitment to make any direct or indirect payment, whether as rent or otherwise, under any lease, rental or other arrangement for the use of property of any other person, if immediately thereafter the aggregate of such payments to be made by it would exceed $500,000 in any consecutive twelve-month period. SECTION 6.33 FINANCIAL COVENANTS. The Borrower will at all times maintain as of the last day of each month as set forth below: (a) a Tangible Net Worth plus Subordinated Debt in the combined amount of not less than the amount set forth below; (b) an EBITDA of not less than the amount set forth below; (a) (b) Tangible Net Worth Minimum Date plus Subordinated Debt Date EBITDA - ---- ---------------------- ---- -------- 12 Months Ended 12/31/96 33,500 12/31/96 (10,000) 3 Months Ended 3/31/97 32,500 3/31/97 3,750 6 Months Ended 6/30/97 32,500 6/30/97 13,000 9 Months Ended 9/30/97 32,500 9/30/97 14,000 35 12 Months Ended 12/31/97 32,500 12/31/97 14,000 Rolling 12 Months Ended 3/31/98 37,500 3/31/98 20,000 Rolling 12 Months Ended 6/30/98 40,000 6/30/98 25,000 Rolling 12 Months Ended 9/30/98 42,500 9/30/98 27,500 For purposes of this Section 6.33: (i) "Tangible Net Worth" means the book value of the Borrower's assets less liabilities, excluding from such assets all Intangibles; (ii) "INTANGIBLES" means and includes general intangibles (as that term is defined in the Uniform Commercial Code); accounts receivable and advances due from officers, directors, employees, stockholders and affiliates; non-trade accounts receivable and other unidentified accounts receivable; leasehold improvements net of depreciation; licenses; good will; prepaid expenses; escrow deposits; covenants not to compete; the excess of cost over book value of acquired assets; franchise fees; organizational costs; finance reserves held for recourse obligations; capitalized research and development costs; and such other similar items as the Lender may from time to time determine in the Lender's reasonable discretion; (iii) "EBITDA" shall mean, for any period of determination, the consolidated net income of the Borrower before provision for income taxes, Interest Expense, depreciation and amortization (including implicit interest expense on capitalized leases), all as determined in accordance with GAAP, excluding therefrom (to the extent included): (a) non-operating gains (including extraordinary or nonrecurring gains, gains from discontinuance of operations and gains arising from the sale of assets other than Inventory) during the applicable period; (b) net earnings of any business entity in which the Borrower has an ownership interest unless such net earnings shall have actually been received by the Borrower in the form of cash distributions; (c) the earnings of any Person to which any assets of the Borrower shall have been sold, transferred or disposed of, or into which the Borrower shall have merged, or been a party to any consolidation or other form of reorganization, prior to the date of such transaction; (d) any gain arising from the acquisition of any securities of the Borrower; (e) non-operating losses arising from the sale of capital assets during such period; and (f) extraordinary charges of up to an aggregate, in each of 1996 and 1997 only, of $7,000,000 relating to the effect of Inventory repurchased from distributors on gross margin. The foregoing terms will be determined in accordance with GAAP, and, if applicable, on a consolidated basis; (iv) "INTEREST EXPENSE" shall mean interest payable on Debt during the period in question. SECTION 6.34 ERISA COMPLIANCE. Neither the Borrower nor any member of the Controlled Group nor any Plan of any of them will: 36 (a) engage in any "prohibited transaction" (as such term is defined in Section 406 or Section 2003 (a) of ERISA) which is not subject to a legal exemption; (b) incur any "accumulated funding deficiency" (as such term is defined in Section 302 of ERISA) whether or not waived; (c) terminate any Pension Plan in a manner which could result in the imposition of a Lien on any property of the Borrower or any member of the Controlled Group pursuant to Section 4068 of ERISA; or (d) violate state or federal securities laws applicable to any Plan. SECTION 6.35 FISCAL YEAR. The Borrower shall not change its fiscal year-end without sixty days prior written notice to the Lender. ARTICLE 7 EVENTS OF DEFAULT SECTION 7.1 EVENTS OF DEFAULT. The occurrence of any of the following events shall constitute an event of default (an "Event of Default") under this Agreement (whatever the reason for such event and whether or not it shall be voluntary or involuntary or be effected by operation of law or pursuant to any Governmental Requirement): (a) any representation or warranty made in this Agreement or in any of the other Credit Documents shall prove to be false or misleading in any material respect as of the time made; or (b) any certificate, financial statement or other instrument furnished pursuant to this Agreement or any of the other Credit Documents, shall prove to be false or misleading in any material respect as of the time furnished; or (c) default shall be made in the payment when due of any of the Obligations, and such default shall continue unremedied for five (5) days; or (d) default shall be made in the due observance or performance of any covenant, condition or agreement on the part of the Borrower to be observed or performed pursuant to the terms of Sections 6.19, 6.20, 6.21, 6.23, 6.24, 6.25, 6.27, 6.28, 6.29, 6.30, 6.31, 6.32, 6.33, 6.34 and 6.35 hereof; or (e) default shall be made in the due observance or performance of any covenant, condition or agreement on the part of the Borrower to be observed or performed pursuant to the terms of this Agreement (other than any covenant, condition or agreement, default in the observance or performance of which is elsewhere in this Section 7.1 specifically dealt with) and 37 such default shall continue unremedied until the first to occur of (1) the date that is thirty (30) days after written notice by the Lender to the Borrower or (2) the date that is thirty (30) days after the Borrower first obtains knowledge thereof; or (f) any default or event of default, as therein defined, shall occur under any of the other Credit Documents (after giving effect to any applicable notice, grace or cure period specified therein); or (g) default shall be made with respect to any Debt (other than the Obligations) of any Obligor in a principal amount in excess of $2,000,000, if the effect of such default is to accelerate the maturity of such Debt or to permit the holder thereof to cause such Debt to become due prior to its stated maturity, or any such Debt shall not be paid when due (after giving effect to any applicable notice, grace or cure periods); or (h) any Obligor shall (1) apply for or consent to the appointment of a receiver, trustee, liquidator or other custodian of such Obligor or any of such Obligor's properties or assets, (2) fail or admit in writing such Obligor's inability to pay such Obligor's debts generally as they become due, (3) make a general assignment for the benefit of creditors, (4) suffer or permit an order for relief to be entered against such Obligor in any proceeding under the federal Bankruptcy Code, or (5) file a voluntary petition in bankruptcy, or a petition or an answer seeking an arrangement with creditors or to take advantage of any bankruptcy, reorganization, insolvency, readjustment of debt, dissolution or liquidation law or statute, or an answer admitting the material allegations of a petition filed against such Obligor in any proceeding under any such law or statute, or if corporate action shall be taken by any Obligor for the purpose of effecting any of the foregoing; or (i) a petition shall be filed, without the application, approval or consent of any Obligor in any court of competent jurisdiction, seeking bankruptcy, reorganization, rearrangement, dissolution or liquidation of such Obligor or of all or a substantial part of the properties or assets of such Obligor, or seeking any other relief under any law or statute of the type referred to in Section 7.1(h)(5) against such Obligor, or the appointment of a receiver, trustee, liquidator or other custodian of such Obligor or of all or a substantial part of the properties or assets of such Obligor, and such petition shall not have been stayed or dismissed within 60 days after the filing thereof; or (j) any Obligor shall be dissolved or liquidated, if an entity, or cease to be Solvent or suspend business; or (k) a Change in Control shall occur; for purposes hereof, a "Change in Control" shall mean (1) a change of ownership of the Borrower that results in the Guarantor not owning at least 80% of all the outstanding stock of the Borrower, (2) a change of ownership of the Guarantor that results in (A) the Sponsors not having beneficial ownership or common voting power of at least 15% of the common voting power of the Guarantor, (B) any "person" (as such term is defined in 13(d) and 14(d) of the Securities and Exchange Act of 1934) having more common voting power 38 than the Sponsors or (C) any person other than the Sponsors for any reason obtaining the right to appoint a majority of the board of directors of the Guarantor; or (l) an Estate Default shall occur; for purposes hereof an "Estate Default" shall mean (1) a failure by the estate Sponsor of either within ninety (90) days of the death of either Sponsor, or a failure by a conservator, committee or guardian (a "conservator") for the assets of either Sponsor within ninety (90) days of the appointment of any such conservator, (A) to duly allow and assume, or otherwise confirm, a creditor's claim filed against the estate or the conservator in accordance with applicable law relating to the obligations of such Sponsor under the Make-Whole and Pledge Agreement (which, in the case of the death of either Sponsor, shall, if required by applicable law, be evidenced by a creditor's claim filed against the estate in accordance with applicable law) and (B) to agree for the benefit of the Lender to maintain (unless the Lender is furnished with cash collateral), a letter of credit or other collateral acceptable to the Lender in an amount equal to the estate's maximum exposure under the Make-Whole and Pledge Agreement (assuming an Event of Default thereunder and an acceleration of the Obligations hereunder at a time when the Loan was fully drawn) the net worth of the estate (disregarding the separate status of the Borrower) of at least $1,000,000,000 and not to make any beneficial distribution from the estate that would cause its net worth to be less than such amount and (C) to provide a legal opinion (in form and substance, and from counsel, reasonably satisfactory to the Lender) regarding such allowance and assumption or confirmation and such agreement or (2) any rejection, or attempt at rejection, by the estate of either Sponsor or a conservator for either Sponsor's assets of his obligations under the Make-Whole and Pledge Agreement or the taking of any action or the filing of any motion by such estate or conservator that could reasonably be expected to materially adversely affect or impede the enforceability of such obligation; or (m) the Borrower or any member of the Controlled Group shall fail to pay when due an amount or amounts aggregating in excess of $2,000,000 which it shall have become liable to pay to the PBGC or to a Plan under Section 515 of ERISA or Title IV of ERISA; or notice of intent to terminate a Plan or Plans (other than a multi-employer plan, as defined in Section 4001(3) of ERISA), having aggregate benefit commitments or vested liabilities in excess of assets by an amount in excess of $2,000,000 shall be filed under Title IV of ERISA by the Borrower, any member of the Controlled Group, any plan administrator or any combination of the foregoing, or the PBGC shall institute proceedings under Title IV of ERISA to terminate any such Plan or Plans and such default, if capable of cure, continues for thirty (30) calendar days after notice of such default to the Borrower from the Lender; or (n) any writ of execution, attachment or garnishment shall be issued against the assets of any Obligor, the fair market value of which assets are in excess of $2,000,000, and such writ of execution, attachment or garnishment shall not be dismissed, discharged, bonded off or quashed within 90 days of issuance; or (o) any final judgment for the payment of money in the amount of $250,000 or more shall be rendered against the Borrower or any such judgment in the amount of $1,000,000 or more shall be rendered against the Guarantor or either of the Sponsors and in either case such judgment 39 shall remain undischarged for a period of 30 days during which execution shall not be effectively stayed; or (p) any guarantor of any of the Obligations shall default in the due observance or performance of any covenant, condition or agreement on such guarantor's part to be observed or performed under such guarantor's guaranty agreement (after giving effect to any applicable notice, grace or cure period specified therein) or shall terminate or attempt to terminate such guarantor's guaranty agreement. SECTION 7.2 LENDER'S REMEDIES ON DEFAULT. If an Event of Default exists, or any event exists that upon notice or lapse of time or both would constitute an Event of Default, the Lender shall have no obligation to extend any further Credit hereunder. If an Event of Default exists under Section 7.1(h) or 7.1(i), all of the Obligations shall automatically become immediately due and payable. If any other Event of Default exists, the Lender may, by written notice to the Borrower, declare any or all of the Obligations to be immediately due and payable, whereupon they shall become immediately due and payable. Any such acceleration (whether automatic or upon notice) shall be effective without presentment, demand, protest or other action of any kind, all of which are hereby expressly waived, anything contained herein or in any of the other Credit Documents to the contrary notwithstanding. If an Event of Default exists, the Lender may exercise any of its rights and remedies on default under the Credit Documents or applicable law, including the right to make withdrawals from the Make-Whole Accounts (as defined in the Make-Whole and Pledge Agreement). ARTICLE 8 MISCELLANEOUS SECTION 8.1 NOTICES. (a) Any request, demand, authorization, direction, notice, consent, waiver or other document provided or permitted by this Agreement or the other Credit Documents to be made upon, given or furnished to, or filed with, the Borrower or the Lender must (except as otherwise provided in this Agreement or the other Credit Documents) be in writing and be delivered by one of the following means: (1) by personal delivery at the hand delivery address specified below, (2) by first-class, registered or certified mail, postage prepaid and addressed as specified below, or (3) if facsimile transmission facilities for such party are identified below or pursuant to a separate notice from such party, sent by facsimile transmission to the number specified below or in such notice. (b) The hand delivery address, mailing address and (if applicable) facsimile transmission number for receipt of notice or other documents by such parties are as follows: 40 BORROWER By hand Snapper, Inc. or mail: 535 Macon Road McDonough, Georgia 30253 Attention: Robin Knight/Paul Kiel By facsimile: (770) 914-4271 Attention: Robin Knight/Paul Kiel With a copy to the c/o One Meadowlands Plaza Guarantor and the East Rutherford, New Jersey 07076 Sponsors: Attention: Arnold L. Wadler, Esq. By facsimile: (201) 531-2803 Attention: Arnold L. Wadler, Esq. And to: Paul, Weiss, Rifkind, Wharton & Garrison 1285 Avenue of the Americas New York, New York 10019 Attention: James M. Dubin, Esq. By facsimile: (212) 757-3990 Attention: James M. Dubin, Esq. LENDER: By hand: AmSouth Bank of Alabama 7th Floor, AmSouth-Sonat Tower 1900 5th Avenue North Birmingham, Alabama 35203 Attention: Samuel M. Tortorici By mail: AmSouth Bank of Alabama P.O. Box 11007 Birmingham, Alabama 35288 Attention: Samuel M. Tortorici By facsimile: (205) 801-0157 Attention: Samuel M. Tortorici 41 With a copy to: J. Kris Lowry Maynard, Cooper & Gale, P.C. 1901 Sixth Avenue North 2400 AmSouth/Harbert Plaza Birmingham, Alabama 35203-2602 By facsimile: (205) 254-1999 Any of such parties may change the address or facsimile transmission notice for receiving any such notice or other document by giving notice of the change to the other parties named in this Section 8.1. (c) Any such notice or other document shall be deemed delivered when actually received by the party to whom directed (or, if such party is not a natural person, to an officer, director, partner, member or other legal representative of the party) at the address or number specified pursuant to this Section 8.1, or, if sent by mail, three Business Days after such notice or document is deposited in the United States mail, addressed as provided above. (d) Five Business Days' written notice to the Borrower as provided above shall constitute reasonable notification to the Borrower when notification is required by law; provided, however, that nothing contained in the foregoing shall be construed as requiring five Business Days' notice if, under applicable law and the circumstances then existing, a shorter period of time would constitute reasonable notice. SECTION 8.2 EXPENSES. The Borrower shall promptly on demand pay all costs and expenses, including the fees and disbursements of counsel to the Lender, reasonably incurred by the Lender in connection with (a) the extension of the Credit and the administration or collection of the Obligations, (b) the negotiation, preparation and review of the Credit Documents (whether or not the transactions contemplated by this Agreement shall be consummated), (c) the enforcement of any of the Credit Documents, (d) the custody and preservation of the Property, (e) the protection or perfection of the Lender's rights and interests under the Security Documents in the Property, (f) the filing or recording of the Security Documents or any related financing, continuation or termination statements, or similar documents (including any stamp, documentary, mortgage, recording and similar taxes and fees), (g) the exercise by or on behalf of the Lender of any of its rights, powers or remedies under the Credit Documents, (h) the compliance by the Lender with any Governmental Requirements with respect to any of the Credit Documents, any of the Property or any of the Obligations, and (i) the successful prosecution or defense of any action or proceeding by or against the Lender, the Borrower, any Obligor, or any one or more of them, concerning any matter related to this Agreement or any of the other Credit Documents, any of the Property or any of the Obligations. All such amounts shall bear interest from the date demand is made at the Default Rate and shall be included in the Obligations secured by the Security Documents. The Borrower's obligations under this Section 8.2 shall survive the payment in full of the Obligations and the termination of this Agreement. 42 SECTION 8.3 INDEPENDENT OBLIGATIONS. The Borrower agrees that each of the obligations of the Borrower to the Lender under this Agreement may be enforced against the Borrower without the necessity of joining any other Obligor, any other holders of Liens in any Property or any other person, as a party. SECTION 8.4 SUCCESSORS AND ASSIGNS. Whenever in this Agreement any party hereto is referred to, such reference shall be deemed to include the successors and assigns of such party, except that neither the Borrower nor the Lender may assign or transfer this Agreement without the prior written consent of the other party; and all covenants and agreements of the Borrower contained in this Agreement shall bind the Borrower's successors and assigns and shall inure to the benefit of the successors and assigns of the Lender. SECTION 8.5 GOVERNING LAW. This Agreement and the other Credit Documents shall be construed in accordance with and governed by Title 9 of the U.S. Code and the internal laws of the State of Alabama (without regard to conflict of law principles) except as required by mandatory provisions of law and except to the extent that the validity and perfection of the Liens on the Property are governed by the laws of any jurisdiction other than the State of Alabama. SECTION 8.6 DATE OF AGREEMENT. The date of this Agreement is intended as a date for the convenient identification of this Agreement and is not intended to indicate that this Agreement was executed and delivered on that date. SECTION 8.7 SEPARABILITY CLAUSE. If any provision of the Credit Documents shall be invalid, illegal or unenforceable, the validity, legality and enforceability of the remaining provisions shall not in any way be affected or impaired thereby. SECTION 8.8 COUNTERPARTS. This Agreement may be executed in any number of counterparts, each of which so executed shall be deemed an original, but all such counterparts shall together constitute but one and the same agreement. SECTION 8.9 NO ORAL AGREEMENTS. This Agreement is the final expression of the agreement between the parties hereto, and this Agreement may not be contradicted by evidence of any prior oral agreement between such parties. All previous oral agreements between the parties hereto have been incorporated into this Agreement and the other Credit Documents, and there is no unwritten oral agreement between the parties hereto in existence. SECTION 8.10 WAIVER AND ELECTION. The exercise by the Lender of any option given under this Agreement shall not constitute a waiver of the right to exercise any other option. No failure or delay on the part of the Lender in exercising any right, power or remedy under this Agreement shall operate as a waiver thereof, nor shall any single or partial exercise of any such right, power or remedy preclude any further exercise thereof or the exercise of any other right, power or remedy. No modification, termination or waiver of any provisions of the Credit Documents, nor consent to any departure by the Borrower therefrom, shall be effective unless in writing and signed by an authorized representative of the Lender, and then such waiver or consent 43 shall be effective only in the specific instance and for the specific purpose for which given. No notice to or demand on the Borrower in any case shall entitle the Borrower to any other or further notice or demand in similar or other circumstances. NO SUCH WRITTEN AMENDMENT, MODIFICATION OR SUPPLEMENT THAT WOULD (A) INCREASE THE PRINCIPAL AMOUNT OF OR RATE OF INTEREST ON THE OBLIGATIONS, (B) INCREASE THE RATE OF ANY FEE PAYABLE UNDER SECTION 2.6(B) OR (C) OF THIS AGREEMENT, (C) EXCEPT AS MAY BE OTHERWISE SPECIFICALLY PROVIDED IN THIS AGREEMENT OR ANY OTHER CREDIT DOCUMENT, RELEASE ALL OR SUBSTANTIALLY ALL OF THE PROPERTY, OR (D) WAIVE AN EVENT OF DEFAULT UNDER ANY CREDIT DOCUMENT SHALL BE EFFECTIVE BETWEEN THE PARTIES THERETO UNLESS CONSENTED TO IN WRITING BY THE GUARANTOR AND THE SPONSORS. SECTION 8.11 NO OBLIGATIONS OF LENDER; INDEMNIFICATION. The Lender does not by virtue of this Agreement or any of the transactions contemplated by the Credit Documents assume any duties, liabilities or obligations with respect to any property now or hereafter granted to it as collateral for any of the Obligations unless expressly assumed by the Lender under a separate agreement in writing, and the Credit Documents shall not be deemed to confer on the Lender any duties or obligations that would make the Lender directly or derivatively liable for any person's negligent, reckless or wilful conduct. The Borrower agrees to indemnify and hold the Lender harmless against and with respect to any damage, claim, action, loss, cost, expense, liability, penalty or interest (including attorney's fees) and all costs and expenses of all actions, suits, proceedings, demands, assessments, claims and judgments directly or indirectly resulting from, occurring in connection with, or arising out of: (a) any inaccurate representation made by the Borrower or any Obligor in this Agreement or any other Credit Document; and (b) any breach of any of the warranties or obligations of the Borrower or any Obligor under this Agreement or any other Credit Document. The provisions of this Section 8.11 shall survive the payment of the Obligations in full and the termination of this Agreement and the other Credit Documents, and the satisfaction, release (in whole or in part) and foreclosure of the Security Documents. SECTION 8.12 SET-OFF. While any Event of Default exists, the Lender is authorized at any time and from time to time, without notice to the Borrower (any such notice being expressly waived by the Borrower), to set off and apply any and all deposits (general or special, time or demand, provisional or final) at any time held and other indebtedness at any time owing by the Lender to or for the credit or the account of the Borrower against any and all of the Obligations, irrespective of whether or not the Lender shall have made any demand under this Agreement and although such Obligations may be unmatured. The rights of the Lender under this Section 8.12 are in addition to all other rights and remedies (including other rights of set-off or pursuant to any banker's lien) that the Lender may have. SECTION 8.13 PARTICIPATION. The Borrower understands that the Lender may, with the Borrower's consent, from time to time enter into a participation agreement or agreements with one or more participants pursuant to which each such participant shall be given a participation in the Credit and that any such participant may from time to time similarly grant to one or more 44 subparticipants subparticipations in the Credit. The Borrower agrees that any participant or subparticipant may exercise any and all rights of banker's lien or set-off with respect to the Borrower, as fully as if such participant or subparticipant had made a loan directly to the Borrower in the amount of the participation or subparticipation given to such participant or subparticipant in the Credit. For the purposes of this Section 8.13 only, the Borrower shall be deemed to be directly obligated to each participant or subparticipant in the amount of its participating interest in the amount of the Credit and any other Obligations. Nothing contained in this Section 8.13 shall affect the Lender's right of set-off (under Section 8.12 or applicable law) with respect to the entire amount of the Obligations, notwithstanding any such participation or subparticipation. The Lender may divulge to any participant or subparticipant all information, reports, financial statements, certificates and documents obtained by it from the Borrower or any other person under any provision of this Agreement or otherwise. SECTION 8.14 SUBMISSION TO JURISDICTION. The Borrower irrevocably (a) acknowledges that this Agreement will be accepted by the Lender and performed by the Borrower in the State of Alabama;(b) submits to the jurisdiction of each state or federal court sitting in Jefferson County, Alabama (collectively, the "Courts") over any suit, action or proceeding arising out of or relating to this Agreement (to enforce the arbitration provisions hereof or, if the arbitration provisions are found to be unenforceable, to determine any issues arising out of or relating to this Agreement) or any of the other Credit Documents (individually, an "Agreement Action");(c) waives, to the fullest extent permitted by law, any objection or defense that the Borrower may now or hereafter have based on improper venue, lack of personal jurisdiction, inconvenience of forum or any similar matter in any Agreement Action brought in any of the Courts;(d) agrees that final judgment in any Agreement Action brought in any of the Courts shall be conclusive and binding upon the Borrower and may be enforced in any other court to the jurisdiction of which the Borrower is subject, by a suit upon such judgment; (e) consents to the service of process on the Borrower in any Agreement Action by the mailing of a copy thereof by registered or certified mail, postage prepaid, to the Borrower at the Borrower's address designated in or pursuant to Section 8.1;(f) agrees that service in accordance with Section 8.14(e) shall in every respect be effective and binding on the Borrower to the same extent as though served on the Borrower in person by a person duly authorized to serve such process; and (g) AGREES THAT THE PROVISIONS OF THIS SECTION, EVEN IF FOUND NOT TO BE STRICTLY ENFORCEABLE BY ANY COURT, SHALL CONSTITUTE "FAIR WARNING" TO THE BORROWER THAT THE EXECUTION OF THIS AGREEMENT MAY SUBJECT THE BORROWER TO THE JURISDICTION OF EACH STATE OR FEDERAL COURT SITTING IN JEFFERSON COUNTY, ALABAMA WITH RESPECT TO ANY AGREEMENT ACTIONS, AND THAT IT IS FORESEEABLE BY THE BORROWER THAT THE BORROWER MAY BE SUBJECTED TO THE JURISDICTION OF SUCH COURTS AND MAY BE SUED IN THE STATE OF ALABAMA IN ANY AGREEMENT ACTIONS. Nothing in this Section 8.14 shall limit or restrict the Lender's right to serve process or bring Agreement Actions in manners and in courts otherwise than as herein provided. 45 SECTION 8.15 USURY LAWS. Any provision of this Agreement or any of the other Credit Documents to the contrary notwithstanding, the Borrower and the Lender agree that they do not intend for the interest or other consideration provided for in this Agreement and the other Credit Documents to be greater than the maximum amount permitted by applicable law. Regardless of any provision in this Agreement or any of the other Credit Documents, the Lender shall not be entitled to receive, collect or apply, as interest on the Obligations, any amount in excess of the maximum rate of interest permitted to be charged under applicable law until such time, if any, as that interest, together with all other interest then payable, falls within the then applicable maximum lawful rate of interest. If the Lender shall receive, collect or apply any amount in excess of the then maximum rate of interest, the amount that would be excessive interest shall be applied first to the reduction of the principal amount of the Obligations then outstanding in the inverse order of maturity, and second, if such principal amount is paid in full, any excess shall forthwith be returned to the Borrower. In determining whether the interest paid or payable under any specific contingency exceeds the highest lawful rate, the Borrower and the Lender shall, to the maximum extent permitted under applicable law, (a) characterize any nonprincipal payment as an expense, fee or premium rather than as interest, (b) exclude voluntary prepayments and the effects thereof, (c) consider all the Obligations as one general obligation of the Borrower, and (d) "spread" the total amount of the interest throughout the entire term of the Note so that the interest rate is uniform throughout the entire term of the Note. SECTION 8.16 ARBITRATION; DISPUTE RESOLUTION; PRESERVATION OF FORECLOSURE REMEDIES (a) The Borrower represents to the Lender that its business and affairs constitute substantial interstate commerce and that it contemplates using the proceeds of the Note in substantial interstate commerce. Except as otherwise specifically set forth below, any action, dispute, claim, counterclaim or controversy ("Dispute" or "Disputes"), between or among the Lender, the Borrower or any other Obligor, including any claim based on or arising from an alleged tort, shall be resolved by arbitration as set forth below. As used herein, Disputes shall include all actions, disputes, claims, counterclaims or controversies arising in connection with the Note, any extension of or commitment to extend Credit by the Lender, any collection of any indebtedness owed to the Lender, any security or collateral given to the Lender, any action taken (or any omission to take any action) in connection with any of the foregoing, any past, present and future agreement between or among the Lender, the Borrower or any other Obligor (including the Note and any Credit Document), and any past, present or future transactions between or among the Lender, the Borrower or any other Obligor. Without limiting the generality of the foregoing, Disputes shall include actions commonly referred to as lender liability actions. (b) All Disputes shall be resolved by binding arbitration in accordance with Title 9 of the U.S. Code and the Commercial Arbitration Rules of the American Arbitration Association (the "AAA"). Defenses based on statutes of limitation, estoppel, waiver, laches and similar doctrines, that would otherwise be applicable to an action brought by a party, shall be applicable in any such arbitration proceeding, and the commencement of an arbitration proceeding with respect to this Agreement shall be deemed the commencement of an action for such purposes. 46 (c) Notwithstanding the foregoing, the Borrower and each other Obligor agrees that the Lender shall have the option, but not the obligation, to submit to and pursue in a court of law any claim against the Borrower or any other Obligor for a debt due. The Borrower and each other Obligor agrees that, if the Lender pursues such a claim in a court of law,(1) failure of the Lender to assert any additional claim in such proceeding shall not be deemed a waiver of, or estoppel to pursue, such claim as a claim or counterclaim in arbitration as set forth above, and (2) the institution or maintenance of a judicial action hereunder shall not constitute a waiver of the right of any party to submit any other action, dispute, claim or controversy as described above, even though arising out of the same transaction or occurrence, to binding arbitration as set forth herein. If the Borrower asserts a claim against the Lender in arbitration or otherwise during the pendency of a claim brought by the Lender in a court of law, the court action shall be stayed and the parties shall submit to arbitration all claims. (d) No provision of, nor the exercise of any rights under this Section, shall limit the right of any party (1) to foreclose against any real or personal property collateral by exercise of a power of sale under any Credit Document, or by exercise of any rights of foreclosure or of sale under applicable law,(2) to exercise self-help remedies such as set-off, or (3) to obtain provisional or ancillary remedies such as injunctive relief, attachment or the appointment of a receiver from a court having jurisdiction before, during or after the pendency of any arbitration or referral. The institution and maintenance of an action for judicial relief or pursuit of provisional or ancillary remedies or exercise of self-help remedies shall not constitute a waiver of the right of any party, including the plaintiff in such an action, to submit the Dispute to arbitration or, in the case of actions on a debt, to judicial resolution. (e) Whenever an arbitration is required hereunder, the arbitrator shall be selected in accordance with the Commercial Arbitration Rules of the AAA. The AAA shall designate a panel of 10 potential arbitrators knowledgeable in the subject matter of the Dispute. Each of the Lender and the Obligor shall designate, within 30 days of the receipt of the list of potential arbitrators, one of the potential arbitrators to serve, and the two arbitrators so designated shall select a third arbitrator from the eight remaining potential arbitrators. The panel of three arbitrators shall determine the resolution of the Dispute. 47 IN WITNESS WHEREOF, the Borrower and the Lender have caused this Agreement to be dated November 26, 1996 and to be duly executed and delivered. SNAPPER, INC. By --------------------------------------- Its ---------------------------------- AMSOUTH BANK OF ALABAMA By --------------------------------------- Its Senior Vice President LIST OF SCHEDULES Schedule A Credit Documents B Eligible Adjusted Equipment Value C Permitted Encumbrances D Request for Advances or Interest Rate Election E Borrowing Base Certificate F Extended Terms G Thirty Day Terms 4.3 Litigation 4.6 Trade Names 4.8 Locations of Personal Property 4.16 Labor Contracts 4.17 ERISA 4.18 Patents, Trademarks and Copyrights 4.20 Real Property SCHEDULE A CREDIT DOCUMENTS The "CREDIT DOCUMENTS" referred to in this Agreement include the following: (a) Credit Agreement dated November 26, 1996 executed by the Borrower and the Lender. (b) Promissory Note dated November 26, 1996 in the principal amount of Fifty-five Million and No/100 Dollars ($55,000,000.00) executed by the Borrower in favor of the Lender (the "Note"), which evidences the loan made by the Lender to the Borrower and has a final maturity date of January 1, 1999. (c) Environmental Indemnity Agreement dated November 26, 1996 executed by the Borrower and Metromedia International Group, Inc. in favor of the Lender. (d) Security Agreement (General) dated November 26, 1996 executed by the Borrower in favor of the Lender. (e) Guaranty Agreement dated November 26, 1996 executed by Metromedia International Group, Inc. in favor of the Lender. (f) Pledge Agreement dated November 26, 1996 executed by Metromedia International Group, Inc. in favor of the Lender. (g) Make-Whole and Pledge Agreement dated November 26, 1996 executed by John W. Kluge and Stuart Subotnick in favor of the Lender. (h) Deed to Secure Debt dated November 26, 1996 executed by the Borrower in favor of the Lender. A-1 SCHEDULE B ELIGIBLE ADJUSTED EQUIPMENT VALUE APPLICABLE PERIOD EQUIPMENT VALUE 12/96 $8,158,000 1/97 8,158,000 2/97 7,991,000 3/97 7,825,000 4/97 7,658,000 5/97 7,492,000 6/97 7,325,000 7/97 7,159,000 8/97 6,992,000 9/97 6,826,000 10/97 6,659,000 11/97 6,493,000 12/97 until the Values to be based upon a Termination Date new equipment appraisal to be provided by the Borrower to the Lender after the Lender applying the assumed depreciation percentage of 2% B-1 SCHEDULE C PERMITTED ENCUMBRANCES JURISDICTION STATE UCC SECURED PARTY COLLATERAL - ------------------------------------------------------------------------------- Henry County Clerk of Superior Court GA UCC-193-845 AT&T Systems Specific equipment - ------------------------------------------------------------------------------- Henry County Clerk GA UCC-193-790 Wrenn Handling Specific equipment of Superior Court under lease - ------------------------------------------------------------------------------- Henry County Clerk GA UCC-194-106 AT&T Systems Specific equipment of Superior Court under lease - ------------------------------------------------------------------------------- Henry County Clerk GA UCC-194-1095 GE Capital Specific equipment of Superior Court under lease - ------------------------------------------------------------------------------- Henry County Clerk GA UCC-1075-95-468 StorageTek Specific equipment of Superior Court Distributed under lease - ------------------------------------------------------------------------------- Henry County Clerk GA UCC-1075-95-683 StorageTek Specific equipment of Superior Court Distributed under lease - ------------------------------------------------------------------------------- Henry County Clerk GA UCC-1075-96-565 AT&T Systems Specific equipment of Superior Court Leasing under lease - ------------------------------------------------------------------------------- Henry County Clerk GA UCC-1075-96-1248 Leasetec Specific equipment of Superior Court Corporation under lease - ------------------------------------------------------------------------------- C-1 SCHEDULE D REQUEST FOR ADVANCES OR INTEREST RATE ELECTION Under the Credit Agreement dated November 26, 1996 (the "Credit Agreement") entered into by SNAPPER, INC., a Georgia corporation, (the "Borrower"), and AMSOUTH BANK OF ALABAMA, an Alabama banking corporation: REQUEST FOR ADVANCES Pursuant to Section 2.2 of the Credit Agreement, the Borrower hereby requests Advances as follows: (a) Aggregate amount of Advances - $_______________. (b) Date as of which the Advances are to be made - _________________, 199__. (c) The following interest rate information is provided with respect to the Segment represented by the Advances: (i) the interest rate shall be [the Floating Rate] [the LIBOR-Based Rate] (circle one). (ii) If the LIBOR-Based Rate is selected, the maturity selected for the LIBOR-Based Rate Period is [one month] [two months] [three months] (circle one, if applicable). INTEREST RATE ELECTION Pursuant to Section 3.2 of the Credit Agreement, the Borrower makes the following interest rate election with respect to the Segment in the principal amount of $______________ that matures on ____________________. (a) The amount of the Segment to which the requested interest rate will apply - $__________. (b) The date on which the selected interest rate will become applicable - _______________. D-1 (c) The interest rate selected is [the Floating Rate] [the LIBOR-Based Rate] (circle one). (d) If the LIBOR-Based Rate is selected, the maturity selected for the LIBOR-Based Rate Period is [one month] [two months] [three months] (circle one, if applicable). In accordance with Section 5.1 of the Credit Agreement, the presentation by the Borrower of this Request for Advances or Interest Rate Election constitutes a representation and warranty by the Borrower to the Lender that (a) no material adverse change in the financial condition of the Borrower in the financial statements referred to in Section 4.1 of the Credit Agreement, has occurred since the date of such financial statements, and (b) no Event of Default exists. Dated ________________, 199__. SNAPPER, INC. By: ----------------------------- Its D-2 SCHEDULE E BORROWING BASE CERTIFICATE To: AmSouth Bank of Alabama Date: _______________, 19____ Snapper, Inc. (the "Borrower") hereby furnishes the following information to you pursuant to the Credit Agreement (the "Credit Agreement") between you and the Borrower dated November 26, 1996. Capitalized terms used in this certificate and not otherwise defined herein have the meanings defined for them in the Credit Agreement. I. ACCOUNTS RECEIVABLE A. Dealer Accounts (1) Home Depot ------------ (2) Dealers utilizing floor plan financing ------------ (3) Dealers utilizing Extended Terms ------------ (4) Dealers utilizing Thirty Day Terms ------------ (5) Dealers/Distributors outside U.S. with letter of credit serving Inventory shipped ------------ B. Sum of (1) through (5) ------------ C. Less adjustments per definition of Net Outstanding Amount of Eligible Accounts ------------ D. Line (B) minus (C) ------------ E. Line (D) times 80% ------------ F. Distributor A/R Sublimit ------------ G. Distributor Accounts ------------ H. Less adjustments per definition of Net Outstanding Amount of Eligible Accounts ------------ I. Line (G) minus (H) ------------------ J. Line (I) times 76.3% ------------------ K. Line (J) times 60% ------------ L. Lesser of Line (F) and (K) ------------ M. $10,000,000 ------------ N. Dealer Accounts utilizing Extended Terms over 90 days but not 60 days past due(1) ------------ O. Less adjustments per definition of Net Outstanding Amount of Eligible Accounts ------------ P. Line (N) minus (O) ------------ Q. Line (P) times 65.8% ------------ - ----------------------- (1) With respect to the Accounts arising from sales to dealers of Inventory consisting of snow products, which Inventory has not been sold by the dealer or financed by the dealer by means of floor planning arrangement, the Borrower shall be permitted to extend the due date with respect to such Account for March 10 of any year to December 10 of such year. E-1 R. Line (Q) times 55% ------------ S. Lesser of Line (M) and (R) ------------ T. TOTAL OF LINES (E), (L) and (S) ------------ II. INVENTORY A. 45,000,000 ------------ B. Finished Goods Inventory ------------ C. Line (B) times 60% ------------ D. $5,000,000 ------------ E. Engines ------------ F. Line (E) times 50% ------------ G. Lesser of Line (D) and (F) ------------ H. $5,000,000 ------------ I. Parts and accessories (other than engines) ------------ J. Line (H) times 35% ------------ K. Lesser of Line (H) and (J) ------------ L. Sum of Lines (C), (G) and (K) ------------ M. Less Inventory that is not Eligible Inventory or that should be excluded per Section 6.6 of the Credit Agreement ------------ N. Line (L) minus (M) ------------ O. Lesser of Lines (A) and (N) ----------------- III. EQUIPMENT A. Eligible Adjusted Equipment Value ------------ B. Line (A) times 75% ------------ IV. MAXIMUM CREDIT ACCOUNT A. Borrowing Base Amount sum of Lines (I.T., II.O. and III.B.) ------------ B. Commitment Amount ------------ C. Lesser of Lines (A) and (B) ------------ D. Outstanding Advances ------------ E. Line (C) minus (D) (Maximum Availability) ------------ The Borrower certifies to you as follows: (a) The representations and warranties contained in the Credit Agreement are true and correct on and as of the date of this certificate, except as follows: E-2 (b) The representations and warranties contained in Section 3.2 of the Security Agreement are true and correct with respect to all Accounts included in the Net Outstanding Amount of Eligible Accounts on line 3 of this certificate except as follows: (c) The representations and warranties contained in Section 3.3 of the Security Agreement are true and correct with respect to all Inventory included in the Eligible Inventory on line 7 of this certificate except as follows: (d) No Event of Default, nor any event that would constitute an Event of Default with the passage of time or the giving of notice, or both, exists under the Credit Agreement or the other Credit Documents, except as follows: (e) The information contained in this certificate is true and correct to the best of the Borrower's knowledge. This certificate is furnished to you for the purpose of obtaining Advances from you under the Credit Agreement or otherwise complying with the provisions of the Credit Agreement. SNAPPER, INC. By: ------------------------ Its -------------------- E-3 SCHEDULE F EXTENDED TERMS EXTENDED TERMS - OPEN ACCOUNT ONLY DEALERS: RESIDENTIAL LAWN & GARDEN: For stocking order shipments during the months of September to March - Payment due June 30. During the months of April to August - Payment due 90 days from invoice date COMMERCIAL: All shipments due for payment in 10 months from invoice date (available in certified commercial territories to certified commercial dealers only) SNOW: For shipments June through December - Payment due March 30. All other months - due in 90 days from invoice date (optional redating to next December 10 if no snow) PARTS AND ACCESSORIES: All stocking orders due June 30 or 90 days from invoice date whichever longer. DOMESTIC DISTRIBUTORS: Extended terms available ONLY for Parts and Accessories (Due 1/3 April, 1/3 May, 1/3 June) and Special Prior Model Year Clear-outs (Due May 10) F-1 SCHEDULE G THIRTY DAY TERMS For all Accounts with dealers and distributors that are not subject to Extended Terms or floor plan financing, Invoices due 30 days from Invoice Date. G-1 [EXECUTION COPY] EX-10.46 3 AMENDMENT NO. 1 TO LICENSE AGREEMENT AMENDMENT NO. 1 TO LICENSE AGREEMENT This Amendment No. 1 to License Agreement (this "Amendment") is made as of June 13, 1996 by and between Metromedia Company, a Delaware general partnership, and Metromedia International Group, Inc., a Delaware corporation. W I T N E S S E T H : WHEREAS, Metromedia Company (hereinafter "Licensor") and Metromedia International Group, Inc. (hereinafter, "Licensee") are parties to that certain License Agreement dated as of November 1, 1995 (the "License Agreement") pursuant to which Licensor granted to Licensee a license to use the Licensor's tradename and trademark "Metromedia" in accordance with the terms and conditions of the License Agreement; and WHEREAS, Licensor and Licensee are also parties to that certain Management Agreement dated as of November 1, 1995 (the "Management Agreement") whereby Licensor and Licensee have agreed that Licensor shall provide management services to Licensee; and WHEREAS, both Licensor and Licensee have agreed to amend the License Agreement to provide that the License Agreement shall be coterminous with the Management Agreement; NOW THEREFORE, in consideration of the mutual premises and covenants made herein and other valuable consideration, the receipt and sufficiency of which are hereby acknowledged, Licensor and Licensee agree as follows: 1. Capitalized Terms. All capitalized terms used but not defined herein shall have the meanings ascribed thereto in the License Agreement. 2. Termination. 2.1 The first sentence of Paragraph 9 of the License Agreement is hereby deleted in its entirety and replaced with the following: "Licensor may terminate this Agreement upon one month's prior written notice to Licensee in the event that, and at any time after, (i) the expiration or termination of the Management Agreement, or (ii) upon a Change of Control (as hereinafter defined) of Licensee; or (iii) if any of the stock or all or substantially all of the assets of any of the subsidiaries of the Licensee are sold or transferred." 2.2 Subsection 9(c) of the Licensee Agreement is hereby deleted in its entirety and replaced with the following: "(c) upon the occurrence of a reorganization, merger, or consolidation where following consummation thereof, Licensor and its affiliates hold less than 10% of the combined voting power of all classes of Licensee's stock; 3. Miscellaneous. 3.1 Except as specifically provided herein, nothing contained in this Amendment shall be deemed to modify in any respect the terms, provisions or conditions of the License Agreement, and such terms, provisions and conditions shall remain in full force and effect. 3.2 This Amendment shall be binding upon and inure to the benefit of Licensor, Licensee, and their respective permitted successors and assigns. IN WITNESS WHEREOF, Licensor and Licensee have executed this Amendment as of the day and year first above written. LICENSOR: Metromedia Company By:___________________________________ Robert A. Maresca Senior Vice President and Treasurer LICENSEE: Metromedia International Group, Inc. By:___________________________________ Arnold L. Wadler Senior Vice President, Secretary and General Counsel EX-10.47 4 AMENDMENT NO. 1 TO MANAGEMENT AGREEMENT AMENDMENT NO. 1 TO MANAGEMENT AGREEMENT This Amendment No. 1 to Management Agreement, dated as of January 1, 1997 (this "Amendment"), amends that certain Management Agreement by and between Metromedia International Group, Inc., a Delaware corporation, ("MIG") and Metromedia Company, a Delaware general partnership ("Metromedia") (the "Management Agreement"). W I T N E S S E T H: WHEREAS, MIG and Metromedia are parties to a Management Agreement dated as of November 1, 1995 wherein Metromedia agreed to provide certain managerial services to MIG and MIG agreed to pay Metromedia a fee for such services; WHEREAS, on December 11, 1996 the Board of Directors of MIG voted in favor of increasing the fee payable to Metromedia for such services; NOW, THEREFORE, in consideration of the mutual covenants and agreements herein contained, the receipt and sufficiency of which are hereby acknowledged, the parties hereto agree as follows: 1. Capitalized Terms 1.1 All capitalized terms used herein and not otherwise defined shall have the meanings assigned thereto in the Management Agreement. 2. Management Agreement 2.1 Subparagraph 1.4.1 is hereby deleted in its entirety and replaced with the following: "1.4.1 In order to compensate Metromedia for its services hereunder and for certain overhead and other costs incurred by it for which MIG is not directly responsible pursuant to Section 1.3 hereof, MIG will pay to Metromedia a management fee (the "Management Fee") at the annual rate of $3,250,000.00. MIG will pay the Management Fee to Metromedia in twelve equal monthly installments of $270,833.33 each no later than 15 days after the end of each of its twelve monthly accounting periods. The Management Fee may be adjusted to the extent necessary to compensate Metromedia for services rendered or costs incurred not originally contemplated hereunder." 3. No Other Change 3.1 Except for the amendments provided for herein, the Management Agreement shall remain unchanged in all respects and shall remain in full force and effect. 4. General 4.1 This Amendment shall be binding upon and inure to the benefit of the parties hereto and their respective successors and assigns, contains the entire agreement of the parties with respect to the specific subject matter hereof, may be executed in counterparts, each of which will be an original and all of which together will constitute the same instrument and will be governed by New York law except for the body of law pertaining to conflict of laws. IN WITNESS WHEREOF, the parties have executed this Amendment as of the date first above written. METROMEDIA INTERNATIONAL GROUP, INC. By:______________________________________ Stuart Subotnick President and Chief Executive Officer METROMEDIA COMPANY By:______________________________________ Arnold L. Wadler Senior Vice President EX-10.48 5 AMENDED AND RESTATED AGREEMENT AND PLAN OF MERGER AMENDED AND RESTATED AGREEMENT AND PLAN OF MERGER AMENDED AND RESTATED AGREEMENT AND PLAN OF MERGER, dated as of May 17, 1996 (as amended, supplemented or otherwise modified from time to time, this "Agreement"), between METROMEDIA INTERNATIONAL GROUP, INC., a Delaware corporation, ("Metromedia"), MPCA MERGER CORP., a Delaware corporation and a wholly-owned subsidiary of Metromedia ("MPCA Mergerco"), and Bradley Krevoy and Steven Stabler (collectively, the "Stockholders") and MOTION PICTURE CORPORATION OF AMERICA, a Delaware corporation (the "Company"). WHEREAS, the Stockholders are the beneficial and record owners of 545,916 issued and outstanding shares (the "Shares") of common stock, $.01 par value per share, of the Company ("Company Common Stock"); WHEREAS, upon the terms and subject to the conditions of this Agreement, the Company has agreed that at the Effective Time (as hereinafter defined), MPCA Mergerco will merge with and into the Company (the "Merger") and, among other things, the Stockholders will receive shares of Metromedia in the manner provided in Section 2; WHEREAS, Metromedia, MPCA Mergerco and the Company wish to make certain representations, warranties and agreements in connection with the Merger and also prescribe various conditions to the Merger. Capitalized terms used herein and not otherwise defined shall have the meanings assigned thereto in Section 12 hereof. NOW, THEREFORE, in consideration of the premises and other good and valuable consideration, the receipt and adequacy of which are hereby acknowledged, the parties hereto hereby agree as follows: ARTICLE 1 THE MERGER Section 1.1 The Merger. Upon the terms and subject to the conditions set forth in this Agreement, and in accordance with the Delaware General Corporation Law (the "DGCL"), MPCA Mergerco shall be merged with and into the Company at the Effective Time. Upon and after the Effective Time, the separate corporate existence of MPCA Mergerco shall cease and the Company shall be the surviving corporation in the Merger (the "Surviving Corporation"). In accordance with the DGCL, all of the rights, privileges, powers, immunities, purposes and franchises of MPCA Mergerco and the Company shall vest in the Surviving Corporation and all of the debts, liabilities, obligations and duties of MPCA Mergerco and the Company shall become the debts, liabilities, obligations and duties of the Surviving Corporation. Section 1.2 Closing. The closing of the Merger (the "Closing") will take place at the offices of Metromedia Company at 10:00 a.m. on a Business Day (as hereinafter defined) mutually agreed to by Metromedia, the Company and the Stockholders prior to the Termination Date (as hereinafter defined) following the satisfaction or waiver by the party entitled to the benefit of such condition of each of the conditions set forth in Articles 7 and 8 or at such other place, time and date as Metromedia, the Company and the Stockholders may agree. The time and date upon which the Closing occurs is referred to herein as the "Closing Date". Section 1.3 Effective Time. On the Closing Date (or on such other date as Metromedia, the Company and the Stockholders may agree), MPCA Mergerco and the Company shall cause a Certificate of Merger (the "Certificate of Merger") to be executed and filed with the Secretary of State of the State of Delaware in accordance with the relevant provisions of the DGCL and shall make all other filings or recordings required under the DGCL. The Merger shall become effective at such time as the Certificate of Merger is duly filed with the Secretary of State of the State of Delaware, or at such later time as Metromedia, the Company and the Stockholders agree to specify in the Certificate of Merger (the "Effective Time"). Section 1.4 Name, Certificate of Incorporation and By-laws. The Certificate of Incorporation (as defined in Section 104 of the DGCL) of the Company as in effect at the Effective Time shall be the Certificate of Incorporation of the Surviving Corporation from 2 and after the Effective Time until thereafter changed or amended as provided therein or by applicable law except that the Certificate of Incorporation of the Surviving Corporation shall be amended at the Effective Time to decrease the number of authorized shares to 1000. The By-laws of the Company at the Effective Time shall be the By-laws of the Surviving Corporation until thereafter changed or amended as provided therein or by applicable law. Section 1.5 Officers and Directors. (a) The by-laws of the Surviving Corporation shall be amended to provide that each of the directors of MPCA Mergerco and the Company at the Effective Time shall be the directors of the Surviving Corporation and shall hold office until their respective successors are duly elected or appointed and qualified or until their earlier death, resignation or removal in accordance with the Certificate of Incorporation and By-laws of the Surviving Corporation. (b) The officers set forth on Schedule 1.5 hereto shall be the officers of the Surviving Corporation and they shall hold office until their respective successors are duly elected or appointed and qualified or until their earlier death, resignation or removal in accordance with the Certificate of Incorporation and By-laws of the Surviving Corporation. ARTICLE 2 EFFECT OF THE MERGER ON THE CAPITAL STOCK AND OPTIONS; EXCHANGE OF CERTIFICATES Section 2.1 Effect on Capital Stock of the Company. At the Effective Time, by virtue of the Merger and without any action on the part of the holder thereof: (a) Conversion of Shares of Company Common Stock. Each issued and outstanding share of Company Common Stock (the "Company Common Stock") shall, subject to compliance with Section 2.2, be converted into the right to receive the Initial Shares, the Adjustment Shares (as defined herein) and, to the extent the Closing Date Boot Limit exceeds the Existing Note Amount (as such terms are defined in Section 2.3), the additional consideration set forth in Section 2.3 to the extent of such excess. At the Effective Time, all such shares of Company Common Stock shall no longer be outstanding 3 and shall automatically be cancelled and retired and shall cease to exist, and the Stockholders, who collectively hold certificates representing all such shares of Company Common Stock shall cease to have any rights with respect thereto, except the right to receive for each share of Company Common Stock outstanding at the Effective Time (a) the Initial Shares (as defined herein) to be issued in consideration therefor upon surrender of such certificates in accordance with Section 2.2, without interest, plus (b) the Adjustment Shares (as defined herein), if any, to be issued on the Adjustment Date (as defined herein), without interest. The term "Initial Shares" shall mean a number of fully paid and non-assessable shares of Common Stock , par value $1.00 per share, of Metromedia (the "Metromedia Common Stock") equal to a fraction (rounded to the fourth decimal point), (i) the numerator of which is 1,433,636 and (ii) the denominator of which is the number of shares of Company Common Stock outstanding at the Effective Time ("Company Outstanding Shares"). The term "Adjustment Shares" shall mean (A) if the Average Closing Price (as defined herein) is less than $16.50, a number of fully paid an non-assessable shares of Metromedia Common Stock equal to (i) a fraction (rounded to the fourth decimal point), (a) the numerator of which is (I) 23,655,000 less (II) the product of (x) 1,433,636 and (y) the Average Closing Price, and (b) the denominator of which is the Average Closing Price, divided by (ii) the number of Company Outstanding Shares (rounding the quotient of (i) and (ii) to the fourth decimal point); provided, however, that in no event shall the Adjustment Shares exceed (i) 458,764 divided by (ii) the number of Company Outstanding Shares, or (B) if the Average Closing Price is greater than or equal to $16.50, zero. The term "Average Closing Price" shall have the meaning ascribed to such term in that certain Agreement and Plan of Merger (the "Goldwyn Merger Agreement") dated as of January 31, 1996 by and among Metromedia, SGC Merger Corp. and The Samuel Goldwyn Company; provided, however, if the transactions contemplated by the Goldwyn Merger Agreement are not consummated on or before September 30, 1996, the term "Average Closing Price" shall mean the average of the last sale prices for the Metromedia Common Stock as reported by the American Stock Exchange for the last 20 consecutive trading days ending on September 30, 1996. The term "Adjustment Date" shall 4 mean five business days following the earlier of (i) the consummation of the transactions contemplated by the Goldwyn Merger Agreement and (ii) September 30, 1996. (c) Treasury Shares. Each share of Company Common Stock held in treasury by the Company immediately prior to the Effective Time shall, by virtue of the Merger, be cancelled and retired and cease to exist, without any conversion thereof. (d) Mergerco Common Stock. Each then issued outstanding share of Common Stock, par value $.01 per share ("Mergerco Common Stock") of MPCA Merger Co. shall be converted into one fully paid and non-assessable share of Common Stock, $.01 par value per share of the Surviving Corporation. Section 2.2 Exchange of Certificates. (a) Exchange Procedures. At the Closing, the Stockholders shall deliver to Metromedia all of the issued and outstanding shares of stock of Company Common Stock, including the Restricted Stock, and Metromedia shall deliver to the Stockholders the Initial Shares. The Adjustment Shares shall be delivered to the Stockholders on the Adjustment Date. The notes and/or other shares of Metromedia Common Stock issuable to the Stockholders pursuant to Section 2.3 on account of the Company Common Stock and the existing indebtedness of the Company to the Stockholders shall be delivered as set forth in Section 2.3. (b) Rule 144 Legend. The shares delivered to the Stockholders in accordance with Section 2.2(a) and, if applicable, Section 2.3, shall contain a restrictive legend pursuant to Rule 144 under the Securities Act of 1933, as amended. Section 2.3 Stockholder Loans; Additional Consideration. (a) For purposes of this Section 2.3, the following terms shall have the following meanings: (i) "Tax Fair Market Value Per Share" of Metromedia Common Stock on a certain date shall mean the lesser of (A) the closing price of Metromedia Common Stock as reported by the American Stock Exchange for such date or (B) the average of the high and the low price of Metromedia Common Stock as reported by the American Stock Exchange for such date. 5 (ii) "Existing Note Amount" shall mean the aggregate principal amount of the existing indebtedness of the Company to the Stockholders determined at the close of business on the date immediately preceding the date during which the Effective Time occurs, but not to exceed $5,000,000. (iii) "Closing Date Boot Limit" shall mean 25% of the Tax Fair Market Value Per Share at the Effective Time multiplied by the number of Initial Shares. (iv) "Test Principal Amount" of a note described in this Section 2.3 shall be the amount assigned to it in such Section 2.3. The actual principal amount of such a note shall be determined pursuant to Section 2.3(g) below. (v) "Maximum Additional Note Amount" shall mean the excess, if any, of $5,000,000 over the aggregate principal amount of notes issued pursuant to Sections 2.3(c)(i) or 2.3(d)(ii) below. (vi) "Stock Amount" shall mean the excess, if any, of the Maximum Additional Note Amount over the Test Principal Amount of the notes issued pursuant to Section 2.3(e) below. (b) If the Closing Date Boot Limit equals or exceeds $5,000,000, then at the Closing: (i) Metromedia shall issue to each of the Stockholders a note dated as of the Effective Date with principal amount equal to, and in replacement for, the existing indebtedness of the Company to such Stockholder, (ii) Metromedia shall issue to the Stockholders, between them in proportion to the number of shares of Company Common Stock, shares which such Stockholders deliver pursuant to Section 2.2(a), notes dated as of the Effective Date with aggregate Test Principal Amounts equal to the difference between $5,000,000 and the aggregate principal amounts of the notes issued pursuant to Section 2.3(b)(i) above, and (iii) Section 2.3(e) shall not apply. (c) If the Closing Date Boot Limit is less than $5,000,000 but greater than or equal to the Existing Note Amount, then: (i) Metromedia shall issue to each of the Stockholders a note 6 dated as of the Effective Date with principal amount equal to, and in replacement for, the existing indebtedness of the Company to such Stockholder, and (ii) The provisions of Section 2.3(e) shall apply. (d) If the Closing Date Boot Limit is less than the Existing Note Amount, then: (i) The Stockholders shall contribute to the capital of the Company as of the Effective Time an amount of the Company's existing indebtedness to the Stockholders equal to the excess of the Existing Note Amount over the Closing Date Boot Limit, between the Stockholders in proportion to their amounts of the Company's indebtedness to the Stockholders, to reduce the amount of the Company's indebtedness outstanding to the Stockholders at that time to the Closing Date Boot Limit, (ii) Metromedia shall issue to each of the Stockholders a note dated as of the Effective Date with principal amount equal to, and in replacement for, the then reduced indebtedness of the Company to such Stockholder and (iii) The provisions of Section 2.3(e) shall apply. (e) If the Closing Date Boot Limit is less than $5,000,000, then this Section 2.3(e) applies and on the Adjustment Date, Metromedia shall issue to the Stockholders, between them in proportion to the number of shares of Company Common Stock which such Stockholders deliver pursuant to Section 2.2(a), notes dated as of the Adjustment Date with aggregate Test Principal Amounts equal to the Maximum Additional Note Amount, but not to exceed the lesser of the amounts D and E in the equations below: D = [.25 x TFMV2 x (N1 + N2)] - FN E = [.25 x [ (TFMV1 x N1) + (TFMV2 x N2))] - FN where TFMV1 = the Tax Fair Market Value per share at Effective Time TFMV2 = the Tax Fair Market Value per share on the Adjustment Date N1 = the aggregate number of Initial Shares N2 = the aggregate number of Adjustment Shares FN = the principal amount of notes issued pursuant to Sections 2.3(c)(i) or 2.3(d)(ii). 7 (f) If the Closing Date Boot Limit is less than $5,000,000 so that Section 2.3(e) applies but the Test Principal Amount of the notes issued pursuant to such Section 2.3(e) is less than the Maximum Additional Note Amount, then Metromedia shall, on the Adjustment Date, issue to the Stockholders, between them in proportion to the number of shares of Company Common Stock which such Stockholders deliver pursuant to Section 2.2(a), a number of shares of Metromedia Common Stock equal to N3 in the equation: N3 = Stock Amount/Average Closing Price, then rounded down to the next lowest whole number of shares of Metromedia Common Stock , provided, however, that the number of shares issued pursuant to this Section 2.3(f) shall not exceed 974,872 (g) Any notes issued by Metromedia pursuant to Section 2.3 shall bear interest at the applicable federal rate as defined in Section 1274 of the Internal Revenue Code of 1986, as amended and shall be due 10 days after the Adjustment Date. Any notes issued pursuant to Sections 2.3(b)(ii) and 2.3(e) shall have an actual principal amount computed as follows: the Test Principal Amount of each note shall be reduced by $500, and such reduced amount shall be rounded down to the nearest even multiple of $1000. (h) The notes and/or shares of Metromedia Common Stock issued pursuant to this Section 2.3, to the extent equal to or less than the Existing Note Amount shall be in satisfaction of the existing indebtedness of the Company to the Stockholders. ARTICLE 3 REPRESENTATIONS AND WARRANTIES OF THE COMPANY 3. The Company represents and warrants to Metromedia as follows: 3.1 Due Incorporation and Authority. The Company is a corporation duly organized, validly existing and in good standing under the laws of the State of Delaware and has all requisite corporate power and lawful authority to own, lease and operate its Properties and to carry on its business as is presently being conducted. 3.2 Subsidiaries and Other Affiliates. Schedule 3.2 sets forth the name 8 and jurisdiction of organization of each corporation or other entity (collectively, "Subsidiaries") in which the Company directly or indirectly owns or has the power to vote shares of any capital stock or other ownership interests having voting power to elect a majority of the directors of such corporation, or other Persons performing similar functions for such entity, as the case may be. Except for the Subsidiaries and except as set forth on Schedule 3.2, the Company does not directly or indirectly own any ownership interest in any other Person. Each of the Subsidiaries is a corporation duly organized, validly existing and in good standing under the laws of its jurisdiction of organization and has the corporate power and lawful authority to own, lease and operate its Properties and to carry on its business as is presently being conducted. 3.3 Qualification. The Company and each of the Subsidiaries is duly qualified or otherwise authorized as a foreign corporation to transact business and is in good standing in each jurisdiction set forth on Schedule 3.3, which are the only jurisdictions in which such qualification or authorization is required by law, except in those jurisdictions in which failure to be so qualified or authorized would not, in the aggregate have a material adverse effect on the Properties, business, operation or financial condition of the Company and the Subsidiaries taken as a whole (a "Material Adverse Effect"). 3.4 Outstanding Capital Stock. The Company is authorized to issue 545,916 shares of Company Common Stock, of which 545,916 shares are issued, and are outstanding and no shares are held by the Company as treasury stock. All of the outstanding shares of Common Stock are owned by the Stockholders in the respective amounts set forth on Exhibit A. The authorized and issued shares of capital stock of each Subsidiary are set forth on Schedule 3.4. All issued and outstanding capital stock of each Subsidiary is owned by the Company, free and clear of any lien, pledge, mortgage, security interest, claim, lease, charge, option, right of first refusal, easement, servitude, transfer restriction under any shareholder or similar agreement, encumbrance or any other restriction or limitation whatsoever (collectively, "Liens"), except as created by this Agreement and except for limitations on transfers imposed by Federal and state securities or "blue sky" laws. All of the outstanding shares of capital stock of the Company and the Subsidiaries are 9 duly authorized and validly issued, fully paid and nonassessable. No other class of capital stock or other ownership interests of the Company or any of the Subsidiaries is authorized or outstanding. 3.5 Options or Other Rights. Except as set forth on Schedule 3.5, there is no outstanding right, subscription, warrant, call, unsatisfied preemptive right, option or other agreement of any kind to purchase or otherwise to receive from the Company, any of the Subsidiaries or any Stockholder any of the outstanding, authorized but unissued, unauthorized or treasury shares of the capital stock or any other security of the Company or any of the Subsidiaries, and there is no outstanding security or instrument of any kind convertible into, exercisable for, or exchangeable for any such capital stock. 3.6 Charter Documents and Corporate Records. The Company has heretofore caused to be delivered to Metromedia true and complete copies of the Certificates of Incorporation and By-laws, or comparable instruments, of the Company and each of the Subsidiaries as in effect on the date hereof and has made available for inspection the true and complete minute books of the Company and each of the Subsidiaries through the date hereof. 3.7 Financial Statements. The combined balance sheets of the Company and its Affiliates as of December 31, 1993, December 31, 1994, and December 31, 1995 and the related combined statements of income, and retained earnings and partners' capital and cash flows for the years then ended, including the footnotes thereto, certified by KPMG Peat Marwick, independent certified public accountants, which have been delivered to Metromedia, fairly present in all material respects the combined financial position of the Company and its Affiliates as at such dates and the combined results of operations of the Company and its Affiliates for such respective periods, in each case in accordance with generally accepted accounting principles consistently applied for the periods covered thereby. The foregoing combined financial statements of the Company and its Affiliates as of December 31, 1995, and for the year then ended are sometimes herein called the "Audited Financials". The unaudited combined balance sheet of the Company and its Affiliates as of March 31, 1996 and the related combined statement of income which have 10 been delivered to Metromedia, fairly present in all material respects the combined financial position of the Company and its Affiliates as at such date and the results of operations of the Company for the three months then ended, in each case in conformity with generally accepted accounting principles applied on a basis consistent with that of the Audited Financials (subject to the normal year-end adjustments described in Schedule 3.7) and with all interim financial statements of the Company heretofore delivered to Metromedia. The foregoing unaudited combined financial statements of the Company and its Affiliates as of March 31, 1996 and for the three months then ended are sometimes herein called the "Interim Financials," the combined balance sheet included in the Interim Financials is sometimes herein called the "Balance Sheet" and March 31, 1996 is sometimes herein called the "Balance Sheet Date." Except as set forth on Schedule 3.7, all of the assets reflected on the Balance Sheet are owned by the Company or one of its Affiliates. 3.8 No Material Adverse Change. Except as set forth on Schedule 3.8, since the Balance Sheet Date, there has been no material adverse change in the Properties, business, prospects, results of operations or financial condition of the Company and the Subsidiaries taken as a whole (a "Material Adverse Effect") other then changes in prospects resulting from changes in general economic, political, legal or other like conditions and in the motion picture industry generally. Neither the Company nor any of the Subsidiaries Knows (as defined in Section 12.1(ii)) of any fact, event, circumstance or change which is reasonably likely to have a Material Adverse Effect and neither the Company nor any of its Subsidiaries knows of any fact, event, circumstance or change which is reasonably likely to result in any damage, destruction or loss of value with respect to the Properties of the Company or any of the Subsidiaries not covered by insurance which has had a Material Adverse Effect. 3.9. Tax Matters. (i) Schedule 3.9(a) identifies all partnerships and corporations which were predecessors or were Affiliates of the Company and the Subsidiaries. (ii) Schedule 3.9(a)(ii) identifies which corporations, included among the Company, the Subsidiaries, and their respective predecessors or Affiliates were 11 intended to be taxed as "S Corporations" pursuant to Sections 1362 et. seq. of the Internal Revenue Code of 1986, as amended (Code") and comparable provisions of state and local tax laws applicable to such corporations (the "S Corporations"). The S Corporations timely filed elections to be taxed as "S Corporations" pursuant to Sections 1362 et. seq. of the Code and comparable provisions of state and local tax laws applicable to the S Corporations. The Company has provided Metromedia with copies of any such elections. The S Corporations' elections did not terminate under Sections 1362(d)(2) or (3) of the Code or comparable provisions of state and local tax laws applicable to the S Corporations, and such elections remained in full force and effect and were not voluntarily revoked, until such S Corporations were liquidated, merged with and into the Company or became one of the Subsidiaries. (iii) All federal, state, county, local, foreign and other taxes (including, without limitation, income, profits, premium, estimated, excise, sales, use, occupancy, gross receipts, franchise, ad valorem, severance, capital levy, production, transfer, withholding, employment, unemployment compensation, payroll related, property, import duties and other governmental charges and assessments), whether or not measured in whole or in part by net income, and including deficiencies, interest, additions to tax or interest, and penalties with respect thereto, (hereinafter "Taxes" or, individually, a "Tax") required to be paid on or before the date hereof (after giving effect to any applicable extensions) by or with respect to the Company, the Subsidiaries and their respective predecessors or Affiliates (or any of them), have been, or will be, timely paid when due (including extensions), except with respect to Taxes for which the failure to pay would not have a Material Adverse Effect with respect to the Company and the Subsidiaries taken as a whole. (iv) All material declarations, reports, information returns, statements and returns for Taxes (hereinafter "Tax Returns" or, individually, a "Tax Return") required to be filed by or with respect to the Company, the Subsidiaries or their respective predecessors or Affiliates (or any of them) on or before the date hereof have been timely filed. No penalties or other charges in a material amount are or will become due with 12 respect to the late filing of any Tax Return of the Company, the Subsidiaries or their respective predecessors or Affiliates or the payment of any Tax of the Company, the Subsidiaries or their respective predecessors or Affiliates, required to be filed or paid on or before the date hereof. (v) With respect to all Tax Returns filed by or with respect to the Company and any of the Subsidiaries or their respective predecessors or Affiliates, (A) Schedule 3.9(b) sets forth the periods for which the statute of limitations for the assessment of federal Taxes have expired; (B) except as set forth in Schedule 3.9(b), neither the Company nor the Subsidiaries has been notified that, nor to the Knowledge of the Stockholders is, there an audit in progress and no extension of time has been executed with respect to any date on which any Tax Return was or is to be filed and no waiver or agreement has been executed for the assessment or payment of any Tax; and (C) except as set forth in Schedule 3.9(b), there is no material unassessed deficiency of Taxes proposed or threatened against the Company or any of the Subsidiaries or any of their respective predecessors or Affiliates. (vi) Except as set forth in Schedule 3.9(c), none of the Company or any of the Subsidiaries or any of their respective predecessors or Affiliates has been or is a party to any tax sharing agreement or similar arrangement. 3.10 Compliance with Laws. Neither the Company nor any of the Subsidiaries is in violation of any applicable order, judgment, injunction, award, decree or writ (collectively, "Orders"), or any applicable law, statute, code, ordinance, regulation or other requirement (collectively, "Laws"), of any government or political subdivision thereof, whether federal, state, local or foreign, or any agency or instrumentality of any such government or political subdivision, any court or arbitrator (collectively, "Governmental Bodies") the enforcement of which would have a Material Adverse Effect on the condition of the Company and the Subsidiaries taken as a whole, and except as set forth on Schedule 3.10, neither the Company nor any of the Subsidiaries has received notice that any such violation is being or may be alleged. The Company and the Subsidiaries have not made any illegal payment to officers or employees of any Governmental Body, or made any payment 13 to customers for the sharing of fees or to customers or suppliers for rebating of charges, or engaged in any other reciprocal practice, or made any illegal payment or given any other illegal consideration to purchasing agents or other representatives of customers in respect of sales made or to be made by the Company or any of the Subsidiaries. 3.11 Permits. The Company and the Subsidiaries have all licenses, permits, orders or approvals of, and have made all required registrations with, any Governmental Body that are material to the current conduct of the business of, or the current use of any of the Properties of, the Company or any of the Subsidiaries (collectively, "Permits"). All Permits are listed on Schedule 3.11 and are in full force and effect; no material violations are or have been recorded in respect of any Permit; and no proceeding is pending or, to the Knowledge of the Company, any of the Subsidiaries or any of the Stockholders, threatened to revoke or limit any Permit. No action by the Stockholders, the Company or Metromedia is required in order that all Permits will remain in full force and effect following the consummation of the transactions provided for herein. 3.12 No Breach. The execution, delivery and performance of this Agreement by the Stockholders and the consummation of the transactions contemplated hereby, including but not limited to, the conversion of shares pursuant to Section 2.1 hereof (the "Contemplated Transactions") will not (i) violate any provision of the Articles of Incorporation or By-laws of the Company or any of the Subsidiaries; (ii) require the Stockholders, the Company or any of the Subsidiaries to obtain any consent, approval or action of, or make any filing with or give any notice to, any Governmental Body or any other Person, except (a) filings under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended, and the rules and regulations promulgated thereunder (the "HSR Act") and (b) as set forth on Schedule 3.12 (b) (the "Required Consents"); (iii) if the Required Consents are obtained, violate, conflict with or result in the breach of any of the terms of, result in a material modification of the effect of, otherwise cause the termination of or give any other contracting party the right to terminate, or constitute (or with notice or lapse of time or both constitute) a default under, any material contract, agreement, indenture, note, bond, loan, instrument, lease, conditional sale contract, mortgage, license, franchise, 14 commitment or other binding arrangement (collectively, the "Contracts") to which the Company or any of the Subsidiaries is a party or by or to which any of them or any of their Properties may be bound or subject, or result in the creation of any Lien upon the material Properties of the Company or any of the Subsidiaries pursuant to the terms of any such Contract; (iv) if the Required Consents are obtained, violate any Order of any Governmental Body against, or binding upon, the Company or any of the Subsidiaries or upon their respective securities, Properties or business; (v) if the Required Consents are obtained, violate any Law of any Governmental Body; or (vi) if the Required Consents are obtained, violate or result in the revocation or suspension of any Permit. 3.13 Claims and Proceedings. There are no outstanding Orders of any Governmental Body against or involving the Company or any of the Subsidiaries. Except as set forth on Schedule 3.13, there are no actions, suits, claims or legal, administrative or arbitral proceedings, public investigations or to the Knowledge of the Company, any private investigations (collectively, "Claims") (whether or not the defense thereof or liabilities in respect thereof are covered by insurance) pending, or to the Knowledge of the Company or any of the Subsidiaries, threatened, against or involving the Company or any of the Subsidiaries or any of their Properties as set forth on Schedule 3.13, to the Knowledge of the Company, any of the Subsidiaries or any of the Stockholders, there is no fact, event or circumstance that may give rise to any Claim. All notices required to have been given to any insurance company listed as insuring against any material Claim set forth on Schedule 3.13 have been timely and duly given and, except as set forth on Schedule 3.13, no insurance company has asserted, orally or in writing, that such Claim is not covered by the applicable policy relating to such Claim. Except as set forth on Schedule 3.13, no claims pending or threatened against or involving the Company or any of its Subsidiaries have been settled, adjudicated or otherwise disposed of since December 31, 1995. 3.14 Contracts. (a) Schedule 3.14 sets forth all of the following Contracts to which the Company or any of the Subsidiaries is a party or by or to which any of them or any of their Properties may be bound or subject: (i) Contracts with any current or former officer, director, shareholder, employee, consultant, agent or other representative 15 or with an entity in which any of the foregoing is a controlling Person; (ii) Contracts with any labor union or association representing any employee or former employee; (iii) Contracts for the sale of any Properties other than in the ordinary course of business or for the grant to any Person of any option or preferential rights to purchase any material Properties; (iv) partnership or joint venture agreements; (v) Contracts under which the Company or any of the Subsidiaries agrees to indemnify any party or to share tax liability of any party; (vi) material Contracts which cannot be cancelled without liability, premium or penalty only on 90 days' or more notice; (vii) Contracts containing covenants of the Company or any of the Subsidiaries not to compete in any line of business or with any Person in any geographical area or covenants of any other Person not to compete with the Company or any of the Subsidiaries in any line of business or in any geographical area; (viii) Contracts relating to the acquisition by the Company or any of the Subsidiaries of any operating business or the capital stock of any other Person; (ix) Contracts relating to the borrowing of money; (x) Contracts containing obligations or liabilities of any kind to holders of the capital stock of the Company as such (including, without limitation, an obligation to register any of such securities under any federal or state securities laws); (xi) Contracts pursuant to which the Company or any of the Subsidiaries may hold or use any interest owned or claimed by the Company or any of the Subsidiaries in or to any material Property; (xii) management Contracts and other similar agreements with any Person; (xiii) any other Contracts pursuant to the terms of which there is either a current or future obligation or right of the Company or any of the Subsidiaries to make payments in excess of $50,000 or receive payments in excess of $100,000; (xiv) Contracts with respect to the development, financing or production of motion picture, video, television or interactive productions; (xv) Distribution Contracts; (xvi) material Contracts relating to the acquisition of Product, including Contracts relating to the acquisition of licensing and distribution rights with respect to such Product; (xvii) Contracts with motion picture studios; (xviii) Contracts relating to television sales and distribution of Product; (xix) Contracts entitling the Company or its Subsidiaries or any Affiliate, including the Stockholders, to Contingent Compensation; and (xx) material Contracts relating to any other Product. 16 (b) There have been delivered to Metromedia true and complete copies of all of the Contracts set forth on Schedule 3.14 or on any other Schedule. All of the Contracts are valid and binding upon the Company or one of the Subsidiaries, as the case may be, in accordance with their terms subject as to enforcement, as to applicable bankruptcy, insolvency, reorganization, moratorium or other similar laws affecting the enforcement of creditors' rights generally and to general principles of equity. Neither the Company nor any of the Subsidiaries is in default in any material respect under any of such Contracts, nor does any condition exist that with notice or lapse of time or both would constitute such a material default thereunder. To the Knowledge of the Company, any of the Subsidiaries or any of the Stockholders, no other party to any such Contract is in default thereunder in any material respect nor does any condition exist that with notice or lapse of time or both would constitute such a material default thereunder. 3.15 Real Estate. 3.15.1 Ownership of Premises. The Company and its Subsidiaries do not own any real property or any buildings, structures and other improvements located on any real property (collectively, "Owned Real Property"). 3.15.2 Leased Properties. Except for short-term space leases entered into by the Company or a Subsidiary in connection with producing a specific Product, Schedule 3.15.2 is a true, correct and complete schedule of all leases, subleases, licenses and other agreements (collectively, the "Real Property Leases") under which the Company or any Subsidiary uses or occupies or has the right to use or occupy, now or in the future, any real property (the land, buildings and other improvements covered by the Real Property Leases being herein called the "Leased Real Property"), which Schedule 3.15 sets forth the date of and parties to each Real Property Lease, the date of and parties to each amendment, modification and supplement thereto, the term and renewal terms (whether or not exercised) thereof and a brief description of the Leased Real Property covered thereby. The Company has heretofore delivered to Metromedia true, correct and complete copies of all Real Property Leases (including all modifications, amendments and supplements). Each Real Property Lease is a legal, valid, binding and enforceable obligation of the Company 17 and is in full force and effect, subject as to enforcement, as to applicable bankruptcy, insolvency, reorganization, moratorium or other similar laws affecting the enforcement of creditors' rights generally and to general principles of equity. All rent and other sums and charges payable by the Company or a Subsidiary as tenant under any Real Property Lease are current, no notice of default or termination under any Real Property Lease is outstanding, no termination event or condition or uncured material default on the part of the Company or the applicable Subsidiary, or to the Knowledge of the Company or the applicable Subsidiary on the part of the landlord, exists under any Real Property Lease, and no event has occurred and no condition exists which, with the giving of notice or the lapse of time or both, would constitute such a default or termination event or condition on the part of the Company or the applicable Subsidiary or, to the Knowledge of the Company or the applicable Subsidiary on the part of the landlord. Except as set forth on Schedule 3.15.2, to the Knowledge of the Company or the applicable Subsidiary, none of the Leased Real Property and the Real Property Leases contravenes any zoning ordinance or other administrative regulation or violates any restrictive covenant, easement or other agreement to which the lessee under any such Real Property Lease is bound, the effect of which in any material respect would interfere with or prevent the continued use of the Leased Real Property for the purposes for which it is now being used by the Company or the applicable Subsidiary. 3.15.3 Entire Premises. All of the land, buildings, structures and other improvements used by the Company and the Subsidiaries in the conduct of their business are included in the Leased Real Property except for land, building, structures and other improvements subject to short term space leases entered into by the Company or a Subsidiary in connection with producing a particular item of Product. 3.16 Intellectual Property. Schedule 3.16 sets forth a list of the Company's registered patents, registered trademarks, registered service marks, registered trade names, registered copyrights and franchises, all applications for any of the foregoing and all permits, grants and licenses or other rights running to the Company and any of its Subsidiaries relating to any of the foregoing that are material to the business of the 18 Company and its Subsidiaries. Except as set forth on Schedule 3.16, (i) the Company or one of the Subsidiaries own, or are licensed or otherwise have the right, to use all registered patents, registered trademarks, registered service marks, registered trade names, registered copyrights and franchises set forth on Schedule 3.16, and (ii) the Company's rights in the property set forth on such list are free and clear of any Lien or other encumbrances and the Company and the Subsidiaries have not received written notice of any adversely-held patent, invention, trademark, service mark or trade name of any other person, or notice of any charge or claim of any person relating to such intellectual property or any process or confidential information of the Company and its Subsidiaries and to the Company's Knowledge there is no basis for any such charge or claim, and (iii) the Company, the Subsidiaries and their respective predecessors, if any, have not conducted business at any time during the period beginning five years prior to the date hereof under any corporate or partnership, trade or fictitious names other than as set forth on Schedule 3.16. 3.17 Ownership of Product; Copyrights and Other Rights. The Products listed on Schedule 3.17 comprise all of the material Products in which the Company or any of the Subsidiaries has any right, title, or interest in or to (either directly or through a joint venture or partnership). As to each item listed on Schedule 3.17 hereto, the party holding such interests, if not the Company or a Subsidiary, to the Knowledge of the Company, has duly recorded its interests in the United States Copyright Office. All such recordation is listed on Schedule 3.17. To the Knowledge of the Company, none of the Company's or any Subsidiaries' right, title or interest in any Product and component parts thereof violates or infringes upon in any material respect any copyright, right of privacy, trademark, patent, trade name, performing right or any literary, dramatic, musical, artistic, personal, private, contract or copyright or any other right of any Person or contain any libelous or slanderous material. There is no claim, suit, action or proceeding pending, or to the Knowledge of the Company or any of the Subsidiaries, threatened against the Company or any of the Subsidiaries that involves a claim of infringement of any copyright with respect to any Product listed on Schedule 3.17 and neither the Company nor any of the Subsidiaries has any Knowledge of any existing infringement by any other Person of any 19 copyright held by the Company or the Subsidiaries with respect to any Product. 3.18 Title to Properties. Except as set forth elsewhere in this Agreement or the Schedules hereto, the Company and the Subsidiaries own outright and have good and marketable title to all of their Properties, including, without limitation, all of the assets reflected on the Balance Sheet or currently used in the operation of their businesses (other than the Leased Real Property) in each case free and clear of any material Lien. 3.19 Liabilities. Except as set forth on Schedule 3.19, as at March 31, 1996, the Company and the Subsidiaries did not have any material direct or indirect indebtedness, liability, claim, loss, damage, deficiency, obligation or responsibility, known or unknown, fixed or unfixed, choate or inchoate, liquidated or unliquidated, secured or unsecured, accrued, absolute, contingent or otherwise, whether or not of a kind required by generally accepted accounting principles to be set forth on a financial statement or in the notes thereto ("Liabilities") that were not fully and adequately reflected or reserved against on the Balance Sheet dated March 31, 1996 or described on any Schedule or in the notes to the Audited Financials. Except as set forth on Schedule 3.19 or described on any Schedule to this Agreement, (x) the Company and the Subsidiaries have not, except in the ordinary course of business, incurred any material Liabilities since the Balance Sheet Date and (y) neither the Company nor any of the Subsidiaries has any Knowledge of any circumstance, condition, event or arrangement that may hereafter give rise to any Liabilities of the Company or any of the Subsidiaries or any successor to their businesses except in the ordinary course of business. 3.20 Employee Benefit Plans. Except as set forth on Schedule 3.20, there are no employee benefit plans or arrangements of any type (whether or not described in section 3(3) of the Employee Retirement Income Security Act of 1974, as amended and the regulations thereunder ("ERISA"), and including, without limitation, plans or arrangements providing for deferred compensation, bonuses, stock options, fringe benefits, cafeteria plan deferrals, flexible arrangements or other similar plans or arrangements), under which the Company or any of its Subsidiaries has or in the future could have, directly or indirectly, any liability with 20 respect to any current or former employee of the Company, any Subsidiary or any Commonly Controlled Entity (within the meaning of section 414(b), (c), (m), (n) or (o) of the Code) ("Benefit Plans"). 3.21 Employee Relations. Except with respect to Projects where members of the Screen Actors Guild, the Directors Guild of America, the Writers Guild of America or other union representation for "below the line" personnel are engaged by the Company or a Subsidiary, no union organizing efforts have been conducted within the last five years or are now being conducted. For purposes of this section 3.21, "below the line personnel" shall mean all persons (other than authors, screenwriters, producers, directors and actors) engaged by the Company or its Subsidiaries in connection with the production of a film. Neither the Company nor any of the Subsidiaries has at any time during the last five years had, nor, to the Knowledge of the Company nor any of the Subsidiaries, is there now threatened, a strike, picket, work stoppage, work slowdown or other labor trouble. 3.22 Insurance. Schedule 3.22 sets forth a list (specifying the insurer, describing each pending claim thereunder of more than $50,000 and setting forth the aggregate amounts paid out under each such policy through the date hereof and the aggregate limit, if any, of the insurer's liability thereunder) of all policies or binders of fire, liability, product liability, workmen's compensation, vehicular and other insurance held by or on behalf of the Company or any of the Subsidiaries. Such policies and binders are valid and binding in accordance with their terms, are in full force and effect. Neither the Company nor any of the Subsidiaries is in default with respect to any provision contained in any such policy or binder or has failed to give any notice or present any claim under any such policy or binder in due and timely fashion. There are no outstanding unpaid claims under any such policy or binder, and neither the Company nor any of the Subsidiaries has received any notice of cancellation or non-renewal of any such policy or binder. Neither the Company nor any of the Subsidiaries has received any notice from any of its insurance carriers that any insurance premiums will or may be materially increased in the future or that any insurance coverage listed on Schedule 3.22 will or may not be available in the future on terms or subject to conditions which would make renewal thereof onerous. 21 3.23 Officers, Directors and Key Employees. Schedule 3.23 sets forth (i) the name and the scheduled 1996 total compensation of each officer and director of the Company and the Subsidiaries, (ii) the name and scheduled total compensation of each other employee, consultant, agent or other representative of the Company or any of the Subsidiaries whose current or committed annual rate of compensation (including bonuses and commissions) exceeds $150,000, (iii) all wage and salary increases, bonuses and increases and any other direct or indirect compensation received by such Persons since December 31, 1995, (iv) any payments or commitments to pay any severance or termination pay to any such Persons, and (v) any accrual for, or any commitment or agreement by the Company or any of the Subsidiaries to pay, such increases, bonuses or pay. None of such Persons has indicated that he or she will cancel or otherwise terminate such Person's relationship with the Company or any of the Subsidiaries. 3.24 Operations of the Company. Except as set forth on Schedule 3.24 or on any other Schedule, since the Balance Sheet Date neither the Company nor any of the Subsidiaries has: (i) declared or paid any dividends or declared or made any other distributions of any kind to its shareholders, or made any direct or indirect redemption, retirement, purchase or other acquisition of any shares of its capital stock; (ii) except for short-term bank borrowings in the ordinary course of business and except for borrowings with respect to the Project Beverly Hills Ninja, incurred any indebtedness for borrowed money; (iii) reduced its cash or short-term investments or their equivalent, other than to meet cash needs arising in the ordinary course of business, consistent with past practices and to pay year end employee bonuses which are set forth on Schedule 3.23; (iv) waived any material right under any contract or other agreement of the type required to be set forth on any Schedule; (v) made any material change in its accounting methods or practices or made any material change in depreciation or amortization policies or rates 22 adopted by it; (vi) materially changed any of its business policies, including, without limitation, advertising, investment, marketing, pricing, purchasing, production, personnel, sales, returns, budget or product acquisition policies, except as specifically set forth in the Company's Confidential Information Memorandum (dated March 1995), a copy of which was previously delivered to Metromedia; (vii) made any loan or advance to any of its shareholders, officers, directors, employees, consultants, agents or other representatives (other than travel advances made in the ordinary course of business for business travel and entertainment expenses), or made any other loan or advance otherwise than in the ordinary course of business; (viii) except for the acquisition or disposition of inventory, or equipment or other Properties in the ordinary course of business, sold, abandoned or made any other disposition of any of its Properties or made any acquisition of all or any part of the Properties, capital stock or business of any other person; (ix) paid, directly or indirectly, any of its material Liabilities before the same became due in accordance with its terms or otherwise than in the ordinary course of business; (x) terminated or failed to renew, or received any written threat (that was not subsequently withdrawn) to terminate or fail to renew, any contract or other agreement that is or was material to the business of the Company and the Subsidiaries taken as a whole; (xi) except with respect to certain transactions among the Company and its Subsidiaries as set forth on Schedule 3.24, amended its Articles of Incorporation or By-laws (or comparable instruments) or merged with or into or consolidated with any other Person, subdivided or in any way reclassified any shares of its capital stock or changed or agreed to change in any manner the rights of its outstanding capital stock or the character of its business; or (xii) except for the Company's "first look" deal with Paramount Pictures Corporation, the most recent copy of which and all material correspondence 23 relating thereto has been provided to Metromedia, engaged in any other material transaction. 3.25 Potential Conflicts of Interest. No executive officer or director of the Company or any of the Subsidiaries, no Stockholder, no relative or spouse (or relative of such spouse) of any such officer, director or Stockholder and no entity controlled by one or more of the foregoing: (i) owns, directly or indirectly, any interest in (excepting less than 5% stock holdings for investment purposes in securities of publicly held and traded companies), or is an officer, director, employee or consultant of, any Person which is, or is engaged in business as, a competitor, lessor, lessee, supplier, distributor, sales agent or customer of the Company or any of the Subsidiaries except as set forth on Schedule 3.25(a); (ii) except as set forth on Schedule 3.25(b), owns, directly or indirectly, in whole or in part, any Property that the Company or any of the Subsidiaries uses in the conduct of its business; or (iii) except as set forth on Schedule 3.25(c), has any cause of action or other claim whatsoever against, or owes any amount to, the Company or any of the Subsidiaries, except for claims in the ordinary course of business such as for accrued vacation pay, accrued benefits under employee benefit plans, and similar matters and agreements existing on the date hereof. 3.26 Premerger Notification. The Company (or its ultimate parent entity) will promptly file notification and report forms with respect to the Contemplated Transactions in compliance with the HSR Act. Metromedia will bear the costs of any filing fees required to be paid pursuant to the HSR Act as a result of Metromedia being deemed an "acquiring person" under the HSR Act in connection with the transactions contemplated in Section 1 hereof. In the event Metromedia is not deemed an "acquiring person" under the HSR Act in connection with the transactions contemplated by Section 1 hereof, the person deemed the "acquiring person" shall bear the sole responsibility for any filing fee under the HSR Act in connection with such transactions. 3.27 Projections. The projections relating to operations of the Company and the Subsidiaries through the fiscal year ending 2003 (the "Projections"), heretofore 24 delivered by the Company to Metromedia, have been prepared in good faith on a reasonable basis. The assumptions on which the Projections are based are stated in Schedule 3.27 and are consistent with past practices of the Company and the Subsidiaries and with historical conditions applicable to the business of the Company and the Subsidiaries. Nothing has come to the attention of the Company or any of the Subsidiaries to indicate that the Projections or the assumptions upon which they are based are not reasonable. 3.28 Full Disclosure. All documents, Contracts, instruments, certificates, notices, consents, affidavits, letters, telegrams, telexes, statements, schedules (including Schedules to this Agreement), exhibits (including Exhibits to this Agreement), the Confidential Information Memorandum dated March 1995 (the "Confidential Memorandum"), the Projections through the year ending 2003, and any other papers whatsoever (collectively, "Documents") delivered by or on behalf of the Stockholders, the Company or the Subsidiaries in connection with this Agreement and the Contemplated Transactions are authentic if original or true and correct copies of the originals. With the exception of the Confidential Memorandum, no representation or warranty of the Company or the Stockholders contained in this Agreement or in any of the Schedules, and no Document furnished by or on behalf of the Stockholders, the Company or the Subsidiaries to Metromedia pursuant to this Agreement or in connection with the Contemplated Transactions, contains an untrue statement of a material fact or omits to state a material fact required to be stated therein or necessary to make the statements made, in the context in which made, not materially false or misleading. Except as otherwise set forth in this Agreement, there is no material fact that the Stockholders have not disclosed to Metromedia in writing that materially adversely affects or, so far as any of the Stockholders can now foresee, will have a Material Adverse Effect on the Company or any of the Subsidiaries or the ability of the Stockholders to perform this Agreement. 3.29 Environment Protection. Except as disclosed on Schedule 3.29: (i) neither the Company nor any of its Subsidiaries is or has been in violation in any material respect of any applicable Safety and Environmental Law (as hereinafter defined); 25 (ii) the Company and its Subsidiaries have all material Permits required pursuant to Safety and Environmental Laws, such Permits are in full force and effect, no action or proceeding to revoke, limit or modify any of such Permits is pending, and the Company and each of its Subsidiaries is in compliance in all material respects with all terms and conditions thereof; (iii) neither the Company nor any of its Subsidiaries has received any Environmental Claim (as hereinafter defined); For purposes of this Agreement, the following terms have the following meanings: (i) "Environmental Claims" means any notification, whether direct or indirect, formal or informal, written or oral, pursuant to Safety and Environmental Laws or principles of common law relating to pollution, protection of the environment or health and safety, that any of the current or past operations of the Company or any of its Subsidiaries, or any by-product thereof, or any of the property currently or formerly owned, leased or operated by the Company or any of its Subsidiaries, or the operations or property of any predecessor of the Company or any of its Subsidiaries is or may be implicated in or subject to any proceeding, action, investigation, claim, lawsuit, order, agreement or evaluation by any Governmental Body or any other person. (ii) "Safety and Environmental Laws" means all federal, state and local laws and order relating to pollution, protection of the environment, public or worker health and safety, or the emission, discharge, release or threatened release of pollutants, contaminants or industrial, toxic or hazardous substances or wastes into the environment or otherwise relating to the manufacture, processing, distribution, use, treatment, storage, disposal, transport or handling of pollutants, contaminants or industrial, toxic or hazardous substances or wastes, including, without limitation, the Comprehensive Environmental Response, Compensation and Liability Act, 42 U.S.C. section 9601 et seq., the Resource Conservation and Recovery Act, 42 U.S.C. section 6901 et seq., the Toxic Substances Control Act, 15 U.S.C. section 2601 et seq., the Federal Water Pollution Control Act, 33 U.S.C. section 1251 et seq., the Clean Air Act, 42 U.S.C. section 7401 et seq., the Federal 26 Insecticide, Fungicide and Rodenticide Act, 7 U.S.C. section 121 et seq., the Occupational Safety and Health Act, 29 U.S.C. section 651 et seq., the Asbestos Hazard Emergency Response Act, 15 U.S.C. section 2601 et seq., the Safe Drinking Water Act, 42 U.S.C. section 300 et seq., the Oil Pollution Act of 1990 and analogous state acts. ARTICLE 4 REPRESENTATIONS AND WARRANTIES OF EACH STOCKHOLDER 4. Each Stockholder, severally and not jointly, represents and warrants to Metromedia as follows: 4.1 Title to the Shares. As of the Closing Date, such Stockholder shall own beneficially and of record, free and clear of any Lien, or shall own of record and have full power and authority to convey free and clear of any Lien, the Shares set forth opposite such Stockholder's name on Exhibit A, and, upon delivery of and payment for such Shares as herein provided, such Stockholder will convey to Metromedia good and valid title thereto, free and clear of any Lien. 4.2 Authority to Execute and Perform Agreement. Such Stockholder has the full legal right and power and all authority and approvals required to execute and deliver this Agreement and to perform fully such Stockholder's obligations hereunder. This Agreement has been duly executed and delivered by such Stockholder and (assuming the due authorization, execution and delivery hereof by MPCA Mergerco, the Company and Metromedia) is a valid and binding obligation of such Stockholder enforceable in accordance with its terms except as the same may be limited by (insolvency qualification). Except as set forth on Schedule 4.2, the execution and delivery by such Stockholder of this Agreement, the consummation of the Contemplated Transactions and the performance by such Stockholder of this Agreement in accordance with its terms will not (i) require the approval or consent of any Governmental Body or the approval or consent of any other Person; (ii) conflict with or result in any breach or violation of any of the terms and conditions of, or constitute (or with notice or lapse of time or both constitute) a default under, any Law or Order of any Governmental Body applicable to such Stockholder or to 27 the Shares held by such Stockholder, or any Contract to which such Stockholder is a party or by or to which such Stockholder is or the Shares held by such Stockholder are bound or subject; or (iii) result in the creation of any Lien on the Shares held by such Stockholder. 4.3 Company's Representations and Warranties. To the Knowledge of the Stockholders, the Company's representations and warranties set forth in Section 3 are true, correct and complete in all material respects. ARTICLE 5 REPRESENTATIONS AND WARRANTIES OF MPCA MERGERCO AND METROMEDIA 5. Metromedia and MPCA Mergerco represent and warrant to the Stockholders and the Company as follows: 5.1 Due Incorporation and Authority. Each of the MPCA Mergerco and Metromedia is a corporation duly organized, validly existing and in good standing under the laws of the State of Delaware, and each has all requisite corporate power and authority to own, lease and operate their respective Properties and to carry on its business as now being and as heretofore conducted. 5.2 Authority to Execute and Perform Agreement. Each of MPCA Mergerco and Metromedia has the full legal right and power and all authority and approvals required to execute and deliver this Agreement and to perform fully their respective obligations hereunder. This Agreement has been duly executed and delivered by each of MPCA Mergerco and Metromedia and (assuming the due authorization, execution and delivery hereof by the Stockholders and the Company) is a valid and binding obligation of each of MPCA Mergerco and Metromedia enforceable in accordance with its terms. 5.3 No Violations. Except as set forth on Schedule 5.3, the execution and delivery by MPCA Mergerco and Metromedia of this Agreement, the consummation of the Contemplated Transactions and the performance by MPCA Mergerco and Metromedia of this Agreement, in accordance with its terms will not (i) require the consent, approval, action of, or making any filing with or giving notice to any Governmental Body or any other 28 Person; (ii) conflict with or result in any breach or violation of any of the terms and conditions of, or constitute (or with notice or lapse of time or both constitute) a default under, the Certificate of Incorporation or By-laws of MPCA Mergerco or Metromedia, any Law or Order of any Governmental Body applicable to MPCA Mergerco or Metromedia, or any Contract to which MPCA Mergerco or Metromedia is a party or by or to which MPCA Mergerco or Metromedia or any of their Properties is bound or subject; or (iii) result in the creation of any material Lien on any of the Properties of MPCA Mergerco, Metromedia or the Surviving Corporation. 5.4 Investment Company Act. Metromedia either (i) is not an "investment company", or to Metromedia's Knowledge a company "controlled" by, or to Metromedia's Knowledge an "affiliated company" with respect to an "investment company" required to register under the Investment Company Act of 1940, as amended (the "Investment Company Act") or (ii) satisfied all conditions for an exemption from the Investment Company Act, and accordingly, none of its subsidiaries is required to be registered under the Investment Company Act. 5.5 Premerger Notification. Metromedia (or its ultimate Parent) will promptly file notification and report forms with respect to the Contemplated Transactions in compliance with the HSR Act. 5.6 Business of MPCA Mergerco. MPCA Mergerco has not incurred, directly or indirectly through any subsidiary or otherwise, any liabilities or obligations, except those incurred in connection with its incorporation or with the negotiation and the execution, delivery and performance of this Agreement and the transactions contemplated hereby. MPCA Mergerco has not engaged, directly or indirectly through any subsidiaries or otherwise, in any business or activities of any type or kind whatsoever, or entered into any agreement or arrangements with any Person, and is not subject to or bound by any obligation or understanding which is not contemplated by this Agreement. 5.7 Capitalization. The authorized capital stock of MPCA Mergerco consists of 1000 shares of common stock, $.01 par value per share, all of which are validly issued and outstanding, fully paid and nonassessable, and owned, beneficially and of record, 29 by Metromedia, free and clear of all Liens. As of the date of this Agreement, there are no outstanding options, warrants, preemptive or other rights, contracts, commitments, or agreements by which MPCA Mergerco is or may become obligated to issue any additional shares of its capital stock or securities convertible into any such shares. 5.8 Reports and Financial Statements. Metromedia has previously furnished or otherwise made available to the Company true and complete copies of all reports on Forms 10-K, 10-Q and 8-K filed by Metromedia and Metromedia has filed all reports on Forms 10-K, 10-Q and 8-K required to be filed by Metromedia with the Securities and Exchange Commission since November 1, 1995. As of their respective dates, such reports did not contain any untrue statement of material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances under which they were made, not misleading 5.9 Status of Metromedia Common Stock to be Issued. Assuming without investigation that the shares of Company Common Stock at the Effective Time will be validly authorized, validly issued, fully paid, and non-assessable, the shares of Metromedia Common Stock to be issued in the Merger will, at the Effective Time, be validly authorized and, when the Merger has become effective and the shares of Metromedia Common Stock have been duly delivered pursuant to the terms of this Agreement, such shares of Metromedia Common Stock will be validly issued, fully paid and non-assessable. ARTICLE 6 COVENANTS AND AGREEMENTS 6.1 Conduct of Business. From the date hereof through the Closing Date, the Stockholders, jointly and severally, agree that they (i) shall cause the Company and the Subsidiaries to conduct their businesses in the ordinary course and, without the prior written consent of Metromedia, not to undertake any of the actions specified in Section 3.24 unless otherwise disclosed in any Schedule referred to in Section 3.24 or in connection with an item disclosed in any such Schedule; and further not to (a) 30 authorize for issuance, issue, grant, sell, pledge, dispose of or propose to issue, grant, sell, pledge or dispose of any shares of, or any options, warrants, commitments, subscriptions or rights of any kind to acquire any shares of, the capital stock of the Company or any securities convertible into or exchangeable for shares of stock of any class of the Company or any of its Subsidiaries; (b) split, combine, subdivide or reclassify any shares of its capital stock or issue or authorize the issuance of any other securities in respect of, in lieu of or in substitution for shares of its capital stock or declare, pay or set aside any dividend or other distribution (whether in cash, stock or property or any combination thereof) in respect of its capital stock, or redeem, purchase or otherwise acquire or offer to acquire any shares of its own capital stock or any of its Subsidiaries or any other securities thereof or any right, warrants or options to acquire any such shares or other securities; (c) (1) except for debt (including obligations in respect of capital leases) not in excess of $50,000 and except for the existing line of credit listed on Schedule 6.1, create, incur or assume any short-term debt, long-term debt or obligations in respect of capital leases; (2) assume, guarantee, endorse or otherwise become liable or responsible (whether directly, indirectly, contingently or otherwise) for the obligations of any other person except wholly-owned subsidiaries of the Company, in the ordinary course of business consistent with past practice; (3) make any capital expenditures or make any loans, advances or capital contributions to, or investments in, any other Person (other than customary travel or business or entertainment advances to employees, representatives, consultants, directors or advisors or subsidiaries made in the ordinary course of business consistent with past practice and/or in connection with the consummation of the transactions contemplated by this Agreement and listed on Schedule 6.1), currently committed, budgeted capital expenditures and additional capital expenditures not in excess of $50,000; or (4) incur any material liability or obligation (absolute, accrued, contingent or otherwise) other than in the ordinary course of business and consistent with past practice; (d) except in the ordinary course of business consistent with past practice or as may be required by local law, sell, transfer, mortgage, or otherwise dispose of, or encumber, or agree to sell, transfer, mortgage or otherwise dispose of or encumber, any material assets or properties, real, personal or mixed; (e) increase in any manner the compensation of any of 31 its officers; (f) enter into severance, termination or retention agreements, and terminating any employment agreements, with its officers and key employees; (g) (except in the ordinary course of business consistent with past practice) enter into any agreement relating to the production, financing, acquisition, development or license of motion pictures or television programming; (h) incur any obligation in excess of $50,000 in connection with any item of Product to be produced by the Company or its Subsidiaries; execute any Contract obligating the Company or its Subsidiaries to pay a minimum guarantee of more than $50,000 for any item of Product, incur acquisition costs of more than $100,000 for any item of Product; (i) enter into any "first look" or output Contract with any Person; and (ii) shall use reasonable commercial efforts to cause the Company and the Subsidiaries to conduct their businesses in such a manner so that the representations and warranties contained in Article 3 shall continue to be true and correct on and as of the Closing Date as if made on and as of the Closing Date. From the date hereof through the Closing Date, each Stockholder, severally and not jointly, agrees to conduct such Stockholder's affairs in such a manner so that the representations and warranties of such Stockholder contained in Article 4 shall continue to be true and correct on and as of the Closing Date as if made on and as of the Closing Date. The Stockholders shall give Metromedia prompt notice of any event, condition or circumstance occurring from the date hereof through the Closing Date that would constitute, to their Knowledge, a violation or breach of any representation or warranty, whether made as of the date hereof or as of the Closing Date, or that would constitute a violation or breach of any covenant of any Stockholder contained in this Agreement. 6.2 Performance of Obligations; Copyright. From the date hereof through the Closing Date, the Company and the Subsidiaries agree (i) to duly observe and perform all material terms and conditions of all material agreements with respect to the production, development and/or exploitation of each item of Product and diligently protect and enforce the rights of the Company or any of the Subsidiaries under all such agreements in a manner consistent with prudent business practice; provided, however, that to the extent the Company does not have adequate resources to comply with the foregoing, it shall 32 promptly inform Metromedia and Metromedia shall, in it sole discretion, decide whether to pursue the same (if sufficient resources are not available, then failure to comply shall not be deemed a breach of this covenant) and (ii) in connection with each item of Product with respect to which the Company or any of the Subsidiaries is or becomes the copyright proprietor thereof or to the extent such interest is obtained by the Company or any of the Subsidiaries, or the Company or any of the Subsidiaries otherwise acquires a copyrightable interest in, take any and all actions reasonably necessary to register the copyright for such item of Product in the name of the Company or any of the Subsidiaries in conformity with the laws of the United States; provided, however, that to the extent the Company does not have adequate resources to comply with the foregoing, it shall promptly inform Metromedia and Metromedia shall, in it sole discretion, decide whether to pursue the same (if sufficient resources are not available, then failure to comply shall not be deemed a breach of this covenant). With respect to subsections (i) and (ii) of this Section 6.2 if sufficient resources are not available to the Company and Metromedia does not expend its resources in connection with the Company's rights under any Production Services Agreement or under any item of Product after notification thereof by Metromedia, such failure shall not be deemed a breach of this covenant by either of the Company or Metromedia. 6.3 Corporate Examinations and Investigations. Prior to the Closing Date, the Stockholders agree that Metromedia shall be entitled, through its employees and representatives, including, without limitation, any counsel, tax advisors and accountants, to conduct its due diligence investigation (the "Due Diligence Investigation") and to make such investigation of the Properties, businesses and operations of the Company and the Subsidiaries, and such examination of the books, records and financial condition of the Company and the Subsidiaries, as it wishes. Any such investigation and examination shall be conducted at reasonable times and under reasonable circumstances, and the Stockholders shall, and shall cause the Company and the Subsidiaries to, cooperate fully therein. No investigation by Metromedia shall diminish or obviate any of the representations, warranties, covenants or agreements of the Stockholders contained in this Agreement except 33 as otherwise specifically set forth herein. In order that Metromedia may have full opportunity to make such physical, business, accounting and legal review, examination or investigation as it may wish of the affairs of the Company and the Subsidiaries, the Stockholders shall make available and shall cause the Company and the Subsidiaries to make available to the representatives of Metromedia during such period all such information and copies of such documents concerning the affairs of the Company and the Subsidiaries as such representatives may reasonably request, shall permit the representatives of Metromedia access to the Properties of the Company and the Subsidiaries and all parts thereof and shall cause their officers, employees, consultants, agents, accountants and attorneys to cooperate fully with such representatives in connection with such review and examination. If this Agreement terminates, (i) Metromedia shall keep confidential and shall not use in any manner any information or documents obtained from the Company or the Subsidiaries concerning their Properties, businesses and operations, unless readily ascertainable from public or published information, or trade sources, or already known or subsequently developed by Metromedia independently of any investigation of the Company or the Subsidiaries or through sources which, to the Knowledge of Metromedia are not subject to an obligation of confidentiality otherwise required by law to be disclosed provided, however, that if required by law to be disclosed, Metromedia shall give the Company and the Stockholders written notice of such disclosure and a reasonable opportunity to obtain a protective order, and (ii) any documents obtained from the Company or the Subsidiaries and all copies thereof shall be returned. 6.4 Publicity. Except as may be required by the rules and regulations of the SEC or the American Stock Exchange, the parties agree that no publicity release or announcement concerning this Agreement or the Contemplated Transactions shall be made without advance approval thereof by the other party hereto. 6.5 Expenses. The parties to this Agreement shall, except as otherwise specifically provided herein, bear their respective expenses incurred in connection with the preparation, execution and performance of this Agreement and the Contemplated Transactions, including, without limitation, all fees and expenses of agents, representatives, 34 counsel and accountants. 6.6 Indemnification of Brokerage. The Stockholders, jointly and severally, represent and warrant to Metromedia that there are no brokerage commissions, finder's fees or similar fees or commissions payable to any Person (a "Broker") in connection with this Agreement or based on any agreement, arrangement or understanding with the Company, any of the Subsidiaries or any of the Stockholders, or any action taken by the Company, any of the Subsidiaries or any of the Stockholders relating thereto. The Stockholders agree, jointly and severally, to indemnify and save Metromedia harmless from any claim or demand for commission or other compensation by any Broker claiming to have been employed by or on behalf of the Company, any of the Subsidiaries or any of the Stockholders, and to bear the cost of legal expenses incurred in defending against any such claim. Metromedia represents and warrants to the Stockholders that no Broker has acted on behalf of Metromedia in connection with this Agreement or the Contemplated Transactions, and that there are no brokerage commissions, finders' fees or similar fees or commissions payable in connection therewith based on any agreement, arrangement or understanding with Metromedia, or any action taken by Metromedia. Metromedia agrees to indemnify and save the Stockholders harmless from any claim or demand for commission or other compensation by any Broker claiming to have been employed by or on behalf of Metromedia, and to bear the cost of legal expenses incurred in defending against any such claim. 6.7 Related Parties. The Stockholders shall, simultaneously with the Closing, pay or cause to be paid to the Company or one of the Subsidiaries, as the case may be, all amounts owed to the Company or such Subsidiary and reflected on the Balance Sheet or borrowed from or owed to the Company or such Subsidiary since the Balance Sheet Date by any of the Stockholders or any Affiliate of any of the Stockholders. At and as of the Closing, upon delivery of the consideration pursuant to Section 2.3, there will be no further obligation of the Company to the Stockholders with respect to the Existing Note Amount. The Company shall remain liable to the Stockholders for compensation, reimbursement of expenses, and obligations under contracts, all listed on Schedule 6.7. 35 6.8 Further Assurances. Each of the parties shall execute such Documents and take such further actions as may be reasonably required or desirable to carry out the provisions hereof and the Contemplated Transactions. Each such party shall use its best commercially reasonable efforts to fulfill or obtain the fulfillment of the conditions to the Closing set forth in Articles 7 and 8. 6.9 D&O Insurance. Metromedia agrees to maintain insurance relating to directors' and officers' liability and cause the Surviving Corporation to act in accordance with the indemnification provisions of the Surviving Corporation's by-laws and certificate of incorporation. 6.10 Employee Benefits; Employment Contracts; Indemnification. (a) Following the Effective Time, the Surviving Corporation will provide generally to officers and employees of the Company employee benefits, which in the aggregate, are no less favorable than those provided by Orion Pictures Corporation, a wholly-owned subsidiary of Metromedia. However, the Surviving Corporation shall have the right to amend, modify, or terminate any employee benefit plan, program, or arrangement after the Effective Time, in accordance with the terms and conditions of such plans, programs or arrangements. (b) The Surviving Corporation will honor all Company employment agreements listed on Schedule 6.10 in accordance with the terms and conditions of such agreement. 6.11 Capital Stock Changes. If, prior to the Effective Time, Metromedia shall effect any stock dividend, stock split, or reverse stock split of Metromedia Common Stock, then the shares of Metromedia Common Stock, to be delivered under this Agreement shall be appropriately and equitably adjusted to the kind and amount of shares of stock and other securities and property to which the holders of such shares of Metromedia Common Stock would have been entitled to receive had such stock or such other security been issued and outstanding as of the record date for determining stockholders entitled to participate in such corporate event. 6.12 Company Trademarks. Upon expiration or earlier termination of 36 the Employment Agreements referred to in Section 7.7 (if expired or terminated separately, upon the expiration or termination of the latter Employment Agreement), the Surviving Corporation agrees to assign to the Stockholders, jointly, all of the Surviving Corporation's right, title and interest in and to the trade name and the trademark MOTION PICTURE CORPORATION OF AMERICA and the design of the mark as reproduced on Exhibit A hereto (collectively, the Mark), provided, however, that Metromedia and its Affiliates shall have the irrevocable, perpetual, royalty-free right to continue to use the Mark throughout the universe on any Company Product (as such term is defined in the Employment Agreements) existing prior to the expiration or earlier termination of the Employment Agreements. The parties agree to execute any and all instruments necessary to effectuate the assignment referred to herein. The Surviving Corporation agrees that from the Effective Time until the assignment to the Stockholders as set forth above, it will not assign, transfer, dispose of, or license the Mark or any part thereof to any Person except that the Mark may be transferred to and used by Affiliates on a non-exclusive basis with the approval of the Stockholders which shall not be unreasonably withheld or delayed. 6.13 Restricted Stock Plan. Metromedia will adopt a Restricted Stock Plan in the form of Exhibit B hereto and grant the Awards (as defined therein) on the Adjustment Date. Metromedia will use reasonable efforts to register the Common Stock underlying the Awards on a Form S-8. ARTICLE 7 CONDITIONS PRECEDENT TO THE OBLIGATION METROMEDIA TO CLOSE 7. The obligations of Metromedia to enter into and complete the Closing are subject, at the option of Metromedia acting in accordance with the provisions of Section 11 with respect to termination of this Agreement, to the fulfillment on or prior to the Closing Date of the following conditions, any one or more of which may be waived by it: 7.1 Representations and Covenants. The representations and warranties 37 of the Company and the Stockholders contained in this Agreement shall be true and correct in all material respects on and as of the Closing Date with the same force and effect as though made on and as of the Closing Date. The Company and each of the Stockholders shall have performed and complied in all material respects with all covenants and agreements required by this Agreement to be performed or complied with by the Company or such Stockholder, as the case may be, on or prior to the Closing Date. The Company and each Stockholder shall have delivered to Metromedia a certificate, dated the date of the Closing and signed by the Company or such Stockholder, to the foregoing effect. 7.2 Consents and Approvals. All Required Consents shall have been obtained and be in full force and effect, and Metromedia shall have been furnished with evidence reasonably satisfactory to it of the granting of such approvals, authorizations and consents. 7.3 Opinion of Counsel to the Stockholders. Metromedia shall have received the opinion of Loeb & Loeb, LLP, counsel to the Company and the Stockholders, dated the date of the Closing, addressed to Metromedia, in the form of Exhibit C. 7.4 Intentionally Omitted. 7.5 FIRPTA Affidavit. Metromedia shall have received an affidavit of each Stockholder sworn to under penalty of perjury, setting forth such Majority Stockholder's name, address and Federal tax identification number and stating that Stockholder is not a "foreign person" within the meaning of Section 1445 of the Internal Revenue Code of 1986 (the "Code"). 7.6 HSR Act Filing. Any Person required in connection with the Contemplated Transactions to file a notification and report form in compliance with the HSR Act shall have filed such form and the applicable waiting period with respect to each such form (including any extension thereof by reason of a request for additional information) shall have expired or been terminated. 7.7 Employment Agreements. Each Stockholder shall have entered into an Employment Agreement in the form attached to that certain letter dated as of the date hereof from the Surviving Corporation to the Stockholders. 38 7.8 No Claims. There shall be no outstanding Order of any Governmental Body against or involving the Company or any of the Subsidiaries and there are no claims pending, or to the Knowledge of the Company, any of the Subsidiaries or any of the Stockholders, threatened against or involving the Company or any of the Subsidiaries or any of their Properties which individually or in the aggregate could have a Material Adverse Effect or an adverse effect on the Contemplated Transactions. 7.9 Board Approval. The Board of Directors of Metromedia shall have approved this Agreement and the Contemplated Transactions. 7.10 Due Diligence. Metromedia shall have completed its legal, financial and accounting review of the Company and the subsidiaries and shall be satisfied with the results of such review. 7.11 No Dissenters' Rights. No holder of any Shares of Company Common Stock shall have objected to the Merger in writing and demanded the value of their shares pursuant to Section 262 of the Delaware General Corporation Law. 7.12 Paramount Pictures. The Agreement dated as of November 1, 1995 between Paramount Pictures Corporation and the Company shall be executed in a form approved by Metromedia. ARTICLE 8 CONDITIONS PRECEDENT TO THE OBLIGATION OF THE STOCKHOLDERS TO CLOSE The obligation of the Stockholders to enter into and complete the Closing is subject, at the option of the Stockholders acting in accordance with the provisions of Section 11 with respect to termination of this Agreement, to the fulfillment on or prior to the Closing Date of the following conditions, any one or more of which may be waived by them: 8.1 Representations and Covenants. The representations and warranties of Metromedia contained in this Agreement shall be true on and as of the Closing Date with 39 the same force and effect as though made on and as of the Closing Date. Metromedia shall have performed and complied with all covenants and agreements required by this Agreement to be performed or complied with by it on or prior to the Closing Date. Metromedia shall have delivered to the Stockholders a certificate, dated the date of the Closing and signed by an officer of Metromedia, to the foregoing effect. 8.2 Consents and Approvals. All Required Consents shall have been obtained and be in full force and effect and the Company and the Stockholders shall have been furnished with evidence reasonably satisfactory to each of them of the granting of such approvals, authorizations and consents. 8.3 Opinion of Counsel to Metromedia. The Stockholders shall have received the opinion of Arnold L. Wadler, General Counsel to Metromedia, dated the date of the Closing, addressed to the Stockholders, in the form of Exhibit F. 8.4 HSR Act Filing. Any Person required in connection with the Contemplated Transactions to file a notification and report form in compliance with the HSR Act shall have filed such form and the applicable waiting period with respect to each such form (including any extension thereof by reason of a request for additional information) shall have expired or been terminated. 8.5 Employment Agreements. The Surviving Corporation shall have entered into employment agreements with each of the Stockholders in the form attached to that certain letter dated as of the date hereof from the Surviving Corporation to the Stockholders. 8.6 No Claims. There shall be no outstanding Order of any governmental body against or involving Metromedia and there shall be no claims pending or to the Knowledge of Metromedia, threatened against or involving Metromedia which could have an adverse effect on the Contemplated Transactions. 8.7 Board Approval. The Board of Directors of the Company shall have approved this Agreement and the Contemplated Transactions. 8.8 Due Diligence. The Company and the Stockholders shall have completed their review of Metromedia and shall be satisfied with the results of such review. 40 8.9 The parties shall enter into a Registration Rights Agreement in the form of Exhibit G hereto. 8.10 No Dissenters' Rights. No holder of any Shares of Company Common Stock shall have objected to the Merger in writing and demanded the value of their shares pursuant to Section 262 of the Delaware General Corporation Law. ARTICLE 9 SURVIVAL OF REPRESENTATIONS AND WARRANTIES OF THE STOCKHOLDERS AFTER CLOSING Notwithstanding any right of Metromedia fully to investigate the affairs of the Company and the Subsidiaries and notwithstanding any Knowledge of facts determined or determinable by Metromedia pursuant to such investigation or right of investigation, Metromedia has the right to rely fully upon the representations, warranties, covenants and agreements of the Stockholders contained in this Agreement or in any Documents delivered pursuant to this Agreement. All such representations, warranties, covenants and agreements shall survive the execution and delivery of this Agreement and the Closing hereunder. Except for all representations and warranties in Article 4, all representations and warranties of the Stockholders contained in this Agreement shall terminate and expire (i) on the date 3 years after the Closing Date, with respect to any General Claim (as defined below) based upon, arising out of or otherwise in respect of any fact, circumstance, action or proceeding of which Metromedia shall not have given notice on or prior to such date to the Stockholders, and (ii) with respect to any Tax Claim ), on the later of (a) the date upon which the liability to which any such Tax Claim may relate is barred by all applicable statutes of limitation or (b) the date upon which any claim for refund or credit related to such Tax Claim is barred by all applicable statutes of limitations. As used in this Agreement, the following terms have the following meanings: (x) "General Claim" means any claim based upon, arising out of or otherwise in respect of any inaccuracy in or any breach of any representation or warranty, of 41 any Stockholder contained in this Agreement or in any Documents delivered pursuant to this Agreement. (y) "Tax Claim" shall mean any claim based upon, arising out of or otherwise in respect of any inaccuracy or any breach of any representation or warranty contained in Section 3.9. ARTICLE 10 GENERAL INDEMNIFICATION 10.1 Obligation of the Stockholders to Indemnify. (a) Subject to the limitations contained in Article 9 and this Article 10, the Stockholders jointly and severally agree to indemnify, defend and hold harmless Metromedia (and their respective directors, officers, employees, Affiliates, parents, partners, shareholders, successors and assigns) from and against all losses, liabilities, damages, deficiencies, demands, claims, actions, judgments or causes of action, assessments, costs or expenses (including, without limitation, interest, penalties and reasonable attorneys' fees and disbursements) ("Losses") based upon, arising out of or otherwise in respect of any inaccuracy in or any breach of any representation, warranty, covenant or agreement of the Company or the Stockholders contained in this Agreement with the exception of Article 4. (ii) Each Stockholder agrees to indemnify, defend and hold harmless Metromedia (and its respective directors, employees, officers, Affiliates, parents, partners, shareholders, successors and assigns) from and against all Losses based upon, arising out of or otherwise in respect of any inaccuracy in or any breach of any representation, warranty, covenant or agreement of such Stockholder contained in this Agreement. 10.2 Obligation of Metromedia to Indemnify. Metromedia agrees to indemnify, defend and hold harmless the Stockholders from and against all Losses based upon, arising out of or otherwise in respect of any inaccuracy in or any breach of any 42 representation, warranty, covenant or agreement of Metromedia contained in this Agreement. 10.3 Notice and Opportunity to Defend. 10.3.1 Notice of Asserted Liability. Promptly after receipt by any party hereto (the "Indemnitee") of notice of any demand, claim or circumstances which, with the lapse of time, would or might give rise to a claim or the commencement (or threatened commencement) of any action, proceeding or investigation (an "Asserted Liability") that may result in a Loss, the Indemnitee shall give notice thereof (the "Claims Notice") to any other party (or parties) obligated to provide indemnification pursuant to Section 10.1 or 10.2 (the "Indemnifying Party"). The Claims Notice shall describe the Asserted Liability in reasonable detail, and shall indicate the amount (estimated, if necessary and to the extent feasible) of the Loss that has been or may be suffered by the Indemnitee. 10.3.2 Opportunity to Defend. Except as otherwise set forth in Section 10.3.3, the Indemnifying Party may elect to compromise or defend, at its own expense and by its own counsel, any Asserted Liability. If the Indemnifying Party elects to compromise or defend such Asserted Liability, it shall within 20 days (or sooner, if the nature of the Asserted Liability so requires) notify the Indemnitee of its intent to do so, and the Indemnitee shall cooperate, at the expense of the Indemnifying Party, in the compromise of, or defense against, such Asserted Liability. If the Indemnifying Party elects not to compromise or defend the Asserted Liability, fails to notify the Indemnitee of its election as herein provided or contests its obligation to indemnify under this Agreement, the Indemnitee may pay, compromise or defend such Asserted Liability. Notwithstanding the foregoing, neither the Indemnifying Party nor the Indemnitee may settle or compromise any claim over the objection of the other; provided, however, that consent to settlement or compromise shall not be unreasonably withheld or delayed. In any event, the Indemnitee and the Indemnifying Party may participate, at their own expense, in the defense of such Asserted Liability. Notwithstanding the foregoing, any Indemnitee shall be entitled to employ separate counsel from the Indemnifying Party if the interests of such Indemnitee 43 may be prejudiced without such separate counsel (including, without limitation, if one or more legal defenses may be inconsistent or in conflict with the legal defenses available to the Indemnifying Party) and the Indemnifying Party shall entirely and solely bear the reasonable fees and expenses of such separate counsel. If the Indemnifying Party chooses to defend any claim, the Indemnitee shall make available to the Indemnifying Party any books, records or other documents within its control that are necessary or appropriate for such defense. 10.3.3 Opportunity to Defend Tax Deficiencies. In the event a claim (a "Tax Deficiency") (including a revenue agent's report or notice of proposed adjustment) shall be made by the Internal Revenue Service or its state, local or foreign counterpart, which, if successful, would result in an obligation on the part of the Stockholders to indemnify Metromedia for Taxes, Metromedia shall give prompt written notice thereof to Stockholders. If, within thirty days after the giving of such notice, the Stockholders notify Metromedia in writing that they wish to question a Tax Deficiency in administrative proceedings before the Internal Revenue Service or its state, local or foreign counterpart, then, subject to the following provisions, Metromedia shall afford to the Stockholders an opportunity in good faith (and subject to the satisfaction of Metromedia's reasonable requirements) to participate in such administrative proceeding as to such Tax Deficiency, provided, however, that in the case of a Tax Deficiency which will, as a result of any adjustment of tax basis of assets of the Company and the Subsidiaries or their respective predecessors or Affiliates or the adjustment, restatement or recharacterization of amounts deducted by the Company and the Subsidiaries or their respective predecessors or Affiliates, require the Company and the Subsidiaries to recognize additional taxable income for any Tax Period following the Effective Time, Metromedia shall not be obligated to afford the Stockholders an opportunity to participate in such administrative proceeding as to such Tax Deficiency unless and until the Stockholders shall have delivered to Metromedia a current opinion of counsel reasonably acceptable to Metromedia to the effect that Stockholders' position with respect to the Tax Deficiency is more likely than not to prevail. Metromedia shall not be obligated to take a protest with respect to a Tax Deficiency to the 44 appellate levels within the Internal Revenue Service or its state, local or foreign counterpart, or to commence litigation in the Tax Court or any other court unless and until the Stockholders shall have (a) delivered to Metromedia a current opinion of counsel reasonably acceptable to Metromedia to the effect that the Stockholders' position with respect to the Tax Deficiency is more likely than not to prevail, and (b) delivered to Metromedia a certified check drawn to Metromedia in the amount of the Tax Deficiency where payment of the Tax Deficiency is required to commence appellate proceedings or litigation. If the Stockholders fail to satisfy the requirements of the preceding sentences, Metromedia may settle the Tax Deficiency covered by the notice for an amount that does not exceed the amount of Taxes set forth in the original notice to the Stockholders. If Metromedia desires to settle any Tax Deficiency, it shall give the Stockholders thirty days' prior written notice of such intention setting forth the terms of such settlement. Metromedia shall be entitled to settle any Tax Deficiency covered by such notice after the expiration of said thirty day period unless in the case of a Tax Deficiency which will, as a result of any adjustment of Tax basis of assets of the Company and the Subsidiaries or their respective predecessors or Affiliates or the adjustment, restatement or recharacterization of amounts deducted by the Company and the Subsidiaries or their respective predecessors or Affiliates, require the Company and the Subsidiaries to recognize additional taxable income for any Tax period following the Effective Time the Stockholders deliver to Metromedia a current opinion of counsel reasonably acceptable to Metromedia to the effect that the Stockholders' position with respect to the Tax Deficiency is more likely than not to prevail. If the Stockholders shall deliver such an opinion, the Stockholders shall be entitled to settle such Tax Deficiency without the written consent of Metromedia unless entering into such a settlement, would, in the reasonable judgment of Metromedia, have an adverse effect on the business of the Company or the Subsidiaries. 10.4 Limitation on Claims. In case any event shall occur which would otherwise entitle Metromedia to assert a claim for indemnification hereunder, no Loss shall be deemed to have been sustained by such party to the extent of (a) any tax savings realized by such party with respect thereto in the year in which the indemnification would otherwise 45 be made in connection with the claim or (b) any proceeds received by such party from any insurance policies with respect thereto. 10.5 Maximum Exposure. Notwithstanding anything to the contrary in Section 10.1(a), (a) Metromedia shall be entitled to indemnification hereunder only when, and only with respect to amounts by which, the aggregate of all Losses sustained by it exceeds $500,000 and (b) the aggregate amount of all Losses subject to indemnification hereunder by the Stockholders shall not exceed $27,500,000. 10.6 Actual Knowledge. An Indemnifying Party shall not be liable under this Article X for a Loss resulting from any event relating to a breach of any representation, warranty, covenant or agreement if the Indemnifying Party can establish that the Indemnitee had Knowledge on or before the Closing Date of such event. 10.7 Option to Pay Indemnity Obligations in Stock. In the event that any payment of the indemnity obligations of the Stockholders set forth in Section 10.1 is required to be made, the Stockholders may satisfy such payment, in whole or in part, by delivering to Metromedia shares of Metromedia Common Stock acquired by them pursuant to the merger pursuant to this Agreement, which shares, for such purpose, shall be valued at the closing price of Metromedia Common Stock, as reported in The Wall Street Journal, on the date such liability is finally determined. The Stockholders may satisfy the indemnification obligations set forth in Section 10.1 by cash, stock, or a combination thereof. ARTICLE 11 TERMINATION OF AGREEMENT 11.1 Termination. This Agreement may be terminated prior to the Closing as follows: (i) at the election of the Stockholders, if any one or more of the conditions to the obligation of the Stockholders to close has not been fulfilled as of the scheduled Closing Date; 46 (ii) at the election of Metromedia, if any one or more of the conditions to its respective obligations to close has not been fulfilled as of the scheduled Closing Date; (iii) at the election of the Stockholders, if Metromedia has breached any material representation, warranty, covenant or agreement contained in this Agreement, which breach cannot be or is not cured by the Closing Date; (iv) at the election of Metromedia, if any of the Stockholders has breached any material representation, warranty, covenant or agreement contained in this Agreement, which breach cannot be or is not cured by the Closing Date; or (v) at the election of Metromedia if Metromedia is not satisfied with the results of its Due Diligence Investigation; (vi) at the election of the Stockholders if there is a Material Adverse Change in the business operations or prospects of Metromedia at any time on or prior to the Closing Date; (vii) at the election of Metromedia, if there is a Material Adverse Change in the business operations or prospects of the Company at any time on or prior to the Closing Date; or (viii) by mutual written consent of the Stockholders and Metromedia. If this Agreement so terminates, it shall become null and void and have no further force or effect, except as provided in Section 11.2. 11.2 Survival After Termination. If this Agreement is terminated in accordance with Section 11.1 and the Contemplated Transactions are not consummated, this Agreement shall become void and of no further force and effect, except for (i) the provisions of Section 6.2 relating to the obligation of Metromedia to keep confidential and not to use certain information and data obtained by it from the Company or the Subsidiaries and to return documents to the Company or the Subsidiaries, and (ii) the provisions of Sections 6.4, 6.5 and 12.2; provided, however, that none of the parties shall have any liability in respect of a termination of this Agreement except to the extent that failure to 47 satisfy the conditions of Article 7 or Article 8, as the case may be, results from the intentional or willful violation of such party contained in this Agreement. ARTICLE 12 MISCELLANEOUS 12.1 Certain Definitions. (a) As used in this Agreement, the following terms have the following meanings: (i) "Active Preproduction" means, with respect to any item of Product as commencing upon the earlier of (i)eight weeks prior to the scheduled date on which principal photography with respect to such item of Product is to commence or (ii) the date that such item of Product has been "greenlighted" as such term is understood in the motion picture industry. (ii) "Affiliate" means, with respect to any Person, any other Person controlling, controlled by or under common control with, or the parents, spouse, lineal descendants or beneficiaries of, such Person. (iii) "Budgeted Negative Cost" means, with respect to any item of Product, the amount of the cash budget for such item of Product including all costs customarily included in connection with the acquisition of all underlying literary and musical rights with respect to such item of Product and in connection with the preparation, production and completion of such item of Product including costs of materials, equipment, physical properties, personnel and services utilized in connection with such item of Product, both "above-the-line" and "below-the-line", any completion guaranty fee, and all other items customarily included in negative costs, but excluding contingency of up to 10%, production fees and overhead charges payable to the Company or its Subsidiaries, finance charges and interest expense. (iv) "Contingent Compensation" means compensation that is contingent upon and payable only (a) to the extent of the receipt of revenues from the exploitation of a particular motion picture, video, television or interactive program or (b) upon the passage of time or the occurrence of an identified event. Examples of such 48 contingent compensation include, but are not limited to, deferred cash payments for rights or services, or gross or net profit or proceed participations. (v) "Distribution Contract" shall mean any agreement entered into by the Company or any of its Subsidiaries pursuant to which the Company or any of its Subsidiaries has licensed, leased, assigned or sold distribution or other exploitation rights to any item of Product in any media or territory. (vi) "Knowledge" with respect to the Company or any of the Subsidiaries means the actual Knowledge, after due inquiry, of any of the following officers or directors of the Company or any of the Subsidiaries: Bradley Krevoy, Steven Stabler and Jeffrey Ivers and "Knows" has a correlative meaning. (vii) "Person" means any individual, corporation, partnership, firm, joint venture, association, joint-stock company, trust, unincorporated organization, Governmental Body or other entity. (viii) "Product" shall mean any motion picture, film or video tape produced for theatrical, non-theatrical, television or video release or for release in any other medium, in each case whether recorded on film, videotape, cassette, cartridge, disc or on or by any other means, method, process or device whether now known or hereafter developed, with respect to which the Company or its Subsidiaries (i) is the initial copyright owner or (ii) has acquired or has contracted to acquire an equity interest or distribution rights. The term "item of Product" shall include, without limitation, the scenario, screenplay or script upon which such Product is based, all of the properties thereof, tangible and intangible, and whether now in existence or hereafter to be made or produced, whether or not in possession of the Company or its Subsidiaries, and all rights therein and thereto, of every kind and character. (ix) "Property" or "Properties" means real, personal or mixed Property, tangible or intangible. (b) The following capitalized terms are defined in the following Sections of this Agreement: 49 Term Section - ---- ------- Asserted Liability 10.3.1 Audited Financials 3.7 Balance Sheet 3.7 Balance Sheet Date 3.7 Buyer Preamble Claims 3.13 Claims Notice 10.3.1 Closing 1.2 Closing Date 1.2 Company Preamble Contemplated Transactions 3.12 Contracts 3.12 Documents 3.28 General Claim 9(x) Governmental Body 3.10 HSR Act 3.26 Indemnifying Party 10.3.1 Indemnitee 10.3.1 Interim Financials 3.7 Laws 3.10 Liabilities 3.19 Liens 3.4 Losses 10.1 Material Adverse Effect 3.8 Orders 3.10 Permits 3.11 Projections 3.27 50 Purchase Price 1.1 Required Consents 3.12 Stockholder Preamble Shares Preamble Subsidiaries 3.2 Tax Claim 9(y) Taxes 3.9 12.2 Consent to Jurisdiction and Service of Process. Any legal action, suit or proceeding arising out of or relating to this Agreement or the Contemplated Transactions may be instituted in any federal court of the Southern District of New York or any state court located in New York County, State of New York, and each party agrees not to assert, by way of motion, as a defense or otherwise, in any such action, suit or proceeding, any claim that it is not subject personally to the jurisdiction of such court, that the action, suit or proceeding is brought in an inconvenient forum, that the venue of the action, suit or proceeding is improper or that this Agreement or the subject matter hereof may not be enforced in or by such court. Each party further irrevocably submits to the jurisdiction of such court in any such action, suit or proceeding. Any and all service of process and any other notice in any such action, suit or proceeding shall be effective against any party if given personally or by registered or certified mail, return receipt requested, or by any other means of mail that requires a signed receipt, postage prepaid, mailed to such party as herein provided. Nothing herein contained shall be deemed to affect the right of any party to serve process in any manner permitted by law or to commence legal proceedings or otherwise proceed against any other party in any other jurisdiction. 12.3 Notices. Any notice or other communication required or permitted hereunder shall be in writing and shall be delivered personally, sent by facsimile transmission (receipt confirmed) or sent by certified, registered or express mail, postage prepaid. Any such notice shall be deemed given when so delivered personally, or sent by facsimile transmission or, if mailed, five days after the date of deposit in the United States mails, as follows: 51 (i) if to Metromedia: Metromedia International Group, Inc. c/o Metromedia Company One Meadowlands Plaza East Rutherford, New Jersey 07073 Attention: General Counsel Facsimile: 201-531-2803 (ii) if to the Company or the Stockholders, to: Motion Picture Corporation of America 1401 Ocean Avenue Suite 301 Santa Monica, California 90401 Attention: Bradley Krevoy and Steven Stabler Facsimile: 310-319-9501 with a copy to: Loeb & Loeb, LLP. 345 Park Avenue New York, New York 10154 Attention: David S. Schaefer, Esq. Facsimile: 212-407-4990 Any party may by notice given in accordance with this Section to the other parties designate another address or Person for receipt of notices hereunder. 12.4 Entire Agreement. This Agreement (including the Exhibits and Schedules) and any collateral agreements executed in connection with the consummation of the Contemplated Transactions contain the entire agreement among the parties with respect to the purchase of the Shares and supersede all prior agreements, written or oral, with respect thereto. 12.5 Waivers and Amendments; Non-Contractual Remedies; Preservation of Remedies. This Agreement may be amended, superseded, cancelled, renewed or extended, and the terms hereof may be waived, only by a written instrument signed by Metromedia and the Stockholders or, in the case of a waiver, by the party waiving compliance. No delay on the part of any party in exercising any right, power or privilege hereunder shall operate as a waiver thereof, nor shall any waiver on the part of any party of 52 any such right, power or privilege, nor any single or partial exercise of any such right, power or privilege, preclude any further exercise thereof or the exercise of any other such right, power or privilege. The rights and remedies herein provided are not exclusive of any rights or remedies that any party may otherwise have at law or in equity. The rights and remedies of any party based upon, arising out of or otherwise in respect of any inaccuracy in or breach of any representation, warranty, covenant or agreement contained in this Agreement or any Documents delivered pursuant to this Agreement shall in no way be limited by the fact that the act, omission, occurrence or other state of facts upon which any claim of any such inaccuracy or breach is based may also be the subject matter of any other representation, warranty, covenant or agreement contained in this Agreement or any Documents delivered pursuant to this Agreement (or in any other agreement between the parties) as to which there is no inaccuracy or breach. 12.6 Governing Law. This Agreement shall be governed and construed in accordance with the laws of the State of New York applicable to agreements made and to be performed entirely within such State. 12.7 Binding Effect; No Assignment. This Agreement shall be binding upon and inure to the benefit of the parties and their respective successors and legal representatives. This Agreement is not assignable except by operation of law, except that Metromedia may assign its rights hereunder to any of its Affiliates. 12.8 Variations in Pronouns. All pronouns and any variations thereof refer to the masculine, feminine or neuter, singular or plural, as the context may require. 12.9 Counterparts. This Agreement may be executed by the parties hereto in separate counterparts, each of which when so executed and delivered shall be an original, but all such counterparts shall together constitute one and the same instrument. Each counterpart may consist of a number of copies hereof each signed by less than all, but together signed by all of the parties hereto. 12.10 Exhibits and Schedules. The Exhibits and Schedules are a part of this Agreement as if fully set forth herein. All references herein to Sections, Exhibits and 53 Schedules shall be deemed references to such parts of this Agreement, unless the context shall otherwise require. 12.11 Headings. The headings in this Agreement are for reference only, and shall not affect the interpretation of this Agreement. 12.12 Interpretation. The parties acknowledge and agree that: (i) each party and its counsel reviewed and negotiated the terms and provisions of this Agreement and have contributed to its revision; (ii) the rule of construction to the effect that any ambiguities are resolved against the drafting party shall not be employed in the interpretation of this Agreement; and (iii) the terms and provisions of this Agreement shall be construed fairly as to all parties hereto, regardless of which party was generally responsible for the preparation of this Agreement. 12.13 Severability of Provisions. If any provision or any portion of any provision of this Agreement, or the application of any such provision or any portion thereof to any Person or circumstance, shall be held invalid or unenforceable, the remaining portion of such provision and the remaining provisions of this Agreement, and the application of such provision or portion of such provision as is held invalid or unenforceable to Persons or circumstances other than those as to which it is held invalid or unenforceable, shall not be affected thereby. 54 IN WITNESS WHEREOF, the parties have executed this Agreement on the date first above written. METROMEDIA INTERNATIONAL GROUP, INC. By ------------------------------ Name: Silvia Kessel Title: Senior Vice President MOTION PICTURE CORPORATION OF AMERICA By ------------------------------ Name: Bradley Krevoy Title: ------------------------------ STOCKHOLDERS: ------------------------------ Name: Bradley R. Krevoy ------------------------------ Name: Steven Stabler MPCA MERGER CORP. By: ------------------------------ Name: Silvia Kessel Title: Senior Vice President 55 EX-11 6 COMPUTATION OF EARNINGS PER SHARE ================================================================================ Metromedia International Group, Inc. ================================================================================ Exhibit 11 METROMEDIA INTERNATIONAL GROUP, INC. Computation of Earnings Per Share (in thousands, except per share amounts)
Years Ended --------------------------------------------------------- December 31, 1996 December 31, 1995 February 28, 1995 --------------------------------------------------------- Loss Per Share - Primary Loss from continuing operations before discontinued operations and extraordinary item $ (94,433) $ (87,024) $ (69,411) Loss on disposal of assets held for sale (16,305) (293,570) -- Loss on early extinguishment of debt (4,505) (32,382) -- --------- --------- --------- Net loss available for Common Stock and Common Stock equivalents $(115,243) $(412,976) $ (69,411) ========= ========= ========= Common Stock and Common Stock Equivalents (A) Weighted average common shares outstanding during the period 54,293 24,541 20,246 ========= ========= ========= Loss Per Share - Primary Continuing operations $ (1.74) $ (3.54) $ (3.43) Discontinued operations (0.30) (11.97) -- Extraordinary item (0.08) (1.32) -- --------- --------- --------- Net Loss $ (2.12) $ (16.83) $ (3.43) ========= ========= ========= Loss Per Share - Assuming Full Dilution $ n/a(B) $ n/a(B) $ n/a(B) ========= ========= =========
A) Common stock equivalents are not included in primary loss per share in Calendar 1996, Calendar 1995 and Fiscal 1995 because they would be anti-dilutive. B) Fully diluted loss per share is not used in Calendar 1996, Calendar 1995 and Fiscal 1995 because it is less than primary loss per share. EX-23.1 7 CONSENT OF KPMG PEAT MARWICK LLP The Board of Directors Metromedia International Group, Inc.: We consent to incorporation by reference in the registration statements (Nos. 333-02301, 333- 07387, and 333-13763) on Form S-8 of Metromedia International Group, Inc. of our report dated March 27, 1997, relating to the consolidated balance sheets of Metromedia International Group, Inc. and subsidiaries as of December 31, 1996, and 1995, and the related consolidated statements of operations, stockholders' equity, and cash flows for each of the years in the two-year period ended December 31, 1996, and for the year ended February 28, 1995, and all related financial statement schedules, which report appears in the December 31, 1996, annual report on Form 10-K of Metromedia International Group, Inc. KPMG Peat Marwick LLP New York, New York March 27, 1997 EX-27 8 FDS -- METROMEDIA INTERNATIONAL GROUP, INC.
5 This schedule contains summary financial information extracted from the consolidated financial statements filed as part of the annual report on form 10K and is qualified in its entirety by reference to such financial statements. 12-MOS Dec-31-1996 Dec-31-1996 91,130 0 84,025 (13,291) 120,560 290,547 81,100 (7,172) 944,740 242,941 403,421 0 0 66,153 153,529 944,740 201,755 201,755 161,564 256,277 0 0 36,256 (93,019) 1,414 (94,433) (16,305) (4,505) 0 (115,243) (2.12) (2.12)
-----END PRIVACY-ENHANCED MESSAGE-----