According to Metromedia International Group, Inc.’s Form 10-K dated April 22, 2002, on August 19, 1998, a purported class action lawsuit, Theoharous v. Fong, et al., Civ. No. 1:98CV2366, was filed in the United States District Court for the Northern District of Georgia. On October 19, 1998, a second purported class action lawsuit with substantially the same allegations, Schuette v. Fong, et al., Civ. No. 1:98CV3034, was filed in the United States District Court for the Northern District of Georgia. On June 7, 1999, plaintiffs in each of these lawsuits filed amended complaints. The amended complaints alleged that certain officers, directors and shareholders of RDM, including the Company and current and former officers of the Company who served as directors of RDM, were liable under federal securities laws for misrepresenting and failing to disclose information regarding RDM's alleged financial condition during the period between November 7, 1995 and August 22, 1997, the date on which RDM disclosed that its management had discussed the possibility of filing for bankruptcy. The amended complaints also alleged that the defendants, including the Company and current and former officers of the Company who served as directors of RDM, were secondarily liable as controlling persons of RDM. In an opinion dated March 10, 2000, the court dismissed these actions in their entirety. On April 7, 2000, plaintiffs in each of these actions filed notices of appeal to the United States Court of Appeals for the Eleventh Circuit. The Eleventh Circuit heard oral argument on March 20, 2001. In July 2001, the Eleventh Circuit affirmed the court's decision dismissing these actions.
The original complaint charges and certain individuals, Equitex, Inc. (NASDAQ:EQTX) and Metromedia International Group, Inc. ("Metromedia")(AMEX:MMG) with violations of Sections 10(b) and 20(a) of the Securities Exchange Act of 1934. Metromedia's principal shareholder has not been named as a defendant. RDM is presently in Bankruptcy and, therefore, is not a named defendant in the action.
The complaint alleges that in 1995, RDM, which held the trademarks to such well-known names as Roadmaster, Vitamaster, Flexible Flyer, American Playworld, MacGregor, DP, Hutch, Reach and Forster, reported revenues of $730.9 million. Despite the seemingly positive revenue stream, RDM was burdened by debt resulting from several acquisitions that the Company had engaged in with Metromedia and/or its affiliates. These transactions, inured primarily to the financial benefit of Metromedia's principal shareholder and entities controlled by him.
The complaint further alleges that the Company was unable to service the enormous debt that had been foisted upon it by Metromedia's principal shareholder and his affiliates because of deteriorating business conditions in certain of its divisions. For example, as alleged in the complaint, the Company's fitness division, which manufactured exercise equipment and became part of the Company in a transaction with Actava Group, Inc. – the Metromedia's principal shareholder’s controlled entity -- was plagued by quality control problems. These problems led to substantial returns of the Company's products and caused the Company's warranty expenses to rise substantially. In response, as set forth in the complaint, RDM was forced to attempt to restructure its manufacturing operations in order to rectify the severe quality control problems it was experiencing. Similarly, the Company's other divisions were experiencing weakening demand for their products.
The complaint alleges that in response to these mounting problems, defendants, who understood and appreciated the grave nature of the dire circumstances facing the Company, schemed to appropriate the assets and monies of Roadmaster for themselves. In order to accomplish this, as alleged in the complaint, defendants orchestrated a virtual liquidation of the Company's core assets and recapitalization of the Company's finances that was designed to siphon assets out of the Company and protect the interests of defendants to the detriment of plaintiff and other members of the Class, all of whom bought Roadmaster securities without knowledge of the scheme or the true state of affairs at the Company.